Fed Maintains Target: A Sound Decision

During the most recent FOMC meeting on January 28, 2015, the Federal Reserve voted to maintain the federal funds target. However, the decision was not a complete consensus. Out of the twelve voting members, there were three dissenters: Richard Fischer of Dallas, Narayana Kocherlakato of Minneapolis, and Charles Plosser of Philadelphia. Plosser, in particular, believes that the Fed should raise rates now instead of waiting till the last minute. He explains that since monetary policy has a “lagging effect,” raising rates later will not do any good for an economy that could suddenly have to deal with heavy inflation.

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Although the dissenters were outmatched 3-9, their arguments still lay the foundation to a very important question: what’s the smarter decision? Raising the rate now to combat future inflation or maintaining the rate to promote established growth? Of course, the Federal Reserve has already issued an official press release and set its choice in stone. But, people like Fischer, Kocherlakato, and Plosser may not be completely content. What happens if inflation does really become a looming crisis? What happens if the growth of today becomes the uncontrollable, ironically destructive growth of tomorrow?

Let’s look at some facts first. The Minneapolis Federal Reserve District reports that 9 out of 10 business leaders are optimistic about growth in their companies, unemployment is on a constant decline, and consumer spending is on a rise, mainly because of lower gas prices that have fostered more spending power. The San Francisco Federal Reserve District reports continuous growth in GDP, tremendous job growth, and, once again, plunging oil prices. Even the regional district that always votes, New York, reported higher business activity and employment than expected as well as fast wage growth. As seen from the statistics of individual district economies, America’s economy as a whole is bustling. The current FFR is evidently boosting national prosperity. So, to address the question of the smarter decision, maintaining the FFR target is indeed the better option.

Small-Business-Optimism-Index-MEO-July-2014

This is not to say that the current growth can never get out of hand. It most certainly can, but like Plosser himself said, “Why do we want to make commitments about the future when we don’t know what it holds?” The truth is that we can’t – in a fast-paced economy, the financial situation can change in an instant. But, if we stop trying to delve too far into the future, the optimism of the present will suddenly be very clear. It’s not only the facts that forecast more growth, but also the people. Maintaining the FFR target will essentially let the economy ride on this wave of buoyancy and hopefully thrive even more than it already has.

Better to be safe than sorry? That’s the policy for people who shy away from risks. Raising the target now could’ve lead to a quite unnecessary contraction of a healthy, booming economy. Therefore, all the dissenters should think twice; much like the public, the Fed seems to be optimistic, too.

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