Fed Stuck In Neutral: Will This Week's FOMC Meeting Be A Letdown?

FOMC meeting

Photo: Wikimedia Commons

With the FOMC set to convene on a two-day meeting this Tuesday and Wednesday, it seems to have market participants excited once again.  For what, I have no idea.In my (rather popular) opinion, the economy is too weak to justify tightening policy but not weak enough for additional QE.

Last week, Goldman echoed this sentiment by pointing to their Taylor rule estimate to come up with scenarios to move outside the “inaction” zone.  

They go on to say:

“We formalise the ideas that the “zone of inaction” is wide by returning to our Taylor rule analysis…which implies a current fed funds rate of -0.6%, which seems broadly consistently with the Fed’s stand-pat stance.  If this is correct, we would need to see about a 3/4 percentage-point decline in the unemployment rate forecast or a 1/2 point increase in the inflation forecast for the rule to project any monetary tightening…

“However, Fed officials seem even further away from renewed easing.  Our analysis implies that it would take a 1 1/4 point increase in the unemployment rate forecast or a 1 pt drop in the inflation forecast for additional easing moves.”

economic musings chart

Photo: GS Global ECS Research

This post originally appeared at Economic Musings.

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