Fed's Decision: "Go Slow" or "Go Bold"?
In the movie "Draft Day," Kevin Costner, the GM of the Cleveland Browns, tells a stunned GM of the Seattle Seahawks of a last-minute trade involving current and prospective draft picks that Seattle got from Cleveland only a few days ago "We live in a different world than we did just 30 seconds ago." The Fed also lives in a different world than just 30 or 60 days ago, meaning what many Fed officials thought would be the appropriate policy stance when they exited the January 25-26 FOMC meeting is no longer adequate or sufficient at the March 15-16 meeting.
At the press conference following the January FOMC meeting, Federal Reserve Chair Jerome Powell stated, "it will soon be appropriate to raise the target for the federal funds rate." Since that meeting, most policymakers have hinted that they would support a 25 basis points hike in the federal funds rate at the March meeting.
Yet, a 25 basis points hike in the federal funds rate would result in the real federal funds rate being lower in March than it was estimated to be in January. The reason is that reported consumer price inflation is markedly higher. To be sure, the reported twelve-month change in the consumer price index at the January meeting was 7%, and now through February 2022, it's almost 100 basis points higher at 7.9%.
At next week's FOMC meeting, will policymakers adopt a "go slow" or a "go bold" strategy? Betting odds indicate a "go slow" approach. Yet, if policymakers want to change the narrative and regain credibility on fighting inflation, "go bold" would be a better decision.
Ideally, a "go bold" strategy would start with a 50 basis point hike and end the promise that official rate increases would be gradual, modest in scale, and only occur at regularly scheduled meetings. Breaking the inflation cycle and inflation psychology requires bold moves.
In 1994, former Fed Chair Alan Greenspan stated, "If the Federal Reserve waits until actual inflation worsens, it would have waited too long." Policymakers have waited too long, and it's now incumbent on them to move quickly and limit the downside risks to the economy that have accompanied every inflation cycle of the past 60 years.