Why the Fed’s next interest rate decision is hard

Feb 2, 2023
Written by WR Communications

Bill Conerly, Sr. contributor, Forbes

The Federal Reserve’s policy making committee will meet January 31-February 1, 2023, and their decision will be tough, more difficult than any of their 2022 choices. Inflation seems to be dropping, but at possibly unrealistic rates, while labor markets continue to show plenty of strength in the economy. With mixed signals coming to the committee, none of their possible choices is obvious.

Inflation is issue number one for the Fed, and the news is pretty dang good. The Fed watches the Personal Consumption Expenditures Price Index excluding food and energy. The most commonly watched calculation, the 12-month percent change, dropped to 4.7% in the last reading from its peak of 5.4% in February 2021. That’s not a huge drop, but the 12-month change misses short-term swings. The last three-month changed, annualized, was just 3.6%, down from 5.1% three months prior. Now that’s a significant deceleration.

Economists are usually skeptical about month-to-month blips in any time series. Our underlying data reflect sampling errors and idiosyncratic variation. We take a couple of months of change with a grain of salt. Still, the recent figures bring hope that the worst inflation lies behind us.

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