A quick note on the Fed meeting and the need for “patience” for a “considerable time.”

December 17th, 2014 at 9:10 am

As the Federal Reserve Open Market Committee meets today to decide their path for monetary policy, there’s great focus on whether they’ll change a few key words of their guidance language. Specifically, will they drop “considerable time” from the sentence wherein the telegraph their thinking about how long they’ll hold interest rates at around zero? EG, from their last FOMC statement (my bold):

The Committee anticipates, based on its current assessment, that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time

I’ll share a few substantive thoughts in a moment, but I’m sure Chair Yellen and co. are looking for helpful alternatives, so here are some suggestions:

Go Zen: When the petals of the plum blossom cascade in the warm winds of future days, so too shall we be moved to action. [investors: note the usage of “warm breeze,” suggesting a spring liftoff…]

Go Brooklyn: Hey, fuggetaboutit…we’ll let yas know when we’re good and ready!

Go Greenspan-ian opacity: There is a frequency distribution wherein the optimal spectrum of rate movements exists alongside stochastic properties that guide a set of choice functions.

Go Logic problem: The FOMC is sitting around a large table. Janet, who wants a later liftoff, is sitting next to Bill, who wants a sooner lifter. Stan is next to Narayana, who wants an even later liftoff…etc…

Go Seasonal: “You better watch out, you’d better not pry, we’ll raise when we see, inflation’s white eye…”

Slightly more seriously, while it’s hard for normal humans to parse the difference between “considerable time” and “patience” (the lead candidate for the word change), such a change should be taken as guidance that they’re on track to raise rates sometime later next year which from my perspective seems like a big mistake.

The narrative around the rate liftoff has morphed into: if you’re hawkish, you’d like to see increases beginning in say Q2 of next year. If you’re a dove, then it’s Q3. But as far as the real economy goes, there’s no difference, especially considering that the magnitude of increases in the federal funds rate is likely to be quite small at first.

But why this obsession with raising at all in the near term? Even as US GDP and employment growth have accelerated, inflation remains extremely quiescent. I worry more about deflation than inflation. Look at the yield of the 10-year treasury, last seen at 2.05%, i.e., flitting around historical lows, implying low inflation expectations a midst strong demand for a safe harbor. Look at oil (from BLS this AM: overall CPI up 1.3%, yr/yr, on falling energy costs; core up 1.7%).

Look at “Strips“: my CBPP pal Chuck Marr sends me this from Bloomberg, telling of strong demand for these zero-coupon securities whose return is eroded by future inflation, meaning market actors are willing to bet real money that inflation will be low for years to come.

Couldn’t they be wrong? Of course, but that’s not what matters re Fed guidance and policy. What matters are market expectations for future inflation which are very clearly “well-anchored.” (BTW, this high Strips demand also implies investors are not worried about future deficits pushing up private interest rates—aka “crowding out.” Deficit hawks, if they’re still out there, really have little-to-nothing by way of evidence for this phenomenon.)

There’s still no wage pressure and no evidence that what wage growth we’ve seen is bleeding into prices. There’s still considerable room for non-inflationary wage growth: it’s been stuck at 2 percent annually but could grow 3.5 percent (productivity of around 1.5 percent + the Fed’s 2 percent inflation target) or even faster if there were some redistribution from the historically inflated profit share of national income into the depressed compensation share.

There’s still considerable slack in the job market, millions of un- and underemployed persons, and millions more who’ve left the labor market but might well come back in if demand would strengthen. Even under current conditions, there variables will take years to get to their full employment levels.

So, the petals of the plum blossom should stay on the damn tree. And as far as all this rate talk goes…fuggetaboutit!

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One comment in reply to "A quick note on the Fed meeting and the need for “patience” for a “considerable time.”"

  1. Peter K. says:

    You were on the Daily Show last night when Stewart showed a clip about the spending bill and weakening the Dodd-Frank rules.

    My guess and only a guess is that Yellen knows all of this – which is why I supported her over Summers who wasn’t that bad either – and that Fischer was playing the bad cop in a way and they’re trying to Jedi Mind Trick the market over inflation expectations. “These aren’t the droids you’re looking for … the economy is improving so much we’ll have to raise any day now to fight inflation … expect inflation …”

    That could be what they’re telling themselves when really they just want to get out of the zero bound business ASAP. I hope not because a premature tightening will get us back into it.


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