With inflation coming in below target, the Federal Reserve is facing increasing pressure to adjust its monetary policy as many see it as too tight, according to an economist at Florida Atlantic University.
With inflation coming in below target, the Federal Reserve is facing increasing pressure to adjust its monetary policy as many see it as too tight, according to an economist at Florida Atlantic University.
The Federal Reserve’s preferred measure of inflation, the Personal Consumption Expenditures Price Index (PCEPI), grew at a continuously compounding annual rate of 1.9% in July, below the Fed’s 2% target. What’s more, the PCEPI has averaged just 0.9% over the past three months.
“While the Federal Reserve has signaled it would cut its policy rate this month, it is playing catch up,” said William Luther, Ph.D., associate professor in FAU’s College of Business. “The Fed has a long way to go to achieve a neutral policy stance. The current federal funds rate target range is 5.25% to 5.5%, with estimates putting the neutral policy rate between 2.7% and 3.2%.”
Ideally, the Fed would gradually reduce its nominal federal funds rate target as inflation falls to prevent monetary policy from passively tightening. As the economic policy is already too tight, given observed inflation in recent months, it will likely tighten further as inflation continues to decline unless the Fed course corrects quickly, according to Luther.
History suggests the Fed will move slower than the market currently projects.
“Fed officials were slow to react when inflation picked up in 2021, slow to reach a tight policy stance once they began raising rates in March 2022, and slow to respond to the disinflation experienced over the last year,” Luther said. “Absent a severe economic contraction, it is difficult to believe the Fed would now pick up the pace.”
Prices are still high despite lower inflation. In July, PCEPI was 8.8 percentage points higher than it would have been had the Fed hit its 2% inflation target since January 2020, according to FAU’s Monthly Inflation Report.
-FAU-
Latest News Desk
- FAU's Cheryl A. Krause-Parello, Ph.D., Awarded Fulbright U.S. ScholarCheryl A. Krause-Parello, Ph.D., received a Fulbright U.S. Scholar award to study Germany's research and education systems in the academic year 2025-26, focusing on funding and university support for research.
- BEPI Poll: Hispanic Economic Optimism FallsHispanic consumers are spending less as optimism about their economic outlook dwindles amid inflation and economic uncertainty, according to a poll from the Business & Economics Polling Initiative at FAU.
- FAU Receives $1M Grant to Study Gulf's Mesophotic Coral HabitatsFAU Harbor Branch researchers and collaborators will study how ocean currents and river nutrients affect deep coral ecosystems on the West Florida Shelf - one of the gulf's largest and least-studied habitats.
- Survey: Tariff Uncertainty Worries Port Everglades BusinessesThe Port Everglades business ecosystem is facing a year of labor challenges and growing concerns over tariff uncertainty, according to a survey from a supply chain management professor at FAU.
- AI Reveals Astrocytes Play a 'Starring' Role in Dynamic Brain FunctionA new FAU study shows astrocytes help neurons fire in sync, shaping brain rhythms key for attention, memory and sleep - guiding how groups of neurons work together during high-focus or restful states.
- FAU Foundation Board Welcomes New MembersFlorida Atlantic University's Foundation Board of Directors welcomed Zachary "Zach" Berg '97, '00, Michael Yoon '96 and Thomas "Tommy" Zeichman '09 to its board.