The Federal Reserve can’t keep things stable all by itself.
Contrary to earlier predictions, the September 19–20 Federal Open Market Committee (FOMC) meeting is becoming into a snooze fest. The FOMC’s decision to hold rates constant in September is highly anticipated by the market. The Soft-Landing faction has benefited from relatively low inflation and labor market data, which is clearly making FOMC members happy. The viewpoint of the market has been orally affirmed by committee speakers.
The FOMC is having trouble communicating in September, though. In the near future, the market anticipates no change in federal funds rates. The FOMC would appreciate the most recent statistics and might decide against indicating another raise without receiving sufficient justification or preventing a protracted delay in market expectations.
That work will be made easier by the August U.S. inflation figures, which is predicted to be slightly lower. Given that the average 2023 FFR in June was higher than 5.5%, the dot plot will be the main focus, with a special emphasis on 2023 growth predictions.
However, the Federal Reserve is facing a more significant, long-term communication issue. The Fed receives a lot of attention from the public, and a single monetary policy can engender animosity. The Fed and the larger economic community share a large amount of accountability.
The Fed needs to be more forthright about the fact that it cannot carry out stabilization efforts on its own and how the American policy mix influences monetary policy. If not, America’s inept and irresponsible political class may eventually threaten its independence.
Jerome Powell, the chairman of the Federal Reserve, has frequently declared during press conferences that “the Federal Reserve is responsible for maintaining price stability.” Price stability is one of the two pillars of the Fed’s mandate, thus it is unquestionably true. Hyperbole, however, might exacerbate the notion that the Fed is alone in charge of and capable of managing price stability.
The Outside the Fed’s Control Factors
Recent years have unequivocally shown that supply shocks and outside variables have a big impact on prices. The dynamics of countries that export oil, supply chains, shifts in the relative costs of goods and services, interruptions, technical advancements, pandemics, shutdowns, and China’s development are a few of these.
Price movements and overall economic performance are heavily dependent on monetary and structural policies. Monetary policy is affected by unstable fiscal impulses. These all fall outside of the Fed’s purview.
The Fed should be in charge of regulating general demand to meet supply and hitting its inflation target, according to some. However, speaking the truth is often easier than living it, especially in light of delays, uncertainty, and the Fed’s lack of a crystal ball.
Continuous narratives in pre-FOMC speeches by Fed governors and regional bank presidents increase the emphasis on monetary policy. They continue to place monetary policy at the forefront of the majority of economic reporting, thereby giving the public the false impression that a change of 25 basis points up or down has a Goldilocks influence on the economy and the trajectory of inflation.
In conclusion, monetary policy coverage has an impact on how economic and financial policies are communicated, leading to inflated expectations of what the Fed can deliver and ultimately putting both America and the Fed in jeopardy.
The Last Chance to Save Fed Independence
Even if Donald Trump significantly broke the gracious tradition established by the administrations of George W. Bush, Barack Obama, and Joe Biden to refrain from criticizing the Federal Reserve, a polarized political system can look for a scapegoat rather than take responsibility for its failed policies. Given the Fed’s present course, America’s enormous fiscal stimulus, long-term budget deficits, and major economic headwinds, it might put pressure on the Fed to maintain low interest rates.
Such occurrences can undermine the efficacy of monetary policy, which serves as a flexible tool for the independence and stability of the Federal Reserve. If Congress and/or the executive branch interfere with monetary policy, as they have in previous decades, it would be extremely harmful to America.
American economic policy debates must be in-depth if the Fed is to succeed. Along with subtly communicating monetary policy, Fed officials need to communicate with the public more forcefully and openly on how other policies affect the dual goals of monetary policy. The accomplishment of monetary policy objectives may be influenced by these influences.
If America adopts a more balanced blend of economic policies and realistically assesses the variables that can jeopardize the fulfillment of monetary policy objectives, it may be advantageous. However, this may make Fed officials uncomfortable because it takes them farther outside of their recognized sphere. The Fed and the larger American economic community may benefit from this.
The Fed should talk about the effects of other measures on its stated objectives in addition to improving the communication of monetary policy. If America adopts a more balanced mix of economic policies and takes a realistic perspective of the dynamics that can obstruct the fulfillment of monetary policy goals, this could potentially push Fed members beyond their perceived comfort zone in terms of their scope. Both the Fed and the larger American economy might gain from this.
The Fed cannot handle it by itself.