U.S. Federal Reserve officials are in “uncharted waters” with no clear historical guide as they set monetary policy in an environment with inflation falling but no increase as yet in the unemployment rate, Richmond Fed staff said in a new research note analyzing a central bank rate cycle they deemed “unlike any other.”
“The current cycle is the first time over the entire postwar period the (Federal Open Market Committee) has made significant progress in lowering inflation without an associated increase in the unemployment rate,” Richmond Fed staffers including senior adviser Pierre-Daniel Sarte wrote in the paper, published Wednesday on the bank’s website.
“The current rate episode sees us in uncharted waters,” with the Fed facing the largest-ever gap between inflation and the target federal funds rate when officials started tightening monetary policy in March of 2022, and now seeing the unemployment rate remain stable and low despite the fastest increase in interest rates in at least 40 years, the researchers wrote.
Whether that sort of cost-free decline in inflation can continue will be at the center of Fed discussion in coming weeks as policymakers decide whether they have moved interest rates high enough, or whether further rate hikes are needed.
Source: Reuters