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Reuters: Powell says Fed will not change 2% inflation goal

Article published: 14 December,  2022

IB Economics syllabus: Macroeconomics (contractionary monetary policy, inflation, economic growth, recession)

The Fed takes it seriously

OK, so this has been the 7th (!) interest rate hike (increase) this year by te US central bank, the Fed (see table below). At the beginning of 2022, the rate was close to 0%, while with yesterday’s decision, it is now in thee “range of between 4.25% and 4.50%”. Hence, it is clear that the Fed is determined to cut inflation which runs at a level of 7.1%, way above the target of 2%. It should also be noted that prior to this 0.50% rate increase, the Fed has increased the interest rates by 0.75% four times in a row! Therefore, this is a relatively smaller increase which is perhaps thanks to the inflation rate dropping in the past two months (disinflation).

Source of table: Forbes

Moreover, it is also important to note that the rate increases might continue next year, as the Fed is determined to “keep [their] inflation target at 2%” and are expected to go as high as 5.1%. When asked whether the Fed is considering increasing their target rate, its chairman, Jerome Powell strongly denied this, saying: “We’re not considering that. We’re not going to consider that. Under any circumstances,” which is understandable: if they start raising the target, it would be kind of admitting that they are unable to actually get inflation down to around 2%. Thus, it would essentially state that they are unable to maintain “price stability, which [the Fed] is legally mandated to achieve”. As you can see, the article is full of statements which can be used really well as quotes in your Macroeconomics IA.

The labour market

One more thing: the article reports that Jerome Powell stated that  “I wish there were completely painless way to restore price stability. There isn’t, and this is the best we can do”. This refers to the “labor market pain” discussed in the next paragraph, which means that this contractionary monetary policy can lead to increased unemployment: “According to their forecasts, the Fed expects the path of rate rises it believes it needs to cool inflation will drive up unemployment and weaken the economy next year”. This very nicely shows the trade-off between inflation and unemployment (both macroeconomic objectives), which can be nicely depicted by a short-run Phillips curve diagram.

IB Economics Internal Assessment (IA) Commentary

This is a great article that you can use for your Macroeconomics IA. You can use intervention, economic well-being and even change as a key concept. Make sure you evaluate the effectiveness of the contractionary monetary policy, prioritizing your arguments and referring to short-run vs. long-run outcomes. As for the diagrams, I’d use an AD/AS diagram showing a fall in AD and a short-run Phillips curve diagram. Make sure you explain both well.

Source of image:REUTERS/Mary F. Calvert/File Photo

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