The latest parlor game in economics has become guessing how far the Fed will go reach its goal of 2% inflation. Is it worth upending the entire economy and markets to simply boost inflation by a couple dozen basis points?
One would imagine that monkeying around with the foundation of a $19 trillion economy in order to boost the reading on a somewhat unreliable measure of price inflation would be a bad way to set policy. That hasn’t seemed to occur to many of the PhDs at the Federal Reserve though.
Bloomberg’s Craig Torres reports on the Fed’s decision making:
Economists expect the Fed to ignore market froth, leaving the policy rate on on hold in a range of 2.25 percent to 2.5 percent at the conclusion of their meeting Wednesday, while expressing concern over “muted” inflation. It’s a tricky subject for the Fed to navigate without sending mixed signals to the markets.
New York Fed President John Williams, prior to the rate hike in December, said an increase had the “added benefit’’ of reducing financial imbalances. As stocks plunged after the move, Williams said the Fed is “listening very carefully to what’s happening in markets.’’
Fed officials discuss financial stability risks at most policy meetings. The Fed Board in Washington even publishes a semiannual report focused specifically on financial risks. But the committee’s communication on the topic can appear confusing and contradictory.
Minutes from the March 19-20 FOMC meeting show “a few” officials worried about growing financial stability risks and a couple pushed to trigger a requirement for big banks to build bigger capital buffers to guard against a downturn. Yet earlier that month the Board voted 4-1 not to do so, with Governor Lael Brainard dissenting.
“How much froth in leveraged lending is the Fed willing to tolerate in exchange for 20 basis points on inflation?,’’ Coronado asked a New York Fed advisory panel earlier this month.
Fed Chairman Jerome Powell will likely face similar questions at his post-meeting press conference Wednesday. He told reporters last month that the linkage between monetary policy and financial stability is an “unsettled and difficult” question and the first option is regulation and supervision.
Fed officials are asking, “‘What is the alternative, what can we do?’’’ said Seth Carpenter, a former adviser to the Fed Board who is now chief U.S. economist at UBS Securities LLC.
“Greenspan’s answer was, ‘Well that is just capitalism,’ and that didn’t turn out very well,’’ he said, referring to former Fed chief Alan Greenspan.
Read more here.
Jeremy Jones, CFA
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