For some time the big monetary policy discussion revolved around a single word: “Patience”. And the word had a clear “sell date” once it was removed: Two FOMC Meetings. That was certainly a problem for the Fed who hates being “tied-up and gagged”. Everyone, without exception, expected the “word” to be removed at today´s FOMC Meeting, eagerly anticipating what would replace it.
The Statement “clears it up”:
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. Consistent with its previous statement, the Committee judges that an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. This change in the forward guidance does not indicate that the Committee has decided on the timing of the initial increase in the target range.
The “sell date” has gone; the Fed has” untied and ungagged” itself! It also has lowered once more the unemployment threshold that would more clearly indicate an interest rate move was imminent. For those with a short memory, that threshold has been 7%, lowered to 6.5%, lowered again to 6%, and under Yellen, a NAIRU faithful, it has been put in the 5.2% to 5.5% range, which has now been lowered to the 5% – 5.2% range!
Fed officials have marked down considerably their view of the “Nonaccelerating inflation rate of unemployment,” or Nairu.
The new central tendency of the long run unemployment rate is 5 to 5.2%, down from 5.2% to 5.5%. Ms. Yellen told WSJ’s Jon Hilsenrath this may explain why so many FOMC members have marked down their path of interest rate increases: it implies more slack in the economy, less inflation pressure and a need for easy policy for longer.
Yellen´s “NAIRU faith” shows up clearly:
The Fed’s forecasts today contained a shallower path for interest rates going forward. Instead of increasing rates at 0.25% at every meeting, the median interest rate estimate from the Fed calls for only 7 increases over the course of the next 14 meetings.
Asked why, Ms. Yellen cited two factors underlying the slow rise of rates:
1) Inflation has come in further below the Fed’s target than they expected, and that calls for lower rates to bring it back.
2) The Fed has lowered its estimates of the normal rate for the unemployment rate. That means, the unemployment goal is a little bit further away than previously estimated. That too calls for somewhat lower interest rates, she said.
Later this year, with inflation remaining far below target, and unemployment continuing to fall as it has for the past 5 years, the “new range” for Yellen´s “beloved NAIRU” will be put at the 4.5% – 5% range. At this rate, in a few years’ time, Yellen will start believing 4% unemployment is the “real thing”!
Maybe that´s possible, not because it is Yellen´s target, but because the Fed will have (re)learned how to conduct an “appropriate monetary policy”, that is, a monetary policy that maintains nominal stability at the appropriate level of activity.