Why the Fed Isn’t Tightening

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On November 3, 2021, Jerome Powell made it clear the Fed will not raise interest rates until the labor market improves further:

We don’t think it’s time yet to raise interest rates. There is still ground to cover to reach maximum employment, both in terms of employment and in terms of participation.

While his concern for the labor situation seems legitimate, he might have an ulterior motive for not raising rates.

The motive lies in the following statement: “The Fed’s policy actions have been guided by our mandate to promote maximum employment and stable prices for the American people along with our responsibilities to promote the stability of the financial system.”

As I show in this article, the economy is pretty much at maximum employment. Inflation is running red hot and increasingly showing signs it is persistent. Having neglected one mandate and largely fulfilled the other, why is the Fed so slow to reduce asset purchases and unwilling to contemplate hiking interest rates?

Before I answer the question, I share data on the two congressionally chartered Fed mandates: price stability, and maximum employment. Examining the data shows there is something else accounting for recent Fed’s policy actions, or better said, lack of action.