The September FOMC (Federal Open Market Committee) meeting should be a ripe time for a mindset change at the Fed to change how it views the economy and monetary policy—but don’t expect it to happen!
When the pandemic hit the American economy hard in the Spring of 2020, GDP dropped north of 30 percent at one point, unemployment spiked north of 15%, and inflation dropped below 2%. These numbers moved the American economy far away from the Fed’s dual mandate of stable prices and full employment. Plus, the situation looked to turn worse over the next 2-3 years period. That’s why the Federal Reserve launched an ultra-accommodative policy and committed to this policy, as far as the eye can see.
Main Street liked what it saw in the Fed’s policy. The federal government could get a free hand to provide income support for the unemployed and keep every business alive, just by issuing debt, which the Fed would buy.
Wall Street loved what it saw even more as money became free, making every risky asset a great bargain. Equities began racing to new highs in the middle of the pandemic-induced recession.
But things didn’t turn as gloomy and doomy as expected. Now, a year and a half later, the American economy is growing above trend, unemployment is flirting with 5 percent, which some economists consider the “natural rate of unemployment,” and inflation is racing well above the Fed’s 2 percent target, hurting Main Street.
Yet, the Fed has failed to change its policy in line with the new data, which are radically different from those it used to form its policy back in March 2020. Behavioral economists have a term for this kind of mindset. They call it “anchoring.” This mindset is different from the mindset of the old days, when the Fed would adjust its policy according to new information that refuted its early postulates.
September Fed Meeting – What to Expect
Still, the September meeting could be a good time for the Fed to change this sort of mindset, and to stop anchoring to the status quo. Yet don’t expect it to be the case.
At best, the Fed could adopt a policy of “normalization,” according to a recent Deutsche Bank note. “The September FOMC meeting should provide important clues about the Fed’s policy normalization plans over the coming years,” says Deutsche Bank. “In terms of the near-term taper signals, we expect the statement to adopt Chair Powell’s language of a reduction being appropriate ‘this year’ as long as the economy remains on track. Powell should maintain optionality about the exact timing of the announcement. Nonetheless, we anticipate that the effective message will be that, as long as the economy and labor market do not materially surprise to the downside, the bar to pushing the announcement beyond November is relatively high.”
We’ll know whether this turns out to be the case next Wednesday, when the FOMC meets.
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