Disinflation debate: Assessing the Fed’s role and projecting future interest rates

Assessing the Fed’s impact on recent U.S. disinflation

Thomas Ferguson and Servaas Storm analyze why inflation fell in the U.S. without causing a recession, examining the role of Federal Reserve policy versus other factors. Towards this goal they a) compare several quantitative approaches to estimate the impact of Fed policy on inflation reduction; b) analyze Fed surveys, economic data, and academic studies; c) examine wage/price dynamics and labor market conditions; and c) evaluate the role of inflation expectations and central bank credibility.

Key findings:

1. The Fed can claim credit for only 20-40% of the inflation decline at most. Other factors like easing supply constraints and falling energy prices played a larger role.
2. There is little evidence that inflation expectations or Fed credibility were important in containing inflation. Low-income workers did not believe Fed assurances about anchoring inflation.
3. Most U.S. workers lack the bargaining power to protect their real wages, which absorbed much of the inflation shock. Real wages declined for most workers during this period.
4. Consumption growth, especially by affluent households benefiting from wealth effects, was a major driver of continued economic growth despite inflation.
5. The paper argues the Fed’s quantitative easing policies fueled unprecedented wealth gains for the rich, which sustained their consumption even as interest rates rose.
6. The authors warn that service sector inflation driven by affluent consumption remains a concern, along with climate change and geopolitical risks.
7. They conclude the focus on central banks as the key inflation stabilizers is misguided, and a wider range of policy tools is needed to address future inflation risks.

The paper challenges conventional narratives about inflation control and highlights the role of inequality and wealth effects in recent macroeconomic dynamics.

Good Policy or Good Luck? Why Inflation Fell Without a Recession
Authors: Thomas Ferguson, Servaas Storm
From: University of Massachusetts, Boston, Delft University of Technology

The way forward

In this article, David Papell and Ruxandra Prodan-Boul present detailed charts comparing various policy rule prescriptions, FOMC projections, and futures market predictions through 2027.

Figure 3 shows the median predictions from futures markets in the CME FedWatch Tool the day following the September 2024 FOMC meeting through the end of the CME prediction horizon in September 2025. The futures markets predict sharper decreases in the FFR than the FOMC projections. We add to this discussion by including prescriptions from policy rules. Figure 3 shows that, for both Taylor and balanced approach rules, the prescriptions from the inertial policy rules for December 2024 through December 2025 are above the futures market forecasts. For the non-inertial Taylor rule, the prescriptions are below the futures market predictions through June 2025 and equal thereafter. For the non-inertial balanced approach rule, the prescriptions are always below the futures market predictions. Comparison between futures market predictions and policy rule prescriptions depends more on the choice between inertial and non-inertial rules than on the choice between Taylor and balanced approach rules.

The Federal Funds Rate: FOMC Projections, Policy Rule Prescriptions, and Futures Market Predictions from the September 2024 Meeting
By: David Papell, Ruxandra Prodan-Boul – University of Houston, University