Repeat after me:
- “economy getting close to full employment”
- “inflation will soon climb to 2%”
So that you can then say:
- “a rate hike will take place soon”
In the not-so-distant future, people will realize that the “gradual normalization” strategy for monetary policy was a most stupid choice!
One of the reasons is that it “keeps out evidence”, in particular evidence that wouldn´t be consistent with their view of necessary “normalization”.
Two pieces of evidence available to policymakers contest their “mantra” about employment and inflation.
The Kansas City Fed calculates a Labor Market Conditions Indicator. The chart shows that for the past two years the changes have trended down and lately have turned negative.
The St Louis Fed calculates a Price Pressure Measure:
Policymakers usually want to know—to the extent possible—the probability that inflation over the next four or eight quarters will exceed the inflation target.
To help policymakers, financial market participants, and others who have an interest in assessing future inflation probabilities, the Federal Reserve Bank of St. Louis has developed an index called the price pressures measure (PPM).3 The PPM measures the probability that the expected inflation rate (12-month percent changes) over the next 12 months will exceed 2.5 percent.
And here´s the chart with the probabilities since January 2012 when the 2% target became official.
Contrary to what the “Parrots” chant, the probability that inflation will exceed the target going forward, has been diminutive!
Unfortunately, the “gradual normalization” strategy ignores all that!