After raising the benchmark interest rate in December, the Federal Reserve didn’t increase the rate at the January 30–31 meeting.
The Fed’s Monetary Policy Report made on February 23 to Congress was optimistic about the economy. This optimism is based on three main factors:
- The strength of recent economic data
- Accommodating financial conditions
- The expected effect of the $1.5 trillion tax cut
The question now is how quickly the Fed will raise rates. “The Fed is seeking to raise rates gradually to maintain control of inflation without impeding an economic expansion that is nearing the end of its ninth year,” according to a February 21, 2018, New York Times article.
CNBC reported three rate increases are widely expected this year. However, a February 23, 2018, New York Times article reported, “A growing number of Wall Street analysts predict the improving economic forecast will persuade the Fed to raise rates four times this year.”
The Question of Inflation
The report to Congress stated the Federal Reserve still believes an inflation rate of 2% is most consistent over the longer run with the Fed’s statutory mandate. 12-month inflation has continued to run below 2%.
A Fed statement issued after the January meeting stated, “Inflation on a 12-month basis is expected to move up this year and to stabilize around the Committee’s 2 percent objective over the medium term.” The statement also said the Fed expects more gradual adjustments to monetary policy will lead to economic activity expanding at a moderate pace, with labor market conditions remaining strong.
Furthermore, “In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation.”
However, some sources question the Fed’s goal to keep inflation around 2%, according to the February 23 New York Times article. That goal limits how forcefully the Fed can respond to future downturns. “Alternative approaches fall into two broad categories: Permanently replace the Fed’s 2 percent target, or set it aside in the aftermath of downturns.” However, the article notes accepting higher inflation could cause political problems for the Fed.
The Fed is monitoring alternatives and last year began including a comparison between Fed management of interest rates and results produced by alternative approaches to monetary policy. The most recent Fed report, for the first time, included an inflation-averaging approach among those alternatives.
But any speculations are, as stated in the Monetary Policy Report, “subject to considerable uncertainty.”