Analysis | Federal Reserve Faces Political Dilemma Of Its Own –

Added to this is a new set of uncertainties facing the global economy regarding the Russian invasion of Ukraine, and it should come as no surprise that members of the Federal Open Market Committee expressed divergent views prior to their discussion. Keeping the FOMC together is a challenge for President Jerome Powell. However, he is undermined by the importance of making the right decision among the less ideal options for that policy.

Many of the Fed’s headaches, however significant, don’t end there. Whatever he decides this week, I suspect he will face fresh criticism. Understanding why it is important to illustrate the significant uncertainty that global politics and economy have added to the tragedy in Ukraine.

A suboptimal selection menu is often associated with decision making, as is the current Fed, which is seriously lagging behind in the field, especially if, as many do today, due to rising prices, if citizens are directly suffering. . . The central bank policy dilemma is particularly acute. It was far from the world of early best policy responses – so, as some of us have argued, the Fed should and could start easing its leg off the stimulus accelerator last summer – central bank options aren’t over yet. . Direct and satisfying.

Just think of the alternatives to the federation’s two main policies.

Fed officials say that by fulfilling its “maximum employment” mandate – although labor force participation rates are still very low – the central bank can take things for granted.

Taking bold steps ahead of time will reduce the risk of meeting expectations that have already joined the growing inflation pool (from high commodity prices and wage increases to supply chain delays and costly transportation). This would mean initiating a cycle of rate hikes with gains of at least 50bp – indicating more aggressive growth – and the start of the balance outflow over the next two months.

This approach will allow the Fed to regain its anti-inflation credibility and better control its political narrative. I just say “a little” because when the Fed misinterprets inflation as a “step” by the end of November, it will continue to lose its inflation forecast, revise the forecast (which it will still need this week) the markets they will have to see more results. And, absurd as it may sound, given how high inflation has been for months, waiting to completely stop emergency liquidity injections last week.

The problem with this approach is that it risks turning the US economy into recession. This is not a risk that can be ignored, especially considering that the most vulnerable sections of the population will be the most at risk. Those who have already experienced a significant erosion of purchasing power due to the dramatic rise in food and gas prices can now face a loss of income from both fear and reality.

The second option is a “pigeon spin” cycle.

In this scenario, the Federal Reserve will raise rates by just 25 basis points on Wednesday, leaving some rather vague policy guidelines and maintaining flexibility on how and when to start cutting the budget by $ 9 trillion.

Again, this is not a very attractive policy option. It will do little to curb inflation expectations, making it more likely that employees and companies will try to more fully compensate for past price increases, and will also begin to take preventative measures to protect themselves from future inflation.

While it is particularly difficult to predict with certainty what the Federal Reserve will ultimately do, I am inclined to think that Sagittarius might choose a perceived middle ground in favor of trying to strengthen it. Notably, the 25-point hike is accompanied by highly conditioned language of what will happen after the central bank tries to maintain maximum political flexibility in both interest rates and balance sheets.

While this may be seen by some as “doing something against inflation”, it could be seen as limiting monetary policy impulses for a momentary contraction and causing less market intimidation. But it won’t be expensive. This will entail the risk of financial and price instability in the future, as well as for the real economy.

A guarantee of this is that even after the FOMC meeting on Wednesday ends, the Fed will continue to dig a deep hole for itself.

Source: Washington Post