Inflation still the enemy as Fed focuses on jobs, stable prices

At a press conference on June 12, Federal Reserve Chair Jerome Powell gave a speech highlighting US economic performance.

Fortunately, as Powell noted, the US economy has made significant progress, with the labor market and supply-and-demand conditions now in better balance, and unemployment rising, but still low at 4 percent.

However, despite the improved economic performance, as evidenced by the moderate growth in gross domestic product from 3.4 percent in the fourth quarter of last year to 1.3 percent in the first quarter of this year, the Fed believes that the inflation rate is still too high — even with a significant drop from a peak of 7 percent to 2.7 percent.

Central banks around the world use monetary policy to stabilize inflation at targeted levels, though higher interest rates, for example.

As indicated by Powell in his speech, the Fed, through its Open Market Committee, remains squarely focused on achieving the dual goals of maximum employment and stable prices for the benefit of the American people.

The FOMC judges that in the longer run an annual increase in inflation of 2 percent is most consistent with the Fed’s mandate for price stability and maximum employment.

According to Bankrate website, in the aftermath of the post-pandemic inflation surge, the FOMC has raised interest rates 11 times in the span of about 18 months, bringing the federal funds rate to a 23-year high of 5.25-5.5 percent. Throughout its history, the Fed’s key rate has been as high as 19-20 percent and as low as 0-0.25 percent.

Central banks around the world use monetary policy to stabilize inflation at targeted levels, though higher interest rates, for example.

The Fed is determined to return inflation to 2 percent, even though the rate has eased notably over the past two years.

Additionally, total personal consumption expenditures and core PCE prices rose by 2.7 and 2.8 percent, respectively, over the 12 months to April 2024.

The consumer price index has witnessed trends running higher than the PCE price index, and rose 3.3 percent over the 12 months to May 2024, while the core CPI rose by 3.4 percent.

All of the indexes that measure inflation in the US economy have dictated that the Fed stick to its decision to keep interest rates unchanged at 5.25-5.5 percent, despite the possible negative effects on American consumers’ financial ability and borrowing capability.

The FOMC projected that US GDP growth will slow from last year, with a median projection of 2.1 percent this year and 2 percent over the next two years.

The Fed realizes that easing policy restraint too quickly or too dramatically could result in a reversal of the progress it has seen on inflation. At the same time, reducing policy restraint too late or too little could unduly weaken economic activity and employment.

To mitigate these concerns, when considering any adjustments to the target range for the federal funds rate, Powell indicated that the FOMC will carefully assess incoming data, the evolving outlook, and the balance of risks.

• Talat Zaki Hafiz is an economist and financial analyst. X: @TalatHafiz