Legendary baseball coach and player Frank Robinson famously said, “Close only counts in horseshoes and hand grenades.” The Federal Reserve is living by that precept as they work to bring inflation down from its highest levels since the early 1980s to a more manageable level of 2.7%. Despite progress, Fed Chair Jerome Powell and his colleagues remain unsatisfied and are steadfast in their commitment to achieving 2% inflation. This determination has led them to keep rates unchanged, even as central banks abroad have begun considering rate cuts to combat rising prices.
Former Fed Chair Ben Bernanke once said that “monetary policy is 98% talk and 2% action,” highlighting the importance of communicating an explicit inflation target to anchor expectations among the public. The belief in 3% inflation by the public can lead to businesses and workers taking actions that perpetuate higher prices, making it difficult for the Fed to bring inflation down further. Surveys show that people expect prices to continue rising, reinforcing the need for the Fed to maintain its insistence on 2% inflation.
While recent inflation readings have shown some progress, with the Consumer Price Index falling to 2.7% in April, there are still concerns about the underlying inflationary pressures that are impacting Americans. Core inflation, which excludes food and energy, remains high at 3.7% for the first quarter of the year, indicating that prices are still rising at undesirably high levels. Fed officials recognize the need for more evidence of moderating inflation before considering any changes to monetary policy.
Fed Governor Christopher Waller has indicated that the modest progress in lowering inflation in April is not enough to support easing of monetary policy. The Fed continues to closely monitor economic data, including the latest inflation readings, to determine the appropriate course of action. By maintaining their commitment to achieving 2% inflation and anchoring expectations among the public, central bankers hope to contribute to low and stable inflation over the long term. The upcoming May Consumer Price Index report will provide further insights into the trajectory of inflation and inform the Fed’s decision-making process.
Despite challenges in bringing inflation down to the target level, Fed officials are aware of the importance of credibility and communication in their efforts. By communicating their inflation target clearly and consistently, central banks can build trust with the public and anchor expectations, contributing to long-term economic stability. As the Fed navigates the complex economic landscape, it remains focused on achieving its inflation goals while supporting sustainable economic growth. The upcoming monetary policy meeting will provide further insights into the Fed’s strategy and outlook for the future.
