Federal Reserve resists hawkish signal, continues to view economy as needing their monetary support…and that’s as it should be.

September 17th, 2014 at 2:55 pm

The Fed is out with their statement and the words “considerable time” live to see another day!

That makes sense both substantively—the remaining slack in the economy requires continued support from monetary policy—and rhetorically: the Fed’s forward guidance has correctly emphasized that their decisions will be data driven, and the data continue to point toward risk asymmetry: the risk of tightening too soon remains potentially more costly than the risk of wage or price pressures.

Moreover, the Fed’s statement announces, as expected, that barring anything quite unforeseen, they’ll end their QE asset buying program at the next meeting.

So, foot coming off gas but not yet moving over to brake.

The WSJ statement tracker shows little change from the last statement, though what changes there are look dovish, e.g.:




[And yes, WSJ—your tracker rules!]

Also notable in regards to their take on slack, check out the FOMCs downgrade of their 2015 forecast for real GDP growth. Two years ago in their September meeting, they were looking for 3.4%; last year they marked that down to 3.25%, and today, down again to 2.8%. This too is consistent with the wait-and-see tone of the statement.


Source: Federal Reserve

So, once again, kudos to the Yellen Fed for not signaling a more hawkish stance in an economy that still needs their support. Remember, folks: when it comes to economic policy makers still trying to do something big to help the macroeconomy, the Fed’s the only game in town.


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10 comments in reply to "Federal Reserve resists hawkish signal, continues to view economy as needing their monetary support…and that’s as it should be."

  1. Robert buttons says:

    Interest rates are at zero, this has never happened before. The fed’s balance sheet is higher than its ever been. Clearly, monetary policy is extraordinary. Therefore, the doves can’t run away if things go badly. There can be no excuses; no “animal spirits”, no “i told you we needed lower (than zero) rates”. Heck, if there’s a soft landing: a balance sheet unwind and normalization of rates, I will admit I’m an idiot.

    • Peter K. says:

      Well Mr. Buttons you will be a rare person to mark your beliefs to market if you do. The nice think about the Internet is that it’s easy to keep track.

      The Fed has been extraordinarily active because it is compensating for

      A) underinvestment and weak private sector demand but as Dean Baker points out it’s up to trend. The issues is that the Fed can’t lower rates below zero to help goose investment

      B) government fiscal austerity thanks to the Republicans, but thankfully this seems to be lessening

      C) the trade deficit

      • Robert buttons says:

        I krep seeing this word “austerity”, but nobody cares to define it. I know economists prefer squishy definitions, so they can walk back their statements when they don’t match future events.

        When our national debt has increased $1T over the last year and our central bank has effectively monetized an equal amount, i would be hard pressed to find this “austerity” you speak of.

        • Carl says:

          Maybe all of this money has been spent on/given to the wrong people. Maybe it should have been just given to the unemployed (through unemployment extensions), our public infrastructure, and to social safety nets instead of just given to all the Scrooge McDucks/Banks who spend their days diving in their piles of gold instead of spending/investing in the economy or employing people…?

          Don’t the poor spend most of their money?
          Doesn’t infrastructure pay for itself reasonably well?
          Wouldn’t this support the demand that the economy is lacking?

          Oh wait- Wall Street always wins. I forgot about that part.

        • Peter K. says:

          Fed Vice-Chair Stanley Fischer:

          “The stance of U.S. fiscal policy in recent years constituted a significant drag on growth as the large budget deficit was reduced. Historically, fiscal policy has been a support during both recessions and recoveries. In part, this reflects the operation of automatic stabilizers, such as declines in tax revenues and increases in unemployment benefits, that tend to accompany a downturn in activity. In addition, discretionary fiscal policy actions typically boost growth in the years just after a recession. In the U.S., as well as in other countries–especially in Europe–fiscal policy was typically expansionary during the recent recession and early in the recovery, but discretionary fiscal policy shifted relatively fast from expansionary to contractionary as the recovery progressed. In the United States, at the federal level, the end of the payroll tax cut, the sequestration, the squeeze on discretionary spending from budget caps, and the declines in defense spending have all curtailed economic growth. Last year, for example, the Congressional Budget Office estimated that fiscal headwinds slowed the pace of real GDP growth in 2013 by about 1-1/2 percentage points relative to what it would have been otherwise. Moreover, state and local governments, facing balanced budget requirements, have responded to the large and sustained decline in their revenues owing to the deep recession and slow recovery by reducing their purchases of real goods and services. Job cuts at federal, state, and local governments have reduced payrolls by almost 3/4 of a million workers, resulting in a decline in total government civilian employment of 3-1/4 percent since its peak in early 2009. The fiscal adjustments of the last few years have reduced the federal government deficit to an expected level of 3 percent of GDP in 2014 and fiscal drag over the next few years is likely to be relatively low. ”


        • smith says:

          It is not to hard to find “austerity”.

          You may be hung up the figure 1 trillion as if that meant anything vs the comparison to total GDP and historical past ratios. Also to note is that the severity of the 2008 – 2009 crisis matched the Great Depression in relative measuring of output. It didn’t feel like the Great Depression because our standard of living is so high, if you lose half the country’s income, you still won’t starve as long as the remaining half is shared enough to reach those without anything, which is the other reason it didn’t feel like the Great Depression, government programs like unemployment insurance and food stamps helped those most in need.

          • Robert Buttons says:

            Krugman is up to his old tricks again. Using an impressive looking YoY chart, because when denominated in actual dollars (rather than YoY %) it looks so much less impressive. Does Krugman think a year with a $0.9T stimulus package should be the baseline and we can go into the stratosphere from there? Further, why use REAL YoY spending???? There is, says PK, “no inflation” so the nominal spending chart should be identical.

            I am asking a simple question: Define austerity. Fischer’s comment didn’t do it and he used 302 words!!

  2. John Daschbach says:

    Both Bernanke and Yellen, and the FOMC have been far more restrained in terms of their comments on fiscal policy being a drag on the economy than I think is warranted. Anyone with a broad understanding of economics knows that the lack of fiscal stimulus has hampered the recovery. Among established macro economists there is a valid debate as to whether direct government spending (e.g. Wren Lewis) or tax reduction (John B. Taylor) is more effective.

    But, as Brad DeLong has pointed out, when r < n+g, the arguments against fiscal stimulus are very shaky. I would argue that many are not driven by a strong ideological bias against government and not based in any rational economic understanding. Or it could be that the Kalecki argument (which clearly is the basis for the Koch's political efforts) has been swallowed hook line and sinker by the masses which are not the Capitalists of the Kalecki argument.

  3. Robert Buttons says:

    Russ Roberts, Veronique de Rugy, Mark Spitznagel, et al have a very broad understanding of economics, yet they are not likely to agree with the statement “the lack of fiscal stimulus has hampered the recovery”