The Fed’s Dilemma Isn’t Going Away Under Powell Inflation and wage increases continue to undershoot  expectations at the same time the central bank confronts forces pressuring it to credit tightening.

• February 2, 2018
• realestate
• Announcements, Business & Markets, Real Estate, Real Estate Finance, Your Real Estate Life

With the pickup in global economic growth, central banks — except for Japan’s — are shifting to tightening from extremely easy money, including massive quantitative easing and trivial, if not negative, short-term interest rates. The Federal Reserve has raised its target for the federal funds rate five times since December 2015 and is suggesting three more increases this year.

But the Fed is confronted with a serious dilemma: Inflation and wage increases continue to undershoot its expectations at the same time the central bank confronts forces pressuring it toward credit tightening.

The new chairman, Jerome Powell, who isn’t a trained economist, may change the central bank’s tone, but his soon-to-be predecessor Janet Yellen and the other academic economists who have dominated monetary policy, believe fervently in the theoretical Phillips Curve. It posits that a declining unemployment rate should spur inflation, despite evidence to the contrary. Rather than increase as the unemployment rate declined since the recession, the rate of inflation has largely stayed the same.

Nevertheless, the Fed wants to tighten credit slowly due to chronic low inflation and memories of the May 2013 “taper tantrum,” when a mere mention by then-Chairman Ben Bernanke of reducing the Fed’s rate of asset purchases sent financial markets into tailspins as interest rates leaped.