Monetary Hopscotch

At first, hopscotch, a children's game, and monetary policy, an aspect of macroeconomics, couldn't seem more disparate. However, the patterns of play and decision-making within hopscotch might have parallels to central banking which aren’t exactly obvious.  In hopscotch, players take turns tossing a marker into a series of squares, then hop through the pattern, avoiding the square with the marker.  Each turn requires decision making, planning and adjustments versus the previous round.  Much like in hopscotch, monetary policy involves a series of strategic steps taken by a country's central bank. In America, these steps are aimed at managing inflation and keeping the nation fully employed in an attempt to ensure economic stability.

Interest rates are like the marker.  If done correctly, they can make endeavor easy.  Otherwise, they can complicate matters.  Think of this time last year when we didn’t yet know if inflation was peaking.  With hindsight, it might be concluded that the Fed’s presumption of transitory inflation in 2021 was the equivalent of throwing the marker into a difficult square.  In response they hopped rates up for 10 consecutive meetings, pushing them from virtually zero to over five percent.

Then last week they decided to skip their turn, leaving their marker were it lies.  Just like in hopscotch, their decisions must be forward-looking, predicting future economic conditions based on current data.  Worried about potentially pushing the American economy into recession and job losses which might coincide with it, they decided to do nothing until at least their next meeting in July.

At times, hopscotch players might face unexpected obstacles.  Perhaps an opponent’s marker is in your way or a dodgeball from an unrelated game may find its way to you mid-move.  Central bankers aren’t immune to such surprises.  Something within the economy might influence employment or inflation (e.g., a new product), and other times, exogenous shocks develop - Covid-19 comes to mind.

Just like a hopscotch player might take a moment to look over the squares and be on the lookout for potential distractions beyond them, Jerome Powell and the Federal Open Market Committee have decided to wait and watch for a bit.  They have until late July to absorb current conditions and come up with a strategy.  In the meantime, inflation is nowhere near their 2.0 percent target, and employment measures are still elevated.  Hopefully, their current game doesn’t morph into a game of a hop, skip, and a jump.  They’ve been hopping rates higher, are currently skipping, and who knows how the economy would react if they needed to jump them.