Given current levels of inflation, what action should the Federal Open Market Committee (FOMC), the body that decides on the policy stance of the Federal Reserve, take in determining the level of the key policy interest rate?
Given current levels of inflation, what action should the Federal Open Market Committee (FOMC), the body that decides on the policy stance of the Federal Reserve, take in determining the level of the key policy interest rate?
In early 2022, the economy was in a precarious situation. After a pandemic-induced recession that saw the global economy grind to a halt, the U.S. entered a phase of recovery. Unemployment was nearing record-lows and GDP surpassed its pre-covid levels.
However, prices had been rising for months and unexpected factors, including a disruption of global supply chains, the threat of new covid variants, and the invasion of Ukraine by Russia, meant a variety of goods were not making it to consumers without major delays, driving prices to even greater heights. In fact, inflation in February climbed to 7.9%, marking the biggest annual increase in four decades. Calls on the Fed to take decisive action to tame inflation intensified, however any decision would be closely scrutinized, and the Fed was wary to repeat past mistakes. In this case, students are asked to consider macroeconomic events leading up to March 2022 and recommend the action to be taken regarding the federal interest rate. They are asked to analyze political and market factors that could affect the Fed's decision and weigh the pros and cons of various scenarios as well as the short- and long-term implications of each option.
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