Nirvana: Will Somebody Tell The Fed That We Have Arrived?

The Fed achieved its congressional dual mandate in January. The unemployment rate fell to 4.3%, and the CPI inflation rate was down to 2.4% y/y. Those round down to what we call “Nirvana” readings, i.e., the low unemployment level of 4.0% and the Fed’s inflation target of 2.0% (chart). Fed officials should celebrate and go on a long vacation. They can leave the federal funds rate (FFR) alone at its current 3.50%-3.75%. By their own definition, that must be the "neutral" FFR, the level that’s consistent with full employment and stable prices. Why mess with success?

The Misery Index is the sum of the unemployment and inflation rates (chart). It was 6.7% in January, only 0.7 percentage points above the Nirvana sum and well below the long-term average of 9.0% (chart). It has been fluctuating around 7.0% since June 2023. We've been in Nirvana for a while!