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The U.S. Federal Reserve has hinted that it may soon start reversing the cycle of increasing interest rates after nudging them up 11 times through the second half of 2022 and most of 2023.
The Federal Open Market Committee (FOMC) in a press release expressed satisfaction with the inflation rate consistently below 2 percent target.
It said that FOMC judges that “following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.”
The change in the Federal Reserve outlook is significant in that in November 2023, Christopher Waller, a member of the Fed's Board of Governors, cautioned that inflation is still too high and that it's not yet certain if a recent slowdown in price increases can be sustained.
Central banks traditionally adopt lower interest rates to fuel economic activity and employment generation.
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The Federal Reserve said the inflation rate over the longer run is determined by monetary policy, and hence the FOMC has the ability to specify a longer-run goal for inflation. It said the FOMC reaffirmed its judgment that inflation at the rate of 2 percent, “as measured by the annual change in the price index for personal consumption expenditures,” was consistent over the longer run with the statutory mandate.
Excerpts from the Federal Reserve press release:
The FOMC is firmly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates. The Committee seeks to explain its monetary policy decisions to the public as clearly as possible.
Such clarity facilitates well-informed decision-making by households and businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society.
The Committee judges that the level of the federal funds rate consistent with maximum employment and price stability over the longer run has declined relative to its historical average. Therefore, the federal funds rate is likely to be constrained by its effective lower bound more frequently than in the past. Owing in part to the proximity of interest rates to the effective lower bound, the Committee judges that downward risks to employment and inflation have increased. The Committee is prepared to use its full range of tools to achieve its maximum employment and price stability goals.
The maximum level of employment is a broad-based and inclusive goal that is not directly measurable and changes over time owing largely to non-monetary factors that affect the structure and dynamics of the labor market. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee’s policy decisions must be informed by assessments of the shortfalls of employment from its maximum level, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments.
Read the full FOMC press release here.
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