What is the Fed thinking?

AT ITS monthly meeting on Jan 31, the Federal Reserve’s Federal Open Market Committee (FOMC) held firm on interest rates. “The committee judges that the risks to achieving its employment and inflation goals are moving into better balance,” the FOMC explained in its press release. But, the “economic outlook is uncertain, and the committee remains highly attentive to inflation risks”. As a result, “(the) committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 per cent”.

I must say, this announcement left me somewhat alarmed, particularly the parts about keeping the target range for the federal funds rate at 5.25 to 5.5 per cent.

After all, the US macroeconomy is already moving forward at a sustainable cruising speed. It is in balance, with an unemployment rate of 3.7 per cent, implying “full employment”. The core personal consumption expenditures (PCE) index (excluding food and energy) over the past six months shows that inflation has fallen steadily towards the Fed’s target.