crosjl.blogg.se - If the fed wants to lower the federal funds rate it can

If the interpretation that inflation was caused mainly by supply constraints is correct, then that suggests that as this multitude of supply factors sort themselves out - and many already have, from autos to some building materials to airfares - the U.S. A reasonable conclusion, therefore, is that as of early 2020, strong demand had at best a very modest effect on inflation, as long as supply conditions were normal. But we enjoyed similarly strong demand in late 2019, before the pandemic: the unemployment rate - a simple but fairly accurate indicator of demand strength - at that time was about 3.5 percent, yet the Fed’s challenge then was to raise stubbornly low inflation to its 2 percent target.

An alternative explanation is that the primary culprit behind elevated inflation is an excess of aggregate demand due to a recovered economy spurred in part by generous government support during the COVID pandemic.The main factors raising inflation may well have been transitory, but a cavalcade of global disruptions, including the war in Ukraine and more recent COVID responses in China, have caused more persistent increases in inflation. 2021 had been at or above 5 percent for six months. By late-2021, the notion that inflation would ease within months was dubious - inflation by Dec. But “transitory” inflation turned out to be longer-lived than many expected. In the first half of 2021 many people thought that inflation would come down fairly quickly with the easing of these constraints. Most agree that COVID shutdowns led to transitory supply constraints.These more recent readings probably better reflect the current underlying rate of inflation. Inflation over the past 3 to 6 months has declined to somewhere between 2.5 and 4.5 percent (at an annual rate), depending on the month (see chart above). The twelve-month inflation rates compare current prices to those from one year ago and are thus arguably too backward-looking. It has since retreated to about 6 percent ( 5 percent for the Fed’s preferred inflation measure, the personal consumption expenditures chain-type price index, or PCE) – lower, but still well above the Fed’s target rate of 2 percent.

Inflation over the past 12 months, as measured by the CPI, was more than 9 percent in the summer of 2022 – the highest rate since 1981.

After reaching the highest rates in decades, inflation has been on the retreat.

The risk of a hard landing has risen substantially, largely due to tighter Fed policy. Is the Fed overreacting with ongoing rate increases? Does reducing inflation require substantial increases in unemployment? To answer these questions, we need to understand what has caused inflation’s rise, what is causing its more recent decline, how restrictive is current and prospective Fed policy, and how much monetary policy tightening is needed to appropriately balance legitimate concerns about inflation against concerns about rising unemployment. But the Fed is also facing the very real risk that its efforts to lower inflation will cause a recession. Nonetheless, the Fed’s policy statement after the March meeting still indicated that “… some additional policy firming may be appropriate”. At one-quarter percentage point, the ninth consecutive rate increase in March 2023 was less than what had been widely anticipated just a few weeks earlier, likely in recognition that the failures of Silicon Valley Bank and Signature Bank could lead to a retraction in bank credit. Since March of 2022, the Federal Reserve has raised interest rates briskly, hoping to reverse a historic rise in inflation, moving the Federal Funds Rate from near-zero to the current 4.75-5%.

Former EVP and Director of Research, Federal Reserve Bank of Boston The Issue: