Magazine article American Banker

Signs Point to No More Easings in '95; Fed Expected to Focus on 4th-Quarter GDP Growth

Magazine article American Banker

Signs Point to No More Easings in '95; Fed Expected to Focus on 4th-Quarter GDP Growth

Article excerpt

The Sept. 26 decision by the Federal Reserve to maintain status quo in monetary policy in the face of mild inflation and a relatively restrictive federal funds rate draws attention to the Fed's objectives and operating guidances.

Clearly, the Fed's objective, often stated, is price stability, in fact and in perception. Perception is important because the Fed's goal is to eliminate the expectation of inflation from decision making. However, the Federal Reserve has never defined price stability - what rate of price increases, by what measure, for how long?

Its refusal to define price stability probably arises out of a reluctance to set a target that would force it into an action that might be consistent with the target but inconsistent with its interpretations. Inflation measures, such as the consumer price index and its contents and the gross domestic product deflators, are lagging indicators.

In contrast, monetary policy must be forward looking. Thus, if the Fed were to use inflation measures for guidance, it would be analogous to driving a car by looking in the rearview mirror. Accordingly, the Fed appears to be using as its primary navigational tool the actual and prospective rates of growth of GDP relative to the potential rate of growth.

It evidently views that tool as especially appropriate when the economy is operating at high rates of resource utilization, a condition that seems to exist at this advanced stage of the expansion. …

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