range for the federal-funds rate to between 0.25% and 0.5%. The decision raises more questions than it settles. Most involve uncertainty about future interest-rate changes, and some about technical or operational issues.
The Federal Open Market Committee’s rationale for its decision offers clues about what may come next. Future decisions, the FOMC said, will be dependent on “a wide range of information.” That by itself is not informative, but a reading of the entire news release suggests that continued improvements in labor-market conditions will be critical to future rate decisions. The first paragraph discusses the improvement in labor-market conditions. These conditions are also the first item mentioned in the list of information to be considered for monetary-policy decisions.
The Fed’s dual mandate requires the FOMC “to foster maximum employment and price stability.” The Fed is counting on the actual inflation rate to move up to its target rate of 2%. Thus far, inflation has stubbornly remained below that target. Fed officials are anticipating that tightening labor-market conditions will produce upward pressure on wage rates and then prices.
Using forward guidance instead of a monetary rule once again leaves financial markets unsettled.
That analysis derives from the Fed’s continued belief in the Phillips curve, the theory that there is an inverse relationship between the unemployment rate and the inflation rate. Like many economists, I think the reasoning behind the Phillips curve theory is flawed and has been discredited by the work of numerous researchers, of which Milton Friedman is the most notable. But it is fundamentally the Fed’s model. Accordingly, improvements in indicators of labor-market conditions are important predictors of future Fed behavior.
http://www.cato.org/publications/commentary/feds-uncertain-leap-forward
The Federal Open Market Committee’s rationale for its decision offers clues about what may come next. Future decisions, the FOMC said, will be dependent on “a wide range of information.” That by itself is not informative, but a reading of the entire news release suggests that continued improvements in labor-market conditions will be critical to future rate decisions. The first paragraph discusses the improvement in labor-market conditions. These conditions are also the first item mentioned in the list of information to be considered for monetary-policy decisions.
The Fed’s dual mandate requires the FOMC “to foster maximum employment and price stability.” The Fed is counting on the actual inflation rate to move up to its target rate of 2%. Thus far, inflation has stubbornly remained below that target. Fed officials are anticipating that tightening labor-market conditions will produce upward pressure on wage rates and then prices.
Using forward guidance instead of a monetary rule once again leaves financial markets unsettled.
That analysis derives from the Fed’s continued belief in the Phillips curve, the theory that there is an inverse relationship between the unemployment rate and the inflation rate. Like many economists, I think the reasoning behind the Phillips curve theory is flawed and has been discredited by the work of numerous researchers, of which Milton Friedman is the most notable. But it is fundamentally the Fed’s model. Accordingly, improvements in indicators of labor-market conditions are important predictors of future Fed behavior.
http://www.cato.org/publications/commentary/feds-uncertain-leap-forward
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