With most people pretty happy with the outcome of the latest FOMC meeting, except of course, Jeffrey Lacker & friends who are all worried about inflation somewhere down the road.
What´s different this time? The wording of the statement says it best (joining two separate strands, my bold):
If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability… [A] highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.
As I mentioned in an earlier post, this sounds much like a ‘light’ or ‘no numbers’ version of Chicago Fed president Charles Evans suggestion “that the federal funds rate will not be increased until the unemployment rate falls below 7 percent”.
What nags me is the “automatic brake” of ‘price stability’ (2% inflation). But then, a “highly accommodative stance will remain appropriate for a considerable time after…” confuses me. What if inflation goes up (even temporarily) during the strengthening of the recovery?
An NGDP level target would be a much better “forward guidance” supporting QE. Likely even that in that case the “Chuck Norris” effect would come into play.
The collage below weaves a story. The 1970s NGDP trend was “bad”, characterized by rising and erratic inflation and unemployment. The Volcker years brought the level of NGDP (relative to previous trend) down permanently and allowed it to join up with the “Great Moderation” trend. A “good” trend, characterized by low and stable inflation, low unemployment and stable real growth.
Bernanke´s Fed lost that. The more time goes by, the more permanent is the level loss. The FOMC today, for once, surprised the markets with a more explicit move in the right direction, but I´m not as optimistic as some of my fellow MM´s. This late in the game I think it was still too weak and heavily conditioned on the 2% “magic number”.