Given that the holiday break is upon us, this FOMC-related post is intended to give you, the educator, food for thought if you are interested in diving a bit deeper into issues surrounding the Federal Reserve and their policies.  You never know, this could come in handy if the topic comes up during one of those holiday gatherings....

The Issue

As part of this month’s FOMC, members revised their projections for economic indicators (SEP), and their interest rate projections are higher than what the market believes they will be a year from now. This made for interesting questions during the post FOMC press conference and among the talking heads afterward. (For more on the SEP, check out this EconExtra from September that explains it.)

Resources

For a thorough review of what came to light in the Powell press conference this week, and how we got to where we are today and where we have been in terms of inflation, take five minutes to watch Gary Cohn on CNBC. He does a good job of honing in on the remaining component that may be driving inflation—wages.

In terms of market expectations, the market is looking for rate cuts, no matter how many times Jerome Powell says that the Fed will “stay the course” (keep interest rates elevated or “restrictive”) until the job is done (inflation has come down to target levels.) Steve Liesman of CNBC was the first journalist to ask a question during Powell’s post announcement press conference. He pointed out the difference between the market and the Fed. In this five-minute CNBC segment from the day after the FOMC, Liesman outlines the Fed projections and shows the deviation between the economists and the market.   They are aligned through mid-year, but the market is lower a year from now. He also discusses how financial conditions have not tightened as much as the Fed has been looking for.  (Listen carefully and you will be able to discuss this subject in terms of “hawks” and “doves.” There is a ship/lighthouse analogy given that could also be fun to use in conversation.)

Finally, here is a brief Bloomberg video clip on the divergent views.   Two of the commentators believe the market will have to move to the Fed view in 2023, as they have had to do through 2022, but a third commentator believes the Fed will move.

Critics Become More Public

There have always been critics of Fed policy. If you are interested in forming your own opinion on the matter and are looking to hone your arguments, here are two very different perspectives that might be useful.

Charles Plosser, former Philadelphia Fed President, and Mickey Levy (Hoover Institution) penned an opinion piece in the Wall Street Journal.   Plosser has not been shy about his position that the Fed’s 2020 Strategy Framework of targeting “average” inflation is misguided, as is its broadened mandate of maximizing “inclusive” employment. The article faults this new strategy for the Fed’s delayed action when inflation first appeared, which likely has made it that much harder to rein in. This piece concludes that the Fed should not wait until 2025 to reconsider this strategy, and that its credibility is at stake.

Former Labor Secretary Robert Reich states his opinion clearly in an opinion piece in the Guardian, where he faults corporations for continued inflation as their profits rise during this inflationary period, and claims the Fed’s interest rate increases are only hurting workers and consumers. He then puts forth his (fiscal) policy prescriptions.

About the Author

Beth Tallman

Beth Tallman entered the working world armed with an MBA in finance and thoroughly enjoyed her first career working in manufacturing and telecommunications, including a stint overseas. She took advantage of an involuntary separation to try teaching high school math, something she had always dreamed of doing. When fate stepped in once again, Beth jumped on the opportunity to combine her passion for numbers, money, and education to develop curriculum and teach personal finance at Oberlin College. Beth now spends her time writing on personal finance and financial education, conducts student workshops, and develops finance curricula and educational content. She is also the Treasurer of Ohio Jump$tart Coalition for Personal Financial Literacy.