Fed legally obliged to curb inflation below 3%, contrasting market’s June rate cut expectations.

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In a recent Reuters poll conducted from Feb. 14-20, a significant majority of 86 out of 104 economists suggested that the Federal Reserve would initiate a rate cut in the next quarter. Currently standing at 5.25%-5.50%, the fed funds rate is under scrutiny amid escalating concerns over inflation.

Underpinning this speculation is a critical aspect of the Full Employment and Balanced Growth Act of 1978, which sets a stringent guideline for the Federal Reserve. According to Section 2(b)(2) of this act, each successive Economic Report must articulate a quantified numerical objective, along with a timeline, to achieve an inflation rate not exceeding 3% per annum by 1988.

This legal stipulation underscores the Fed’s obligation to keep inflation levels in check, adhering to the parameters set forth by Congress. With the current inflation rate hovering at 3.2%, the Fed finds itself at a crossroads: obligated by law to take measures to curb inflation, even as market expectations lean towards a rate cut.

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This conundrum highlights the delicate balance the Fed must strike between fulfilling its statutory mandate and responding to market sentiments. As inflation surpasses the 3% threshold, the Fed’s hands may be tied by legal requirements, necessitating a reevaluation of market expectations.

In essence, the law mandates the Fed to prioritize inflation control, compelling action to ensure inflation remains below the stipulated 3% threshold. As market speculation diverges from legal mandates, the Fed faces the challenging task of reconciling statutory obligations with market dynamics.

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www.reuters.com/markets/rates-bonds/fed-cut-us-rates-june-risks-skewed-towards-later-move-2024-02-20/

uscode.house.gov/statutes/pl/95/523.pdf

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