Fed's "Relaxed" Commitment to 2% Inflation Target Gives Investors the "Green Light" to Take Risk
The Fed's "relaxed" commitment to its 2% inflation target gives investors the "green light" to take risks. At the press conference following the June 13-14 FOMC meeting, Fed Chair Powell stated, "We remained committed to bringing inflation to our 2% goal." Really?
Remember that before the June meeting, policymakers said future policy moves are data-dependent. Before the meeting, the two critical economic reports showed payroll job growth of 339,000 and core CPI up 0.4% (5.3% in the last twelve months). So at the June meeting, policymakers raised their growth and core inflation forecast and lowered their year-end unemployment estimate but still decided to keep policy rates unchanged.
Is Fed policy data-dependent? A more accurate description of monetary policy is when the data doesn't fit the script, ignore it.
Fed Powell says policymakers are still waiting for the lagged effects of previous rate hikes as one of the reasons for pausing rate hikes. Yet, if policymakers thought the lagged effects were adverse, wouldn't that be reflected in their economic projections?
But the Fed's script gets even more friendly for investors. At the end of 2024, Fed policymakers expect core inflation of 2.6%, still well above the 2% target. Nonetheless, policymakers are telegraphing, or even promising, a 100 basis points reduction of official interest rates. Is that a firm commitment to 2% inflation?
Policymakers face an unusual set of economic and financial conditions. Never before has Fed raised official rates by 500 basis points and simultaneously encountered a labor and housing shortage and exuberant financial markets. Given those economic and financial conditions, it's difficult to see how a "relaxed" commitment enables the Fed to achieve its ultimate inflation objective. The more significant risk for investors is that growth and inflation dynamics are more robust, requiring more policy tightening currently in the Fed's dot plot. Yet, until the Fed admits its mistake, it's party time.