4 ms·

As others have pointed out, the stated goal is 2%. Keep in mind, however, that the Fed's founding mandate is to balance price stability with unemployment. The m

As others have pointed out, the stated goal is 2%. Keep in mind, however, that the Fed's founding mandate is to balance price stability with unemployment. The mandate takes priority over their stated inflation target, so don't be too surprised if the Fed pivots strategy sooner depending on how the labor market evolves. You should also keep in mind that inflation trends tend to lag behind monetary policy, so the Fed will actually pivot strategies ~6-12 months prior to when the inflation rate is projected to return to 2%. This means that the actual rate we land at will be a lot more imprecise -- potentially as high as 4% or as low as 1% -- while policy gets dialed in. The Fed has historically been fine with a sine-wave pattern of this nature so long as it averages out to 2% over time (there will also probably be some magical thinking in underweighing the past 12 months of extraordinary inflation for the purposes of such averages). One last thing: the Fed typically uses the core PCE for measuring inflation, which excludes food and energy prices, since they're prone to price shocks. The year-over-year core PCE was 4.8% for the month of July. They'll probably choose to overshoot this measure, however, since inflation sentiment over the CPI is highly negative.

starkd 4y ago
But they've lost a lot of credibility in being able to make those projections. The inflation-is-transitory call was a major blunder.
- chaorace 4y ago
  Yes, well... they make their own predictions, so it's not really a matter of whether the public trusts the Fed as long as they are internally unified. Public inflation expectations certainly do play a role in inflation, but, as Volcker showed us in the 80s, it doesn't matter how much credibility you have with the public if you're willing to slam on the brakes hard enough.
  - starkd 4y ago
    But I think a lot of the Fed's strategy was jawboning the rate increases - aka offering "forward guidance". Notice how the rate hikes were fairly measured and tepid. They didn't even start the actual QT until a few months ago. There's a limit to how effective jawboning is, and it requires the public have credibility in the Fed to do so. Eventually, you have to back it up with actions.
    - chaorace 4y ago
      That's a fair point, but let's also consider that markets tend to overreact to rate hikes. The public's languid response to the Fed's inching of the interest rate may actually be a desireable outcome. If they were truly going for shock & awe, it would have been much more effective do one single 2% hike rather than breaking it up over 3 adjustments.
- jrsj 4y ago
  I think it could have been but the underlying issues were never solved (bad enough to make inflation permanent on its own) and then energy and food markets were disrupted by escalation of war in Ukraine. Had the federal government pursued different strategies this all could have been avoided and these rate hikes would have come at a much slower rate.

starkd 4y ago

But they've lost a lot of credibility in being able to make those projections. The inflation-is-transitory call was a major blunder.

chaorace 4y ago
Yes, well... they make their own predictions, so it's not really a matter of whether the public trusts the Fed as long as they are internally unified. Public inflation expectations certainly do play a role in inflation, but, as Volcker showed us in the 80s, it doesn't matter how much credibility you have with the public if you're willing to slam on the brakes hard enough.
- starkd 4y ago
  But I think a lot of the Fed's strategy was jawboning the rate increases - aka offering "forward guidance". Notice how the rate hikes were fairly measured and tepid. They didn't even start the actual QT until a few months ago. There's a limit to how effective jawboning is, and it requires the public have credibility in the Fed to do so. Eventually, you have to back it up with actions.
  - chaorace 4y ago
    That's a fair point, but let's also consider that markets tend to overreact to rate hikes. The public's languid response to the Fed's inching of the interest rate may actually be a desireable outcome. If they were truly going for shock & awe, it would have been much more effective do one single 2% hike rather than breaking it up over 3 adjustments.
jrsj 4y ago
I think it could have been but the underlying issues were never solved (bad enough to make inflation permanent on its own) and then energy and food markets were disrupted by escalation of war in Ukraine. Had the federal government pursued different strategies this all could have been avoided and these rate hikes would have come at a much slower rate.