NAIRU: The “Holy Grail”

Tim Duy, the quintessential “Fed Watcher”, has a detailed discussion of the FOMC Minutes: This Is Not A Drill. This Is The Real Thing.  He then gives his thoughts, the last of which summarizes them:

E.) Of all the divisive points above, I think the most important is the debate over the level of full employment. The ability of the doves to slow the pace of subsequent rate hikes will hinge on their willingness to push for below NAIRU unemployment to alleviate underemployment.

Which puts the Fed in a very bad light, square in the Phillips Curve camp, with the long discredited NAIRU being the “holy grail” in determining Fed policy!

When your tank is almost empty and the engine is gasping, fill it up with a better grade fuel

To me this was the best part of the Minutes, the only real forward-looking one; the rest was the usual BS!:

A lower long-run level of r* [natural real rate of interest] would also imply that the gap between the actual level of the federal funds rate and its near-zero effective lower bound would be smaller on average.

A smaller gap might increase the frequency of episodes in which policymakers would not be able to reduce the federal funds rate enough to promote a strong economic recovery and rapid return to maximum employment or to maintain price stability in the aftermath of negative shocks to aggregate demand.

Some participants noted that it would be prudent to have additional policy tools that could be used in such situations.

Better think hard and choose carefully, if only to avoid falling into another trap. Unfortunately, from the wording, it seems they don´t grasp the fact that if there is something the Fed can avoid, or at least minimize the effects, are shocks to aggregate demand.

Infighting at the FOMC

According to the Minutes from the July meeting:

“Some participants expressed the view that the incoming information had not yet provided grounds for reasonable confidence that inflation would move back to 2 percent over the medium term and that the inflation outlook thus might not soon meet one of the conditions established by the [Fed] for initiating a firming of policy,” the minutes said.

Some also worried about moving prematurely and lacking tools to address downside shocks to the economy, and about downside risks to the economy from developments abroad, particularly China.

There was push back against hesitating. A number of officials argued that a rate increase could convey confidence to the world about the economic outlook and that the Fed needed to move in acknowledgment of the progress the economy had already made toward normalcy.

Desperadoes_1The “desperadoes” at the FOMC want to “shoot ´em up”! To them, the economy “deserves a rate hike”!


Meanwhile, CPI inflation is keeping it´s distance from the target (2.35% equivalent to 2% PCE)



According to Tim Duy:

Former Federal Reserve Governor Lawrence Meyer is also interesting here:

“What are you worrying about, September or December? It doesn’t matter. Just pull the trigger,” said Laurence Meyer, co-founder of Macroeconomic Advisers, a research firm, in an interview before the release of the minutes.