If you’re keeping an eye on the financial markets or the U.S. economy, you’ve probably heard about the inflation story. On September 7, 2023, Lorie Logan, the President of the Dallas Federal Reserve, gave us some valuable insights into this ongoing saga. In her speech, she unpacked why inflation matters, what’s happening in the labor market, and why the Federal Reserve needs to tread carefully.
Why Inflation Matters
Let’s start with the basics. The Federal Open Market Committee (FOMC), the group responsible for steering U.S. monetary policy, has a dual mission: maximum employment and stable prices. Stable prices mean keeping inflation in check.
The ideal target for inflation, according to the FOMC, is 2 percent annually, measured by the personal consumption expenditures (PCE) price index. But lately, inflation has been playing hard to get. In 2021, it soared to a whopping 6 percent, and in 2022, it was still uncomfortably high at 5.3 percent. Even in the first seven months of 2023, it was marching on at a 3.2 percent annual rate.
The Labor Market Conundrum
So, why is this a big deal? Well, high inflation isn’t just a number on a chart. It impacts people’s lives. When prices go up faster than our paychecks, we feel the pinch. Businesses also find it challenging to make plans when they can’t predict costs or prices.
Now, here’s where the labor market comes into play. In the past year, we’ve seen a wild ride in the job market. There were more job openings than you could shake a stick at, and the unemployment rate dropped to historic lows. But, interestingly, the labor market is still super strong.
For example, the U.S. has been adding around 150,000 jobs every month. That’s more than enough to keep up with the natural growth of the workforce. And, if you look at wage data, it tells you something fascinating. Employers are still competing fiercely for workers. Wages have been rising at an annual rate of over 4 percent, compared to just 3 percent in 2019.
Reading the Signs in the Financial Markets
Now, let’s talk about what’s been happening in the financial markets. In the weeks following the July FOMC meeting, we saw a noticeable tightening of financial conditions. The 10-year Treasury yield shot up by nearly 50 basis points, and mortgage rates reached levels not seen since 2001.
Some of this was in response to strong economic data. Investors know that the FOMC might have to raise interest rates to cool down an overheating economy. But it’s not just monetary policy driving these moves. There’s been other news in the market influencing interest rates.
The Need for Caution and Balance
So, where does this leave us? Logan emphasizes that we need to proceed with caution. Tightening too little could leave us with persistently high inflation, which isn’t great. But on the flip side, going too hard on the brakes could hurt households and businesses and maybe even cause inflation to drop below our 2 percent target.
“I’m not yet convinced that we’ve extinguished excess inflation. But in today’s complex economic environment, returning inflation to 2 per cent will require a carefully calibrated approach — not endless buckets of cold water,” she said at a Dallas Business Club event.
A year ago, the Fed was jacking up interest rates pretty quickly to tame soaring inflation. But you can’t keep tossing cold water on the economy just in case things get too hot. That’s not the plan. So, Logan suggests a gradual approach, keeping a close eye on the balance between inflation risks and economic growth.
She also reminds us that last year, they slowed down the pace of rate increases, and they might do it again.
“And another skip could be appropriate when we meet later this month.” She added.
This measured approach allows them to gather and assess data carefully, reducing the risk of economic chaos.
Looking Ahead: The Carefully Calibrated Approach
In the coming months, as they continue to evaluate data and the economic outlook, it might become evident that more action is needed to rein in inflation. The FOMC has its water bucket ready and won’t hesitate to use it when necessary. But they’re not in a rush. This careful and calibrated approach is aimed at achieving maximum employment and price stability sustainably.
So, that’s where we stand in the world of monetary policy and inflation. Keep an eye on how the story unfolds because, as we’ve learned from Logan’s insights, it’s a dynamic one that impacts us all.
Comments