U.S. Federal Reserve policymakers are in “uncharted territory,” with no clear historical guidance for setting monetary policy in an environment in which inflation falls but the unemployment rate has yet to rise, the Richmond Fed said in a note analyzing a cycle they consider “unlike any other.”
“The current cycle is the first time in the entire postwar period that the Federal Open Market Committee has made significant progress in reducing inflation without an associated increase in the unemployment rate,” the officials, including senior adviser Pierre-Daniel Sarte, wrote in the Noted posted on the Fed’s website.
“The current rate episode has us in uncharted territory, with the Fed facing the largest gap in history between inflation and the target federal funds rate when policymakers began tightening monetary policy in March 2022 and now seeing the unemployment rate remain stable and low despite the fastest rate hike in at least 40 years,” they added.
Whether that kind of cost-free decline in inflation can continue will be at the center of the Fed’s discussion in the coming weeks, as policymakers decide whether they have raised rates enough or whether more hikes are needed.
The new data seems to keep the positive trend intact. The Consumer Price Index rose 3.2% year-on-year in July, up slightly from 3% in June.
However, underlying price trends showed a continued slowdown. Excluding volatile food and energy costs, annual core CPI fell to 4.7% in July from 4.8% in June, and much of this decline was due to housing costs, which Fed officials expect to moderate steadily.
