Opinion from a Libertarian ViewPoint

The Fed Is Making It Up as It Goes, So It Ditched Forward Guidance

Posted by M. C. on July 30, 2022

The fact the Fed has no idea how things will go is emphasized by Powell’s admission that the Fed isn’t planning to offer any more forward guidance this year, which frees it up to make more last-minute decisions and to more aggressively make things up as it goes. Specifically, Powell said that moving forward “we think it’s time to just go to a meeting by meeting basis, and not provide the kind of clear guidance that we did on the way to neutral.”

Translation: “Things might go even more off the rails at any time, so let’s just play it by ear.”

Ryan McMaken

The Federal Reserve’s Federal Open Market Committee announced Wednesday it is raising its key policy rate—the federal funds rate—by 75 basis points to 2.5 percent. According to the FOMC’s press release, the committee recognizes that economic activity is declining but that Consumer Price Index (CPI) inflation also “remains elevated”:

Recent indicators of spending and production have softened. Nonetheless, job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.

The committee goes on to state that with these conditions in mind, it will raise the target rate in order to “achieve … [CPI] inflation at the rate of 2 percent over the longer run.” Moreover, the committee states it “will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities.”

There were not many surprises here. Most Fed watchers were predicting a 75 basis point increase, and that’s what the Fed delivered.

This then leaves us with the question of what now. The Fed doesn’t know, and the weakness of the present economy will keep the Fed very cautious moving forward.

As is clear from Powell’s press conference Wednesday, following the release of the FOMC statement, the Fed is still holding out hope for a “soft landing” in which it can significantly reduce inflation without sizably reducing employment or causing a greatly weakened economy.

How the economy will react to the Fed’s changes remains a complete mystery to the Fed, however, as has long been clear. It only took six weeks, after all, for the Fed to go from a stance of “economic activity appears to have picked up” (at the June meeting) to noting how “recent indicators of spending and production have softened” (in its July report).

See the rest here

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