Fed leaders don´t pay attention to staff research. Sometimes they don´t even pay attention to themselves

Recently, I asked “Why have such a large research staff if their findings are ignored”?, with Janet Yellen in the “title role”.

Let´s go down to the level of Fed presidents.

First, Bullard has made several recent speeches again calling for tightening……….because you never know when inflation finally is going to appear.  But contrast his call for tightening against this new research from his own staff:

The figure shows the PPM constructed from our preferred specification since January 1995.5 Since the mid-1990s, there have been four periods—broadly speaking—when the PPM exceeded a probability of 0.5 (that is, 50 percent). Inflation was highest in the mid-2000s and the PPM exceeds 0.5 for several months during this period.

But during this most recent business expansion, with inflation averaging less than 2 percent, the PPM averages well under 0.5. As of October 2015, the PPM predicts a zero percent probability that PCEPI inflation will average more than 2.5 percent over the next 12 months.

The PPM is another instrument that policymakers and financial market participants can add to their tool kit to monitor the near-term outlook for inflation. The Federal Reserve Bank of St. Louis will regularly update the PPM shortly after the release of the monthly PCEPI.

Let´s not quibble, understand “0% probability” as meaning extremely low probability.

Next, San Francisco Fed president John Williams (who doesn´t pay attention to himself):

Now that the United States is closing in on full employment and inflation is likely to rise to target levels, the “next step” should be to start gradually increasing rates, a top U.S. central banker said on Saturday.

“I do think it makes sense to gradually remove the policy of accommodation that helped get the economy to where we are,” San Francisco Federal Reserve Bank President John Williams told the Arizona Council on Economic Education.

He must have forgotten the very recent update on his own research “Measuring the Natural Rate of Interest Redux”, which shows it has been negative for the past three years (see Fig 5)! How, then, under his criteria, can policy be accommodative?

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