With each new Federal Open Market Committee meeting, Dow drop, and indicator headline that comes out, journalists and politicians would have you believe one of two things: that a recession is imminent or that the Federal Reserve is raising interest rates without cause, sabotaging the economy. For a layman, the jargon around many of these headlines can sound simultaneously convincing and confusing.
One thing that experts and the common man can agree on is that we live in a time of uncertainty. In many ways, we’re walking economic pathways that haven’t been treaded.
The Federal Reserve operates under a dual mandate from Congress–to promote an environment for maximum employment, and to keep inflation in check. Inflation, thus, should play a large role in the Federal Reserves decision-making process, and historically has been one of the strongest historic indicators for an incoming recession.
Currently, according to most economists, inflation is largely in check at 1.9 percent. The Fed’s key metric for tracking inflation is the Core Personal Consumption Expenditures index, essentially the Consumer Price Index, excluding food and energy costs. This metric has remained well within the Federal Reserve’s desired range.
Between a low interest rate environment to support growth, and the explosive expansion the U.S. economy has seen over the past two years, many investors and average Americans may feel that a cool down has been imminent. Expectedly, after years of quantitative easing and economic expansion, Asset bubbles, particularly the stock market, has been a natural reaction. With the Federal Reserve moving towards a more normalized rate, we’re seeing those bubbles correct themselves.
With inflation seemingly in check and unemployment at historically low rates, it’s easy to see the confusion some people may have when the Federal Reserve raises its interest rates. It’s even possible to empathize with conspiracy theorists who think that they are sabotaging the Trump administration. The truth is much simpler. Rates have never been this low and the Federal Reserve has enough confidence in the current economy to move towards a normalized rate and away from the quantitative easing of the previous ten years.
Last month, following news that the Fed would keep its interest rate at 2.25 percent, Jerome Powell announced that 2019 would see a broad review of policies and framework at the Federal Reserve.
“With labor market conditions close to maximum employment and inflation near our 2 percent objective, now is a good time to take stock of how we formulate, conduct and communicate monetary policy,” said Fed Chairman Jerome Powell.
The review will include a research conference in June, held at the Federal Reserve Bank of Chicago.
“At the end of the process, policymakers will assess the information and perspectives gathered during the year of review and will report their findings,” the statement said.
It’s clear that we’re walking down unseen economic pathways. While each Dow drop seems to indicate economic collapse, inflation remains at the Federal Reserve’s preferred level, and we’re still seeing economic growth. Coming off of a historic period of quantitative easing and into a “normalized rate” era, there will undoubtedly be some growing pains. Growth will most likely continue, however, and 2019 could bring us into a new era of economic policy with the Federal Reserve’s review under Chairman Powell.