First, I want to say that it feels great to be back behind the helm of my blog. Although I had an amazing time getting my students involved in economic events, it was sort of like being a coach when you used to be a player. As my first blog back, I thought it would be appropriate to give a small breakdown of the recent FOMC statement.
[T]he Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate.
“Transitory factors” are things that the Fed basically thinks are temporary, notably how the strong US dollar impacted some trade numbers and how the crash in oil prices weighed on inflation in the last several months.
As for when the Fed thinks it will be appropriate to raise rates, the Fed kept its language mostly unchanged from its March statement. However, unlike in March, the Fed did not rule out any meeting for a policy change.
The Fed said it “anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.”
My opinion: The big takeaway from the recent FOMC statements should not be an understanding of how these transitory factors impact our economy, but the extent that they do. It is a noteworthy fact that our economy remains so fragile that temporary decreases in energy prices and exports still has such a substantial effect on the interest rate decision of the Fed. This is a clear sign, to me, that our economy can see the light at the end of the tunnel, but we are still in the tunnel!
However, I certainly don’t think we are still on the brink of another recession. And, I don’t want my opinion to be misconstrued as negative. On the contrary, I am very optimistic about our economy. My opinion above is to point out something that I see people ignore — the fact that our economy is not 100% recovered from the financial crisis.
The health of the economy is not a binary system. There are MANY shades of gray between the darkness of a recession and the brightness of an expansion. And, yet, I continue to hear people say that it is a forgone conclusion that interest rates should rise NOW! Umm, chill. Any number of short-run issues (or “transitory factors”), compounded by a poorly calculated FFR increase could cause a very intense situation. So let’s all realize that our economy still needs a lot of TLC.
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