In a semi-annual monetary policy report to the United States Congress dated July 9, 2024, the Federal Reserve Chairperson Jerome Powell noted that the Fed’s “inflation goals are coming into better balance.” While stakeholders expected this “better balance” would lead to an interest rate reduction, this has not yet happened. The outcome is market confusion about what the Fed means by a “better balance” and how the Fed measures it.
Better balance
When the Fed chairman refers to a “better balance,” this indicates that the Fed’s current monetary policy of “higher for longer interest rates” is achieving the Fed’s mandate “to promote maximum employment and stable prices for the benefit of the American people.”
In addition, “better balance” may mean that there are better demand and supply conditions in the economy, which may lead to a continued downward pressure on inflation.
In other words, the Fed appears to believe that its policy is working to keep the US economy stable.
Why the current “better balance” is not sufficient for the Fed to reduce interest rates
Notwithstanding that “the most recent monthly readings have shown modest further progress” and “Longer-term inflation expectations appear to remain well anchored, as reflected in a broad range of surveys of households, businesses, and forecasters, as well as measures from financial markets,” the Fed is unlikely to reduce interest rates soon because it needs more economic data to gain “greater confidence that inflation is moving sustainably toward 2 per cent.”
The Fed added:
We continue to make decisions meeting by meeting.
We know that reducing policy restraint too soon or too much could stall or even reverse the progress we have seen on inflation.
At the same time, in light of the progress made both in lowering inflation and in cooling the labor market over the past two years, elevated inflation is not the only risk we face.
Reducing policy restraint too late or too little could unduly weaken economic activity and employment.
In considering adjustments to the target range for the federal funds rate, the Committee will continue its practice of carefully assessing incoming data and their implications for the evolving outlook, the balance of risks, and the appropriate path of monetary policy.
Implications of Fed’s policy
While the Fed maintains its “higher for longer” interest rate policy, lower-income families and small businesses continue to be affected.
For example, lower-income families with variable-interest mortgages are either close to or falling off the financial edge with current interest rates. Any further increase could mean default in some cases.
In the case of small businesses, some would like to seek financing but reluctant to do so until interest rates go down.
What’s next for the Fed
While the Fed has acknowledged in past meeting minutes that some households face challenges, it now looks forward to the July 11 release of consumer price index data and the July 12 release of producer price index data. The Fed will analyse this information and indicate its interest rate stance after its next scheduled meetings from July 30 to 31. Each of these announcements may lead to a shift in markets
Notes for readers
For those who are unfamiliar with the consumer price index and what the Fed is looking for, the US Bureau of Labor Statistics explained as follows:
The Consumer Price Index (CPI) measures the change in prices paid by consumers for goods and services.
The CPI reflects spending patterns for each of two population groups: all urban consumers and urban wage earners and clerical workers. The all urban consumer group represents over 90 percent of the total U.S. population. It is based on the expenditures of almost all residents of urban or metropolitan areas, including professionals, the self-employed, the poor, the unemployed, and retired people, as well as urban wage earners and clerical workers.
The CPIs are based on prices of food, clothing, shelter, fuels, transportation, doctors’ and dentists’ services, drugs, and other goods and services that people buy for day-to-day living.
The US Bureau of Labor Statistics added: “CPI is a statistical estimate that is subject to sampling error because it is based upon a sample of retail prices and not the complete universe of all prices.”
Concerning the produce price index, the US Bureau of Labor Statistics explained:
The Producer Price Index (PPI) is a family of indexes that measures the average change over time in selling prices received by domestic producers of goods and services. PPIs measure price change from the perspective of the seller.
About 10,000 PPIs for individual products and groups of products are released each month.
PPIs are available for the output of nearly all industries in the goods-producing sectors of the U.S. economy—mining, manufacturing, agriculture, fishing, and forestry—as well as natural gas, electricity, construction, and goods competitive with those made in the producing sectors, such as waste and scrap materials.
PPIs capture price movement prior to the retail level. Therefore, they may foreshadow subsequent price changes for business and consumers. The President, Congress, and the Federal Reserve employ these data in formulating fiscal and monetary policies.
