Goldie Dots

Goldilocks was tired and hungry when she came across the Bears’ home.  Wanting to catch up on some sleep, she first tried Papa Bear’s bed, but it was too hard.  Then she jumped into Mama Bear’s, but it was too soft. Finally, she settled into Baby Bear’s, and it was just right.  Like her quest for comfort, the Federal Reserve is looking for policies which will offer the American economy a “just right” outcome.  Roughly speaking, “just right” would mean they could guide inflation’s trend down to their target of 2.0 percent without a substantially negative impact on the unemployment rate.

At the end of each quarter the Federal Reserve releases their dot plot.  This is a graph anonymously representing what individual members of the Federal Open Market Committee believe is the appropriate fed funds rate at the end of each calendar year.  Inevitably, policy will either be too hard, too soft, or just right.   If the central bank tightens too much, we could end up in a hard landing scenario. If they don’t tighten enough, then the economy may not extinguish the inflation surge America is in the midst of.  Not landing anytime soon could potentially set up an even harder landing in the more distant future.  On the other hand, if they get things just right, a soft landing could be on America’s horizon.

Finding the right balance for the American economy involves lots of variables and unknowns, a tough task given not even experts can predict outcomes with certainty.  The Federal Reserve has probably done the easiest part of its job this cycle, taking most of the heat out of inflation.  The requirements ahead will likely need more nuanced adjustments to navigate inflationary pressures without tipping the economy into a serious recession.  These folks certainly have their work cut out for them.  Finding a bowl of porridge in a bear family’s home in the forest might be easier than landing the world’s largest economy just right.