LONDON, July 1, 2019 /PRNewswire/ -- A mere six months ago, we were trying to decide how much further the Fed might raise interest rates in order to reach the so-called "neutral level". How quickly the tide has shifted. Following the FOMC meeting which concluded on 19 June, Fed Chairman Jay Powell communicated that most of the committee was now focused on the downside risks to the US economy, namely slowing global growth, weaker trade and the lack of investment spending. The Fed did not raise interest rates at this meeting. However, it is once again, in "wait and see" mode until its July 30-31 meeting so that it can assess the outcome of the G-20 meeting between Presidents Trump and Xi as well as the next round of economic data which should provide insight into US economic activity during Q2 2019.
The Fed has achieved its dual mandate, sort of.
The Federal Reserve was created in 1913 as a policymaking institution independent of political pressure. Since 1977, it has operated under a dual mandate from Congress to promote both low inflation and ensure full employment. In January 2012, Fed Chairman Ben Bernanke announced an explicit inflation target, which has been interpreted as 2.0%, bringing the US into line with many other central banks around the world. The Fed's preferred measure of inflation is the "core PCE deflator", which excludes the volatile food and energy components of the price basket.
There can be little argument that the Fed has achieved the "full employment" part of its mandate. The headline unemployment rate in May 2019 was reported at 3.6%, very close to the all-time low of 3.4% last reached in May 1969.
We illustrate the fuller measure of unemployment which includes part-time and discouraged workers, referred to as U6. In May 2019, the U6 unemployment rate stood at 7.1%, slightly above its all-time low of 6.8% which was achieved in October 2000.
The problem for the Fed is the inflation side of the dual mandate. The Fed began raising rates back in December 2015 but only managed to hit and remain at the 2% inflation level for a few months in 2019. However, since the December 2018 increase in the Fed Funds rate to its current range of 2.25%-2.50%, PCE inflation has declined steadily and is back to the lower levels seen in 2016.
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