he Fed has an inflation target of 2%, which it aims to achieve through monetary policy tools such as adjusting interest rates and the money supply. Recently, the Fed's preferred measure of inflation, Personal Consumption Expenditures, has been running at an annual rate of 5.5%, which is well above the target.
Inflation Concerns
Inflation is that thing which can make everything from your morning cup of coffee to your monthly rent feel like they're costing more and more. The Federal Reserve has a magic number. It wants inflation to stay close to 2%. But lately, the Fed's preferred inflation measure is currently at 5.5%.
Atlanta Fed President Raphael Bostic said that the Fed remains committed to using its policy tools to get inflation back to its target and that there is still much work to be done. However, policymakers will closely monitor economic data, including inflation and employment reports, for signs of how the economy is performing.
Rate Hikes
So, how does the Fed cool things down? One way is through adjusting interest rates. Higher interest rates make borrowing more expensive, which can reduce overall demand in the economy and thus curb inflation.
Recently, Atlanta Fed President Raphael Bostic suggested the central bank raise interest rates above 5% by early Q2 and hold for "a long time" to tackle high inflation.
"I am not a pivot guy. I think we should pause and hold there, and let the policy work"
Bostic also emphasized the importance of understanding the relationship between financial markets and monetary policy to bring down underlying inflation. The minutes of the Fed's December meeting cited concerns that "misperception" of the Fed's intentions and plans could complicate the effort to restore price stability if financial conditions remain looser than needed to lower the pace of price increases.
Data-dependent policy
It is worth noting that the Fed does not have a specific interest rate target in mind, and interest rate changes are data-dependent. Policymakers will closely monitor economic data, including inflation and employment reports, for signs of how the economy is performing. Additionally, the Fed has emphasized that they're flexible and willing to adjust policy appropriately to address inflationary concerns.
The Fed's next meeting is at the beginning of February, and CME futures data currently forecasts a 78% probability of a 25bps hike, which would bring the target rate to 4.75%.
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