Starting from the spring of 2021, the inflation rate in the United States skyrocketed, and the Consumer Price Index (CPI) reached a 40 year high of 9% in mid-2022. With the improvement of supply chain conditions, by the end of 2023, the Federal Reserve's tightening policy has reduced inflation rates to within 1-2 percentage points of the 2% target, while unemployment rates have not significantly increased.
However, people are concerned that the "last mile" of continuously lowering inflation to the 2% target will be even more difficult than the journey ahead. But a recent study by the Atlanta Federal Reserve suggests that this is not the case.
The bank pointed out that as the last mile may not be more difficult than elsewhere, it is unlikely that the Federal Reserve will need to make extraordinary efforts to further tighten policy as inflation approaches its target. Excessive tightening of policies will unnecessarily increase the risk of a hard landing.
In a paper published on Tuesday, economist David Rapach of the bank wrote, "It is difficult to conclude that the last mile of fighting inflation is more difficult than the rest. In terms of policy, this means that the Federal Reserve does not need to consider the final stage to be substantially different from the other stages."
The median quarterly economic forecast of Federal Reserve officials shows that they expect to cut interest rates three times in 2024 as inflation decreases last year. Nevertheless, policymakers have dispelled market expectations that they will start cutting interest rates as early as the March meeting.
Earlier on Tuesday, Federal Reserve Director Waller said that if inflation does not rebound, the Federal Reserve will be able to lower interest rates this year. He believes that when that moment arrives, policymakers should be cautious and orderly.
Rapach concluded that being overly concerned about the "last mile" of this battle could lead to policy errors.
He wrote, "From a risk management perspective, it is believed that the last mile will be even more difficult, which may lead to the Federal Reserve tightening its policies excessively, increasing the likelihood of economic recession and a sharp rise in unemployment rates."