Fed October update: 'I told you so' or missed opportunity?
October 28, 2015
Did the Fed miss an opportunity at its previous meeting?
It came as no surprise that the Fed announced that its latest meeting ended with a decision to make no change in interest rates, and consequently bank rates. Conditions seem to have deteriorated since the prior meeting, in mid-September. At that time, conditions seemed ripe for the Fed to finally raise short-term rates. It is fair to argue whether not raising rates in mid-September was a missed opportunity, or whether the Fed's caution was confirmed by the slippage in economic conditions since then.
Fed statements consistently focus on two things: inflation and employment. The Fed describes its mandate as striking a balance between fostering price stability and job growth, and the Great Recession left both in shaky condition. Inflation has consistently run below the Fed's target rate of 2 percent and even experienced bouts of deflation, while unemployment peaked at 10 percent back in October of 2009.
Of the two problems, employment improved more quickly than inflation. By August 2015, the unemployment rate dropped by almost half, down to 5.1 percent. Low inflation, however, remained stubborn, most recently because of the sharp slide in oil prices since mid-2014.
It is naturally difficult for consumers to view low price increases as a problem. In particular, when price weakness means cheaper gasoline, it is hard to understand why the Fed found this so concerning. Even from an economic point of view, given that price weakness was largely due to a falling oil price trend that could not continue indefinitely, it can seem overly cautious for the Fed to have held out for inflation hitting its 2 percent target before raising interest rates.
For now though, it may be a moot point because the momentum in job growth appears suddenly to have stalled. Job growth was disappointing in both August and September, so the Fed may be back to having two major problems rather than just one.
Can the Fed say 'I told you so?'
Federal Open Market Committee statements are written in fairly dry economic language, and so it is no surprise that the Fed did not actually come out and say "I told you so" in its most recent statement. Still, the deterioration in employment growth between the last meeting and this one seems to confirm the Fed's cautious handling of the economy.
On the other hand, you could argue that if the Fed does not raise interest rates when it gets a reasonable chance at doing so, it will be left with fewer policy options when the economy really does start to deteriorate. After all, the U.S. is now more than six years into the current expansion. If that and getting the unemployment rate down to 5.1 percent haven't given this Fed the confidence to return interest rates to more normal levels, one has to wonder whether conditions will ever be strong enough to give them that confidence.
Add your comments: Do you think the Fed made the right decision or missed an opportunity in not raising rates?
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