Where’s the Fulcrum?

Monetary policies executed by the Federal Open Market Committee (FOMC) are designed to fulfill our central bank’s dual mandate: full-employment and price stability.  What the heck do those terms mean? 

Let’s explore them.  Generally speaking, full-employment means that everyone who wants a job can get one.  How about price stability?  That one is even less obvious than full-employment.  The FOMC has decided to define stability as gently rising.  So when inflation is moving up, but not up at a worrisome pace, they find prices are stable.  Confusing?  Yes, but that’s why they define a two percent inflation rate as stable.

These mandates are theoretically at odds with one another.  Historically, full-employment leads to rising wages, which creates two issues: higher input costs to employers and more money chasing goods and services.  Both of these knock-on effects are more likely to cause upward pressure on prices (inflation) than not.  Does it matter that these mandates are in conflict?  The short answer could be yes.

When the economy has high unemployment, the FOMC attempts to stimulate output by lowering rates, and they raise rates to cool things off when inflation gets past their comfort zone.  However, research from the Federal Reserve Bank of Richmond (click here), indicates results from monetary policies are asymmetric.  Our central bank appears to be better at cooling off a hot economy than stimulating it during a recession.

This could help explain the reluctant growth rate in America since the Great Recession.  Despite historic attempts at stimulating output, America’s growth rate has averaged 2.3 percent since its end.  That is 36 percent slower than the expansion America enjoyed from 1991 to 2001, a period of similar length.

Atlas has been writing about deceleration in some of our indicators for several months now.  When combined with some of the recent testimony from FOMC Chairman Jerome Powel, the findings of the research from the Richmond Fed make it seem unlikely that the FOMC will rush to continue raising rates until signs of a quicker economic pace begin developing.