Making a speech at the Annual Meeting of the National Association for Business Economics, Lael Brainard starts with a pointed criticism of her “calendar bosses” Yellen and Fischer:
The will-they-or-won’t-they drumbeat has grown louder of late. To remove the suspense, I do not intend to make any calendar-based statements here today. Rather, I would like to give you a sense of the considerations that weigh on both sides of that debate and lay out the case for watching and waiting.
While Yellen is a Phillips Curve worshiper:
Economic theory suggests, and empirical analysis confirms, that such deviations of inflation from trend depend partly on the intensity of resource utilization in the economy–as approximated, for example, by the gap between the actual unemployment rate and its so-called natural rate, or by the shortfall of actual gross domestic product (GDP) from potential output.
Lael Brainard is skeptical:
To be clear, I do not view the improvement in the labor market as a sufficient statistic for judging the outlook for inflation. A variety of econometric estimates would suggest that the classic Phillips curve influence of resource utilization on inflation is, at best, very weak at the moment. The fact that wages have not accelerated is significant, but more so as an indicator that labor market slack is still present and that workers’ bargaining power likely remains weak.
In her “Policy Considerations” she argues:
There is a risk that the intensification of international crosscurrents could weigh more heavily on U.S. demand directly, or that the anticipation of a sharper divergence in U.S. policy could impose restraint through additional tightening of financial conditions. For these reasons, I view the risks to the economic outlook as tilted to the downside. The downside risks make a strong case for continuing to carefully nurture the U.S. recovery–and argue against prematurely taking away the support that has been so critical to its vitality.
Her speech is of a higher quality than the ones we´ve recently had from most FOMC members, but like the others she slips on “reasoning from price changes” when mentioning oil prices and the dollar exchange rate, and also on “reasoning from quantity changes” when spending time on “GDP components contributions”.
She´s partly right when she says:
Over the past 15 months, U.S. monetary policy deliberations have been taking place against a backdrop of progressively gloomier projections of global demand. The International Monetary Fund (IMF) has marked down 2015 emerging market and world growth repeatedly since April 2014.
But misses the fact that the “gloomier projections of global demand” in no small part derive from the tightening of US monetary policy that has taken place over this period, as can be gleaned, for example, from the falling growth rate of US aggregate demand (nominal spending or NGD). After all, the US is a monetary superpower!
And it´s not the case that they don´t know the consequences!