Whatever forecasts officials do make in March are surrounded by uncertainty. The same was true for their December projections, minutes of that meeting later revealed. But they fumbled the communication, spooked markets by sounding too committed to further rate hikes, and have engaged in a two-month speaking campaign to reverse the damage.
“It was a disastrous, circuitous route to get where they are, but they are happy they are there,” said Mark Spindel, head of Potomac River Capital and co-author of a book on the Fed, referring to the recent pause in rate hikes. “They really think they are in a great spot.’’
Another feature of the patience doctrine is that a policy of jumping ahead on rates based on a forecast of higher inflation, known internally as pre-emption, has been retired.
Clarida discussed how even if a model predicted a surge in inflation, that would have to be balanced “against the considerable cost’’ of that forecast being wrong. Commerce Department data released on Friday showed the Fed’s preferred price index rose 1.7 percent for the year ending December; excluding food and energy, the index rose 1.94 percent, just below their 2 percent goal.
“Given muted inflation and stable inflation expectations, I believe we can be patient and allow the data to flow in as we determine what future adjustments to the target range for the federal funds rate may be,” Clarida said.
Finally, the officials also gave some hints on how their balance sheet discussions are evolving. Powell said the Fed’s balance sheet could settle into a range of 16 percent to 17 percent of GDP compared with 6 percent before the financial crisis.
In today’s numbers, GDP currently stands at $20.9 trillion so by the Fed’s estimate a normalized balance sheet would be around $3.5 trillion. Total assets on the balance sheet are currently about $4 trillion.
“The committee can now decide on the appropriate timing and pace for concluding our balance sheet drawdown,” Clarida said, hinting that they may taper the runoff into their target range.
This article was provided by Bloomberg News.