Image Source: PixabayThe Fed should not be targeting interest rates. But if it insists on doing so, then the most efficient regime would adjust the fed funds rate target by basis points (i.e., 0.01%), not quarter-point increments. In addition, the rate should be adjusted daily based on the median vote of the FOMC. It should move around like a market price, rising and falling unexpectedly as new information comes in each day.Instead, the Fed has adopted a clumsy procedure of quarter-point adjustments every 6 weeks. Even worse, they’ve made the system even more clumsy by investing inflection points with vast significance:Chair Jerome Powell, who is speaking later Friday, has stressed the need for patience, saying the timing of the first-rate cut would be “highly consequential.” Policymakers will have access to one more PCE report, in addition to others on consumer and producer prices as well as employment, before their next meeting starts on April 30.PS. Here’s a prediction for 2024: Inflation will remain above the Fed’s target, disappointing those who expected a soft landing. The economics profession will fall all over itself making up phony “supply-side” excuses for the lack of progress against inflation (which has obviously been a mostly demand-side problem and will remain so in 2024.)As always, watch the NGDP growth rate, which remains too high. From the same Bloomberg article:
“We really just haven’t seen that consumer fatigue that we were getting some hints of in the last month’s data,” said Sarah House, senior economist at Wells Fargo & Co. “That’s going to make it really hard, I think, for businesses to hold the line on prices if consumers are still willing to splash out at these levels.”
Translation: If NGDP growth remains high, the inflation will persist.More By This Author:Is The Natural Rate Of Unemployment Turning Higher? Why No Recession (So Far)?Price Indices: Constant Utility Or Constant Quantity?
