The Federal Open Market Committee (FOMC) decided to raise the federal funds interest rate this week by 25 basis points. Taken by itself, an increase in short-term interest rates by 25 basis points is relatively unimportant. A change in interest rates that small is unlikely to have substantial effects on consumers’ or firms’ borrowing or lending.
The increase, though, is part of a series of increases, and that does matter. For much of 2022, the FOMC was playing catch up after misinterpreting the increase in inflation as “temporary” and small. This interpretation was in spite of the dramatic increase in M2, which grew 16 percent from February to June 2020. Absent other factors affecting the inflation rate, this suggests an increase in the level of prices in the United States by about 15 percent. Of course, this increase would occur over time. If households’ expectations of inflation in future years were unaffected, that would be the end of the story. While not as “temporary” or as minor as the FOMC initially interpreted the increase in inflation to be, higher inflation need not be persistent.
In response to the inflation, the Federal Reserve increased the federal funds rate from a range of 0.00 to 0.25 percent to 4.00 to 4.25 percent in 2022. These increases occurred due to increases by 0.25 to 0.75 percentage points at seven of the eight FOMC meetings in 2022. There were extraordinary increases of 0.75 percentage points in June, July, and September.
The series of increases can be interpreted as part of a plan to raise interest rates and lower inflation rates to decrease the extraordinary inflation owing to the one-off cash distributions in 2020.
These increases in the federal funds rate have been associated with a decrease in the inflation rate. The attached figure shows the inflation rates from January 2020 to December 2022 measured by the Consumer Price Index (CPI) and the Personal Consumption Expenditures Price Index (PCEPI). It also includes core CPI (CPILFE) and core PCEPI (PCELFE), which exclude food and energy prices. CPI is the most commonly used measure. The PCEPI is the Fed’s preferred measure of inflation, and Fed officials generally believe that core PCEPI is the best indicator of underlying inflation.
While there are differences, there is common overall behavior. After deflation in 2020, inflation returned and increased dramatically, peaking at 1.0 percent per month in March and June of 2022 for the PCEPI. These inflation rates are 12 percent per year, if they were to continue for a year. Core PCEPI inflation peaked at 0.6 percent per month in June, which would be an annual rate of 7.2 percent. Since then, inflation has been noticeably lower and is falling overall. While not too much should be made of any one month’s data alone, inflation fell in the second half of 2022. The inflation rate for the five months from June through December 2022 is 1.6 percent, which would be an annual inflation rate of about 3.2 percent. While not as low as the target average inflation rate of 2 percent, the direction of movement is correct.
Furthermore, the breakeven inflation rate on 5- and 10-year dollar-denominated and inflation-adjusted government securities is 2.3 percent. This is roughly consistent with the Fed’s target. These rates are down from 3.5 and 3.0 percent earlier in 2022. This suggests that expectations are more or less consistent with the Federal Reserve’s stated goals.
Given the lagged effect of monetary policy on the economy, it is quite possible that the inflation rate will gradually return to the Federal Reserve’s goal, and to what market participants expect, without any further changes in the Federal Funds rate.
Why not increase rates more, possibly buying insurance against inflation increasing?
While inflation is moderating, signs of impending recession are common. The long-term interest rate is above the short-term rate, which has been a reliable signal of recession at least since World War II. Reports of large layoffs at large companies have been common in the Wall Street Journal. The WSJ even had an article about whether it is appropriate to lay off people by email. M2 is not given much credence as a signal by many, just as it wasn’t for the recent inflation. That said, the recent monthly declines in M2 do not suggest higher, or even continuing, inflation.
While the Phillips Curve is commonly invoked as a reason to induce a recession and thereby lower inflation, the fall in inflation in 2022 is evidence that a recession is unnecessary. That is in addition to the large body of theoretical arguments and empirical evidence that the Phillips Curve is not informative.
While inflation is not down to 2 percent, the direction is correct. Given uncertainties surrounding the unusual stimulus and the lagged effects of monetary policy, it would be prudent to hold the Federal Funds rate constant for a few months and see how the economy responds to recent policy.
Kamati ya Soko la Wazi la Shirikisho (FOMC) imependekeza kuongeza kiwango cha riba cha Fedha ya Shirikisho kwa pointi 25 kwa wiki hii. Kwa upande mwingine, ongezeko la kiwango cha riba ya muda mfupi kwa pointi 25 ni muhimu. Mabadiliko katika viwango vya riba kwamba ndogo ni uwezekano wa kuwa na athari kubwa juu ya watumiaji au makampuni ya kukopa au kukopa. Hata hivyo, ongezeko hilo ni sehemu ya ongezeko la ziada, na hilo ni jambo muhimu. Kwa sehemu kubwa ya 2022, FOMC ilikuwa ikicheza catch up baada ya kutofautisha vibaya ongezeko la mfumuko wa bei kama "wa muda" na ndogo. Ufafanuzi huu ulifanyika licha ya ongezeko kubwa la M2 ambalo lilikua kwa asilimia 16 kuanzia Februari hadi Juni 2020. Kwa kutokuwa na sababu nyingine zinazoathiri kiwango cha mfumuko wa bei, hii inaonyesha ongezeko la kiwango cha bei nchini Marekani kwa karibu asilimia 15. Bila shaka, ongezeko hilo lingetokea baada ya muda. Kama matarajio ya kaya ya mfumuko wa bei katika miaka ijayo hayakuathiriwa, hiyo ingekuwa mwisho wa hadithi. Ingawa si kama "wa muda" au kama ndogo kama FOMC awali kutafsiriwa ongezeko la mfumuko wa bei kuwa, mfumuko wa bei ya juu haihitaji kuwa ya kudumu. Kwa mujibu wa ripoti ya Fedha, Fedha ya Marekani imepunguza kiwango cha Fedha ya Fedha kutoka 0.00% hadi 0.25% hadi 4.25% mnamo 2022. Mabadiliko hayo yalitokea kutokana na ongezeko la asilimia 0.25 hadi 0.75 katika mikutano saba kati ya nane ya FOMC mnamo 2022. Mabadiliko makubwa ya asilimia 0.75 yalitokea mwezi Juni, Julai na Septemba. Mfululizo wa ongezeko la Fedha unaweza kuelezwa kama sehemu ya mpango wa kuongeza viwango vya riba na kupunguza viwango vya mfumuko wa bei ili kupunguza mfumuko wa bei wa ajabu kutokana na mgawanyo wa mara moja wa fedha mnamo 2020. Ongezeko hili katika kiwango cha fedha za shirikisho limehusishwa na kupungua kwa kiwango cha mfumuko wa bei. Takwimu zilizoambatanishwa zinaonyesha viwango vya mfumuko wa bei kutoka Januari 2020 hadi Desemba 2022 vilivyopimwa na Kiashiria cha Bei ya Watumiaji (CPI) na Kiashiria cha Bei ya Matumizi ya Kibinafsi (PCEPI). Pia inajumuisha msingi CPI (CPI) na msingi PCEI (CPI), ambayo ni mbali na chakula na bei ya nishati. CPI ni kipimo kinachotumiwa sana. PCEPI ni kipimo cha Fed cha kupendelea cha mfumuko wa bei, na maafisa wa Fed kwa ujumla wanaamini kwamba PCEPI ya msingi ni kiashiria bora cha mfumuko wa bei wa msingi. Ingawa kuna tofauti, kuna tabia ya kawaida kwa ujumla. Baada ya kushuka kwa bei mnamo 2020, mfumuko wa bei ulirudi na kuongezeka kwa kasi, ukifikia kiwango cha juu cha asilimia 1.0 kwa mwezi mnamo Machi na Juni 2022 kwa PCEPI. Kiwango cha mfumuko wa bei ni asilimia 12 kwa mwaka, ikiwa itaendelea kwa mwaka mmoja. Kiwango cha juu cha PCEI kilikuwa 0.6% kwa mwezi mwezi Juni, ambayo ni kiwango cha kila mwaka cha 7.2% kwa mwaka. Tangu wakati huo, mfumuko wa bei umekuwa chini sana na unashuka kwa ujumla. Ingawa hakuna haja ya kufanya mengi ya data ya mwezi mmoja pekee, mfumuko wa bei ulipungua katika nusu ya pili ya 2022. Kiwango cha mfumuko wa bei kwa miezi mitano kuanzia Juni hadi Desemba 2022 ni 1.6%, ambayo itakuwa kiwango cha mfumuko wa bei ya kila mwaka ya karibu 3.2%. Ingawa si chini kama lengo la kiwango cha wastani cha mfumuko wa bei ya asilimia 2, mwelekeo wa harakati ni sahihi. Kwa kuongezea, kiwango cha ulemavu wa kiwango cha ulemavu wa dola za dola za dola za dola za dola za dola za dola za dola za dola za dola za dola za dola za dola za dola za dola za dola za dola za dola za dola za dola za dola za dola za dola za dola za dola za dola za dola za dola za dola za dola za dola za dola za dola za dola za dola za dola za dola za dola za dola za dola za dola za dola za dola za dola. Hii ni takriban sambamba na lengo la Fed. Kiwango cha chini cha asilimia 3.5 na 3.0, kulingana na mwaka wa 2022. Hii inaonyesha kwamba matarajio ni zaidi au chini ya upatano na malengo ya Fedha ya Fedha. Kwa kuzingatia athari ya nyuma ya sera ya fedha kwenye uchumi, inawezekana kabisa kwamba kiwango cha mfumuko wa bei kitaanza kurudi kwa lengo la Fed na kwa kile wanachama wa soko wanatarajia bila mabadiliko zaidi katika kiwango cha Fedha za Fedha. Kwa nini usiongeze viwango zaidi, labda kununua bima dhidi ya kuongezeka kwa mfumuko wa bei? Ingawa mfumuko wa bei unapungua, ishara za kushuka kwa bei kunakoelekea ni za kawaida. Kiwango cha riba cha muda mrefu ni juu ya kiwango cha muda mfupi, ambayo imekuwa ishara ya kuaminika ya mfumuko wa uchumi angalau tangu Vita Kuu ya Pili. Ripoti za kufutwa kazi kwa wafanyakazi wengi katika makampuni makubwa zimekuwa za kawaida katika gazeti la Wall Street Journal. "Wikipedia ina makala ya ""Je, ni sahihi kuondoa watu kwa barua pepe?""" M2 haijapewa imani sana kama ishara na wengi, kama vile haikuwa kwa mfumuko wa bei wa hivi karibuni. Kwa mujibu wa ripoti hiyo, kupungua kwa kiwango cha M2 kwa mwezi kwa sasa hakusababisha kuongezeka kwa kiwango cha bei ya sarafu, na hata haisemi kwamba kiwango hicho kitatokea. "Wakati mwinuko wa Phillips unajulikana kama ""sababu ya kuchochea mfumuko wa uchumi na hivyo kupunguza mfumuko wa bei,"" kushuka kwa mfumuko wa bei katika 2022 ni ushahidi kwamba mfumuko wa bei ni ""hauhitaji.""" Hiyo ni pamoja na mwili mkubwa wa hoja za kinadharia na ushahidi wa kihistoria kwamba Phillips Curve si habari. Ingawa mfumuko wa bei haujashuka hadi asilimia mbili, mwelekeo ni sahihi. "Kwa kuzingatia kutokuwa na uhakika kuzunguka kichocheo cha kawaida na athari za nyuma za sera ya fedha, itakuwa busara kuweka kiwango cha Fedha za Shirikisho kwa miezi michache na kuona jinsi uchumi unavyojibu sera ya hivi karibuni. """