Lunch and Tea with the Forecasters Club of NY

If you had your TV set tuned to CNBC… August 21, 2001, two commentators were watching Alan Greenspan get out of a car and head to his office. They discussed the color of his tie (maroon) and the brand of shoes he appeared to be wearing (Rockports).’
         Danny Hakim, New York Times[1]

Yesterday, I had a great visit with the Forecasters Club of New York. Here are my slides. As we were chatting, a question came up about the Fed’s change in its strategy statement. This question has surfaced many places since the FOMC meeting, and my view about it flows directly from the no tea leaves approach to interpreting Fed communication that I’ve been pushing.

When there is a significant change in the Fed’s assessment of the outlook or in its likely reaction to the outlook, in this view, the Fed will probably attempt to tell you that directly. Because the world is complicated and communication is hard, those statements won’t be as clear as anyone would like—we’ll still need those Fed analysts. Important news will not, however, be signaled by obscure signals and signs.

Of course, the life of a tea-leaf-watcher is far more entertaining. The FOMC’s projections alone are a veritable vat of soggy tea leaves, and then there’s the Chair’s tie (or scarf). As of Wednesday, it looks like we can add the annual revision or nonrevision of the strategy statement to the list of tea leaves to be pondered.

Since 2012, the Fed has followed the tradition of reaffirming each January, possibly with revisions, its Statement of Longer-run Goals and Policy Strategy. In this year’s version, the FOMC added language clarifying that the 2 percent inflation goal was symmetric: “The Committee would be concerned if inflation were running persistently above or below this objective.[2] ” I can just imagine the dialog leading to this dramatic change:

Chair: How can we signal our dovishness?

Fresh-faced staffer: We could attempt to say something straightforward in the FOMC statement.

Chair: Who’s the new person? How about some serious ideas?

Savy staffer: I’ve got it. January is the month we revise our goals and strategy statement. We could slip something in there.

Chair: Brilliant. What scarf should I pair with that?

The symmetry now embedded in the strategy statement has always been FOMC policy. Symmetry has regularly been asserted by policymakers, and I suspect that no current or recent FOMC member has ever said anything to the contrary. This January may have been an appropriate time for the FOMC to be sure the public understood this point, but I don’t think it reflects any change in views or signal about the near-term course of policy.[3]

In the no-tea-leaf interpretation, the FOMC on Wednesday said that this year’s macro data and market moves have the FOMC’s attention, but are still too recent to warrant a definitive and pronounced shift in the U.S. outlook. As the presence or absence of a significant change in the outlook becomes clearer, the FOMC will, as always, adjust policy as appropriate.

What I’d like to hear from the FOMC is a clearer statement about their assessment of the likelihood of recession[4] and about how policy would likely respond. And by the way, the ‘balance of risks’ statement—or absence of such a statement—is a grossly inadequate vehicle for conveying that information. But that’s a subject for another day.

Notes:

1. Quoted in All the People, Joy Hakim, 2003, p231. [back]

2. The use of the subjunctive tense here is entirely appropriate, but it does kind of invite a waggish lad to add, “You know, for example, if persistently low inflation were ever to happen.” [back]

3. So why was it not explicit before? Not sure, but we can speculate. Perhaps it was not included because between the original penning of the statement and the 2015 revision, questions over symmetry were not so pressing in practice, and the FOMC was not so aware of public confusion on this point. Policymakers, in this view, included the clarification so that they didn’t have to keep answering questions on the topic. [back]

4. And throw in the likelihood of a substantial overshoot of 2 percent inflation. [back]