Fed Week

Eakinomics: Fed Week The leading economic story this week is the two-day meeting of the Federal Reserve Open Market Committee (FOMC) today and tomorrow. At the conclusion, the FOMC is expected to announce that it is raising the federal funds target from zero to 0.25 percent, that bond purchases are over, and that it is making a plan to reduce the size of the portfolio (which pulls liquidity from financial markets and puts further upward pressure on rates). These moves can’t happen too soon, as inflation has soared to 7.9 percent from February. Equally troubling is that households are beginning to see inflation as the norm. The New York Federal Reserve Bank survey indicates that expectations are at a record level. Bloomberg reported: “The median one-year inflation expectation rose to 6% in February, matching a record set in November 2021, according to the latest consumer survey by the Federal Reserve Bank of New York. In three years, the respondents anticipate a 3.8% rate.” The one-year expectation is perhaps understandable; there has been a toxic mix of uber-stimulative fiscal policy, loose monetary policy, and energy price shocks. But it is troubling that households expect that in three years inflation will still be essentially twice its target rate. Expected inflation is a reason to bargain in advance for higher wages, which can produce need to pass costs along to consumers. In short, inflation expectations can be a self-fulfilling prophecy. The key, then, is for the Fed to move strongly enough to convince households that inflation will be under control. In its survey of the policy outlook, Bloomberg reported: “Goldman Sachs Group Inc. reckons the Fed will stop hiking sometime next year with their benchmark at 3%.” Let’s think about that. Inflation is likely to be in the range of 6 percent by year’s end. Combined with a 3 percent policy rate, the Fed will still have real (inflation-adjusted) interest rates of negative 3 percent. That’s a long way from the 1 to 1.5 percent real inflation that most people estimate is “neutral” for the Fed. All of this suggests that there are many more Fed Weeks in our future. Get ready!