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Mindset Change at the Fed? By TipRanks


© Reuters. Mindset Changes at the Fed during FOMC Meeting

The September FOMC (Federal Open Market Committee) meeting should be a ripe time for a mindset change at the Fed to change how it views the economy and monetary policy—but don’t expect it to happen!

In the spring of 2020, the US economy suffered a severe pandemic. At one time, the GDP plunged to 30%, while unemployment rose to over 15% and inflation fell below 2%. These numbers moved the American economy far away from the Fed’s dual mandate of stable prices and full employment. The situation was expected to worsen over the next two years. This is why the Federal Reserve adopted an ultra-accommodative policy. They are still committed to it, so far as one can see.

Main Street loved the Fed policy. By issuing bonds, the Fed could buy debt and get an income boost for all the people who are unemployed.

Wall Street loved the free money, which made risky assets a bargain. In the middle pandemic-induced recession, equity prices rose to new heights.

However, things did not turn out to be as bad as we expected. One year and half later, America’s economy has grown above average, with unemployment hovering around 5 percent. This is what some economists call the “natural rate” of unemployment. Main Street is also suffering from the fact that inflation is climbing well beyond the Fed’s target of 2 percent.

However, the Fed is not changing its policy in accordance with new data that are drastically different to the ones it used back in March 2020. This mindset is known as “anchoring” by behavioral economists. This is known as “anchoring”. This mentality is quite different than in the past when the Fed adjusted its policy to reflect new information.

September Fed Meeting – What to Expect

Still, the September meeting could be a good time for the Fed to change this sort of mindset, and to stop anchoring to the status quo. However, don’t assume that this will happen.

At best, the Fed could adopt a policy of “normalization,” according to a recent Deutsche Bank (DE:) note. Deutsche Bank states that “the September FOMC meeting could provide important clues regarding the Fed’s policy normalization plans in the coming years.” We expect that the statement will adopt the language used by Powell in the recent taper signals. A reduction is appropriate “this year” as long as there are no economic problems. Powell can remain flexible about when the announcement will be made. We expect that this will convey that as long as there is no material surprise in the labor market or the economy, it’s not possible to push the date of the announcement past November.

We’ll know whether this turns out to be the case next Wednesday, when the FOMC meets.

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