The Fed Has No Plan, and Is Just Hoping for the Best

November 10, 2023

by Ryan McMaken Mises.org

The Federal Reserve’s Federal Open Market Committee (FOMC) last week left the target policy interest rate (the federal funds rate) unchanged at 5.5 percent. This “pause” in the target rate suggests the FOMC believes it has raised the target rate high enough to rein in price inflation which has run well above the Fed’s arbitrary two-percent inflation target since mid-2021. I say “believe,” but perhaps the more appropriate word here is “hope.”

That is: the Fed hopes it has raised the target interest rate high enough. Moreover, the Fed hopes this will both reign in price inflation and also avoid raising unemployment too high. (See below for what is meant by “enough” and “too high.”)

After all, the Fed has no idea what the “correct” federal funds rate is to achieve the goals that the Fed has set for itself. Nor does the Fed know what the “neutral” interest rate is at any given time. As even chairman Jerome Powell admitted at this month’s press conference, “you can’t identify [the neutral rate] with any precision in real time and we know that.”