Ahead of a planned meeting of the Federal Open Market Committee, we asked three Hoover Institution economists what advice they have for the committee, as it continues to grapple with uninspiring macroeconomic indicators and inflation that remains above target.
In your view, is the Federal Reserve effectively responding to inflation and labor market conditions?
Inflation has exceeded the Fed’s 2 percent target for nearly five years, and unemployment has been under 4.5 percent since late 2021. Yet the FOMC cut the Fed Funds rate five times in the past fifteen months, and markets expect another cut in December. This policy path underweights the price-stability part of the Fed’s mandate.
What advice would you offer the members of the Federal Open Market Committee in 2026?
People dislike inflation—a lot. The 2021–22 inflation surge damaged the Fed’s credibility, its reputation for competence, and its political support. More above-target inflation will chip away at confidence in the Fed and in the Fed’s political support.
What should the FOMC advise to do (raise/cut/hold) to interest rates?
Hold steady. The chief argument for more rate cuts rests on a weakening in labor market conditions. That weakening is real, but it mainly reflects restrictive immigration policy, chaotic trade policy, and generative AI’s impact on entry-level jobs in a few sectors. Monetary policy easing won’t offset these developments. It will boost already-high equity valuations and squeeze already-narrow corporate bond spreads. That raises the risk of a major asset-price bust in the next two years.
In your view, is the Federal Reserve effectively responding to inflation and labor market conditions?
The Fed is responding—but it often seems more reactive than forward-looking, more firefighting than wise fire prevention. Not exactly a textbook example of “effective” policy. After dismissing surging inflation as “transitory” through 2021, they watched inflation soar to a fotty-one-year high of 9.1 percent. The Fed responded with a barrage of rate hikes that helped blow up several banks in 2023. Now, with inflation still above target, the Fed has pivoted to rate cuts, responding to unemployment ticking up to 4.4 percent—up from historic lows, but hardly at recession levels. As Milton Friedman warned decades ago, monetary policy works with “long and variable lags.” There is no need to keep relearning this lesson the hard way.
What advice would you offer the members of the Federal Open Market Committee in 2026?
First, to the FOMC on monetary policy, low, stable inflation is a cornerstone of long-run economic growth and hence full employment. Second, to the Fed more generally, fix your other job: financial regulation. You’ve extended the too-big-to-fail safety net to all corners of finance and made bailouts the norm—you’ve created extraordinary incentives for excessive risk-taking. Heads, the protected financiers win; tails, the taxpayers lose. This moral-hazard time bomb threatens not just financial stability but faith in our economic system—potentially with significant ramifications for our political system.
What should the FOMC advise to do (raise/cut/hold) to interest rates?
I hope the Fed makes this decision based on a long-term plan rather than a reaction to recent news. Pushed to answer the question: with low, stable inflation as the primary goal for fostering long-term growth and strong labor demand, I can mostly easily see the advantage of holding now to achieve that long-run goal.
In your view, is the Federal Reserve effectively responding to inflation and labor market conditions?
I think getting inflation firmly under control before the next shock hits should take priority in the Fed’s thinking, over quickly acting on yet-to-be-realized labor market fears. Tariffs have yet to wash through, the 2021–22 experience is fresh in people’s minds, and people are clearly not sure of the Fed’s commitment to do what it takes if serious inflation were to break out again.
What advice would you offer the members of the Federal Open Market Committee in 2026?
Think more about basics and long-run strategy, and less about minute to minute. Think about risks, rather than treat today’s forecast as a certainty. The next battle will likely be over what happens in the next crisis, and whether the Fed will again bail out widely, and buy huge amounts of Treasury debt and hold interest rates down. If the Fed needs to raise interest rates, that will again raise interest costs on the debt. Is the Fed ready for that battle? And get serious about the house of cards that is our financial regulatory system. This is a whole of FOMC, think outside the box issue, not boring green eyeshade stuff.
What should the FOMC advise to do (raise/cut/hold) to interest rates?
I think John Taylor is rolling over in his office at the question. Monetary policy should be a strategy, part of a coherent long-run plan, not a sequence of what do you feel like doing now questions. That said, and within the standard policy framework, hold.
