One Chart That Shows The Policy Dilemma Facing The Federal Reserve

One Chart That Shows The Policy Dilemma Facing The Federal Reserve
Andrew Rummer

over 2 years ago1 min

The Federal Reserve (the Fed) is facing a tricky balancing act as the US economic recovery slows rapidly, even while inflation fears grow.

The central bank’s job is to keep inflation in check while also boosting the number of Americans in work. While reconciling those two goals is rarely easy, it’s looking particularly hard in the current economic environment.

The chart shows how the Atlanta Fed’s GDPNow estimate of the current state of the US economy (in blue) has dropped to the lowest level in 15 months. Such a slowdown could signal to Fed policymakers that they need to keep monetary policy at its current ultra-loose level for longer. 

Unfortunately for the Fed, however, the rising pink line – which represents the bond market’s expectations of the US inflation rate over the next 10 years – suggests that the opposite course is needed: that they should pare quantitative easing and maybe even raise interest rates.

With Friday’s closely watched US jobs data showing the world’s largest economy added far fewer jobs than expected in September, Fed policymakers will have much to discuss at their next policy meeting on Nov. 2-3.

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