In this episode, the economy is clearly above full employment and inflation is much higher than 2%. So we’re not close to being on an even keel or in that longer-run world. It’s pretty clear that maximum employment and a neutral rate are now higher than their longer-run values. While all these concepts can be confusing, financial markets and Fed watchers understand them — the Fed would have been well advised to make clear that the longer-run unemployment rate and neutral interest rate in the SEP weren’t the right concepts right now. (Note: In March, Fed officials projected that the unemployment rate consistent with longer-run maximum employment is 4% and the longer-run neutral interest rate is 2.4%.)
The FOMC seems really good at communicating a baseline forecast. They don’t seem very good at communicating what happens when the economy gallops off the baseline. And the result is that when a credible policy maker offers an alternative path, markets hew to that because it seems more realistic.
What do you have to say about this?
It doesn’t seem logical to take the remarks of one policy maker — who opened the door to a 50 basis-point increase — and run with it, does it?
This is what was happening before the March meeting. St. Louis Fed President James Bullard was coming out and saying the FOMC could raise the policy rate 50 basis points. Others like San Francisco Fed President Mary Daly or Cleveland Fed President Loretta Mester were saying, “I really don’t think 50.” It took a bit of work for the Fed to get markets to understand that the looming Russian invasion of Ukraine was going to affect the March decision. (Note: a basis point is 0.01 percentage point.)
I don’t see why markets take the view of one policy maker.
Isn’t it because the whole committee can’t offer us an alternative path?
The SEP is only quarterly. In the current environment it gets extremely out of date before it gets updated. If they move to an SEP at every meeting, they probably have to live forever with that. But I do think that would be helpful to them right now.
You could also take the median estimates and run alternatives off the medians if you could agree you were going to run them with FRB-US (the Fed’s simulation of the economy). But you would have to have people agree to the models and methods used to run those alternatives. Getting agreement on these communication initiatives can take an enormous amount of time when it doesn’t seem like it should.
I do agree that the situation right now is so fraught, and it is changing so rapidly, it would be very helpful to have an update of their forecast as well as have scenarios and have them talk from the same hymn book.
How did you remain patient herding all these cats?
It is fascinating to watch. When I first started attending FOMC meetings, it seemed to me that it was a little bit like a soap opera. You have a lot of subplots going on and they are about different issues that policy makers are concerned with. They are on different sides of those issues. Those subtexts have been running for a long time. It takes a while to see how they are thinking about these things.
Was it hard to get these people to agree on something?
Yes.
Why do we see Fed officials resorting to code words like “expeditiously”? Why not just say a half-point for the next three or four meetings. Why do they opt for the less specific?
The Fed is saying it wants to move “expeditiously” to the neutral policy rate. How you get there — in terms of basis points and at which meetings — isn’t decided until the FOMC actually holds its meetings. They discuss these issues and policy makers may have a sense of what they plan to do. Maybe even it seems that they are in agreement, although sometimes they have different views. But I think the main reason is that the actual decision hasn’t been made yet, so the best they can do is to select a word that represents what they are trying to achieve and use that word consistently.
This article was provided by Bloomberg News.