Is Fed Policy Still Too Tight?
The next round of central bank decisions could rank among the most challenging in recent history, perhaps in decades. Policy hawks and doves can cite a fair amount of evidence for supporting their respective views. The deciding factor, as usual, will be the incoming data. But waiting for clear signs could risk the Fed’s success to date in taming inflation without damaging economic growth. On the other hand, one can argue that policy is still too tight for an economy that appears to be slowing, albeit modestly.
For perspective, let’s start with a simple overview of how current policy compares with headline consumer inflation plus unemployment, which together can be used as a proxy for the central bank’s dual mandate for minimizing inflation and maximizing employment. After two rounds of rate cuts that have trimmed the Fed funds target rate by 75 basis points to the current 4.50%-to-4.75% range, policy still appears to be moderately tight as of October 2024, per the chart below. The implication: there’s still room for another rate cut.