Federal Chairman Defends Hike Rise Policy

During the Jackson Hole symposium, Federal Chairman Jerome Powell expressed, “Inflation is near our 2 percent objective, and most people who want a job are finding one.” Powell anticipates stable interest rate increases to continue as the central bank aims to meet the dual mandate. The target range for the federal funds rate is at 1.75 percent to 2 percent for August 2018. It is apparent from the most recent FOMC statement, that the labor market and economic activity has strengthened suggesting another rate increase soon. The fed economists stress that it’s better to act than just waiting for inflation.

The Fed chairman said the economy’s “strong performance will continue” and wants to pave a way for normalization. The term normalization signifies that the central bank wants a returning policy aligned with a neutral interest rate that won’t stagnate the economy. Powell’s speech heavily emphasized the timeline of the inflation boom in the 1970s.

Over the course, the Fed has learned to be more attentive when trying to regulate inflation, “doing too little comes with higher costs than doing too much.”   The fed funds rate has been increased seven times since 2008.

Powell’s policy is textbook economics, keeping inflation expectations low and stable. The Fed’s strategy is to have stable rate increases so there is a balance between moving too quickly and raising rates to slowly. Should inflation become hazy, the Fed would act aggressively, although Powell does not see any signs of concern. “With solid household and business confidence, healthy levels of job creation, rising incomes, and fiscal stimulus arriving, there is a good reason to expect that this strong performance will continue,” he said.

On a final note, some economists criticize moving too gradually given the current state of the unemployment in the US could increase the bargaining power of workers which will then encourage inflation. Others insinuate that the economy could begin to lag and that additional rate increases could aggravate the slowdown.