The Fed´s “two-step” dance

From today´s Minutes:

The information on economic activity received since the staff prepared its forecast for the September FOMC meeting was close to expectations, and therefore, the staff’s projection for real GDP growth over the remainder of the year was little revised. However, in response to a further rise in the foreign exchange value of the dollar, a deterioration in global growth prospects, and a decline in equity prices, the staff revised down its projection for real GDP growth a little over the medium term.

Even with the slower expansion of economic activity in this projection, real GDP was still expected to rise faster than potential output in 2015 and 2016, supported by accommodative monetary policy and a further easing of the restraint on spending from changes in fiscal policy; in 2017, real GDP growth was projected to step down toward the rate of potential output growth. As a result, resource slack was anticipated to decline steadily, albeit at a slightly slower rate than in the previous projection, and the unemployment rate was expected to gradually improve and to be at the staff’s estimate of its longer-run natural rate in 2017.

The staff’s forecast for inflation this quarter and early next year was reduced in response to further declines in crude oil prices, but the forecast for inflation over the medium term was only a touch lower. Consumer price inflation was projected to be lower in the second half of this year than in the first half and to remain below the Committee’s longer-run objective of 2 percent over the next few years. With resource slack projected to diminish slowly and changes in commodity and import prices anticipated to be subdued, inflation was projected to rise gradually and to reach the Committee’s objective in the longer run.

Pathetic!

Expansion of economic activity is expected to be slower but RGDP was still expected to rise faster than potential in 2015-16!

Resource slack is expected to diminish slowly. This seems inconsistent with RGDP expected to rise faster than potential!

They say 2% inflation is years away!

And they think monetary policy is supportive!

To repeat a chart from yesterday´s post, monetary policy is supportive if by supportive you mean it is successful in keeping the economy in a depressed state (of (too) low real growth, (too) low inflation and low employment).

But even that will look good if the Fed engages in the “two-step”!

Two Step

One thought on “The Fed´s “two-step” dance

  1. I have been saying that the US economy is no longer inflation prone.

    Does not the Fed believe this? After three rounds of quantitative easing they are below their already too-low 2 percent inflation target.

    What does it take for the Fed to realize that inflation is no longer the phantasm that haunts America, but rather sustained weak economic growth.

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