The “Wishin´& Hopin´” Fed

Or is it the “Expecting & Anticipating” Fed? Given the time span (7 years) of “Expecting & Anticipating”, those words have become meaningless, so the timeliness of “Wishin’ & Hopin’” is more appropriate.

And it´s “W&H” for inflation! An account.

In the early months after the crash, the FOMC was still very much focused on headline inflation. That was certainly one of the reasons monetary policy was so tight going into the “Great Recession”:

In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability.(Oct 08).

In later occasions the FOMC doesn´t mention energy and commodity prices explicitly (maybe because they crashed):

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time. (Nov 09)

Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow. (Dec 10)

Fantastic! They anticipated inflation would remain excessively low:

The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations. (Dec 11)

The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective. (Dec 12)

The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective. (Apr/May 13)

Suddenly they acknowledge that “too low” inflation could pose risks. But instead of doing something about that they start “anticipating” that it will move back up in the medium term (are they evoking the “Holy Ghost”?):

The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term. (July 13)

In a November 2013 speech, Bernanke drops the risk part and only continues to “expected” that inflation will somehow rise:

The Committee additionally expected that inflation would be moving back toward its 2 percent objective over time. (Speech Nov 13)

This old chart illustrates that they have for a long time “expected” and “anticipated” wrong.

Wishin´& Hoping´_1

Since then expectations and anticipations have not markedly improved!

The Minutes of the December 2014 FOMC meeting is “fun” to read:

Participants generally anticipated that inflation was likely to decline further in the near term, reflecting the reduction in oil prices and the effects of the rise in the foreign exchange value of the dollar on import prices. Most participants saw these influences as temporary and thus continued to expect inflation to move back gradually to the Committee’s 2 percent longer-run objective as the labor market improved further in an environment of well-anchored inflation expectations.

With regard to inflation, a number of participants saw a risk that it could run persistently below their 2 percent objective, with some expressing concern that such an outcome could undermine the credibility of the Committee’s commitment to that objective.

With lower energy prices and the stronger dollar likely to keep inflation below target for some time, it was noted that the Committee might begin normalization at a time when core inflation was near current levels, although in that circumstance participants would want to be reasonably confident that inflation will move back toward 2 percent over time.

After battling inflation for almost three decades, FOMC members are now in the position of having to “pray” for more inflation! Call in the shrinks!

Interestingly, now they say that the fall in oil prices will have only temporary effects. In 2008 they thought that the rise in oil prices required “tightening”!

Even more interesting is the fact that as soon as the US became an official inflation targeter in January 2012, inflation dropped significantly below target and has remained there for the last three years!

And that´s no “fault” of oil prices, which remained pretty stable (approx. $100) between mid-2011 and mid-2014.

What could possibly give FOMC members’ confidence to establish the time for the first rate hike?

“Praying” won´t cut it. They have to do something that would get aggregate nominal spending up. But that´s not likely to happen and so there will be no “confidence that inflation will travel towards the target” and, therefore, the “rate rising date” will keep being postponed!

In April 2015 they were still “keeping the faith”!

Participants generally anticipated that inflation would rise gradually toward the Committee’s 2 percent objective as the labor market improved further and the transitory effects of declines in energy prices and non-energy import prices dissipate

The chart updates the previous one.

Wishin´& Hoping´_2

And the next chart indicates the behavior of one (Cleveland Fed) estimate of long-term inflation expectations since the crisis took hold

Wishin´& Hoping´_3

Title song


2 thoughts on “The “Wishin´& Hopin´” Fed

  1. A classic post.

    Over the last year or two I have spent some time chatting to senior US business executives. Increasingly, many echo the comments of old Dick Fisher of the Texas Fed. In my mind, I picture these guys (they are mostly men) in their country clubs lamenting the low interest rates, the ultra-easy money, and thinking the economy needs to prove itself robust enough to take some rate rises. It is the medicine of the Spartans, get up and get out of bed into the fresh air, that’ll work. I think of it as country cub economics. Your quotes from Yellen show that it seems to be gaining traction in the core of the Fed, too.

    To be fair, I can sympathise with business leaders’ frustration at weakening growth in nominal sales in the US and from overseas too as the dollar strengthens. They want some leadership at the Fed to drive up confidence, like the leadership they provide inside their firms. I agree, we all do. But they are not monetary economists, they know their industries well but not macroenomics.

    Partially, I blame Greenspan for understanding monetary economics at the gut level but then personalising policy rather introducing clear rules. It left huge expectations on his successors to be as understanding at that gut level. However, they are theoreticians without the gut understanding of the counter-intuitive challenges of monetary policy: low rates = tight money, high rates = easy money.

    The Fed needs someone of the character and colourful background of Greenspan but with the understanding of modern NGDP Targeting to lead it. Sadly, these people only get appointed in unusual circumstances. If the Fed bows to country club economics and raises rates we will be likely to have to endure such circumstances.

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