Source: Golden Ten Data
In an effort to curb inflation, the Federal Reserve's monetary policy has reached a point of uncertainty.
Federal Reserve Chairman Powell said at a press conference on May 1 that he doesn't want to talk about economic “assumptions,” but this is probably a topic he and other Fed officials turned to when discussing monetary policy. In an effort to curb inflation, the Federal Reserve's monetary policy has reached a point of uncertainty.
Powell and other Federal Reserve officials abandoned clear guidance on the possibility of cutting interest rates this year and instead focused their attention on the different short-term paths the economy might take and how they might respond to each situation.
Former Federal Reserve officials and staff with FOMC meeting experience said this shows how uncertain policymakers currently feel, and the intention is to shift their attention from the detailed economic and policy predictions they make each quarter to broader potential outcomes.
Powell's former adviser, Antulio Bomfim, who is currently the Global Macro Director of the Northern Trust Global Fixed Income Team, said that as we all know, “scenario analysis” does not mean that the Federal Reserve needs to explain every shock. Under normal circumstances, the economic statements put forward by the Federal Reserve staff at every meeting may be “quite bland.”
However, Bomfim said that Powell's explanation of the different paths the economy may take at the press conference after the May 1 meeting “caught my attention” and that “scenario analysis is important for dealing with these situations in situations where you are unsure what will happen next.”
The minutes of the Federal Reserve meeting will be released in the early hours of Thursday morning Beijing time, and may provide more details about policy changes.
“For me, the response to uncertainty is not to make more predictions,” San Francisco Federal Reserve Chairman Daly said earlier this month. “You will take different policy actions in different situations. I think the best way I can talk to people is by analyzing these scenarios rather than trying to make more accurate predictions.”
“Uncertainty” is very high
If the Federal Reserve's benchmark is that inflation continues to fall and interest rates are cut, then other possibilities include: the US unemployment rate begins to rise and interest rate cuts accelerate; inflation takes a long time to fall, and interest rate cuts are postponed; inflation unexpectedly accelerates, and interest rate hikes are necessary; and perhaps the most difficult situation is that inflation remains at the current level.
If public and market perception is too far ahead or behind the Federal Reserve, it will reduce the effectiveness of monetary policy and make the work of the Federal Reserve more difficult.
Donald Kohn (Donald Kohn), a former vice chairman of the Federal Reserve and a current senior researcher at the Brookings Institution, said that after Powell published the report and the anti-inflation process unexpectedly stalled, “I infer that there are some discussions within the Federal Reserve.”
Cohen believes that scenario analysis is a way for the market to “pay less attention” to the quarterly predictions of economic growth, unemployment, inflation, and appropriate policy interest rates, especially the “bitmap” of policy interest rate predictions. When seen as helping to stabilize public opinion, Fed officials will rely on it, and when officials do not want to provide specific guidance, and when it is viewed as something close to a promise, officials will call it a distraction.
Now is such a moment. The economy unexpectedly surpassed the Federal Reserve's forecast. After inflation did not improve in the first quarter, the Federal Reserve may reduce its expectations of cutting interest rates three times during the year.
Any prediction of current interest rate cuts will depend on the outlook for inflation and the job market, and the performance of both is very different from what policymakers expect.
Bill English, the former head of the Federal Reserve's monetary policy department and a professor at the Yale School of Management, said that Fed officials may maintain basic confidence in easing inflation and cutting interest rates, but “they do think the uncertainty is higher than usual.”
In contrast, discussing through a series of scenarios is “a way to specify to the public why things are uncertain... it seems helpful right now because they feel some situations are more reasonable.” English said.
Economic uncertainty has always been a sign of the post-COVID-19 era, but at present, the market not only has questions about key variables such as inflation and employment, but also about what conditions will cause the Fed to cut interest rates, keep interest rates stable, or raise interest rates again.
On May 1, Powell discussed a baseline where inflation continues to fall. This will eventually guarantee interest rate cuts. The decline in the job market will also lead to lower borrowing costs and a situation where the unemployment rate remains low. The PCE index “moves horizontally” near the current 2.7% level.
Powell said, “Under these circumstances, it may be appropriate to delay interest rate cuts,” and believes that the economy will eventually slow down and inflation will fall. Some analysts say this is waiting for “opportunistic anti-inflation.”
Cohen said that under these circumstances, the Federal Reserve can only be patient if inflation expectations do not rise. If they do, the Federal Reserve will try to get inflation back to 2% by slowing the economy and reducing pressure on the labor market.
edit/lambor