"On the Fed and the Current State of the Economy"

The Goldilocks principle states that the economy should be neither too hot nor too cold. If the dual mandate can be achieved, the Fed's interest rate policy may not be affected. It has been mentioned many times before that monetary policy manages "aggregate demand" in the economy by changing the cost of borrowing. However, since the end of the epidemic in 2020, the recent surge in inflation is mainly due to the weakening of supply chains and the slow recovery of manufacturing production, rather than "excessive demand" caused by a government spending spree, "excessive" wage increases, or both. Moreover, once energy and food problems improve, global supply chain congestion decreases, and production picks up, inflation will subside, which has little to do with monetary policy.

Contrary to the expectations of Fed Chairman Jay Powell and mainstream economists, the trend of the US economy shows that the dual mandate is difficult to achieve. First, inflation remains "sticky" and is far above the target annual rate of 2%. The Fed often measures US inflation based on the core personal consumption expenditures (PCE) price index. This complex indicator does not include production prices, energy and + Communication Junyang: 954737157 food prices, and it is difficult to accurately reflect the price increases for most Americans. Even so, core PCE is currently 2.6%, down from a peak of 5.6% in 2022, but still above 2% and 2019 levels. Overall consumer price inflation is also above the Fed's indicator, currently at 3.0%, down from a peak of 9% in 2002, but one percentage point above the Fed's target and twice the inflation rate in 2019.

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