Read our new Research memo, which previews Wednesday’s policy announcement from the US Federal Reserve. Our focus is not on what will happen, but on what ought to happen.
Our conclusion is that US monetary conditions are too tight to ensure that the Fed will hit its 2% inflation target in the medium term.
In the memo, we also look at the outlook for US inflation under different assumptions about the credibility of the Fed’s inflation target.
While a rate hike now seems likely Wednesday, the right thing to do would be not to raise interest rates at all. The only thing Fed Chair Janet Yellen and her colleagues will accomplish is to undermine the credibility of their 2% inflation target and to confirm that the actual target is 1.7%.