I hate to pull your attention away an edifying display of democracy in all its glory, so this will be brief. My prediction for today’s FOMC meeting is slightly different from what I stated before the January FOMC, but utterly unchanged from before Chair Yellen’s August Jackson Hole speech.
For about a year now, I’ve been writing of the well-disguised, steady predictability of FOMC policy. The historical record is, I argue, pretty clear. Since mid-year 2013, the FOMC has predictably responded to incoming information as if guided by two principles:
So long as steady job market gains persist, continue a gradual, pre-announced removal of accommodation.
So long as inflation remains below target, take a tactical pause if credible evidence arises that the job gains might soon falter.
There are two parts to trying to convince you of this admittedly controversial stance. First, I’ve been trying to convince you that policy has, in fact, been very predictable. Second I’ve tried to explain why, nonetheless, astute observers have remained so baffled by the Fed’s actions. Until I had been away from the Fed for a little over a year, I didn’t make any explicit predictions that might illustrate my claims. About year ago, I started being more explicit.
Before the January FOMC, I predicted that so long as the economy did not break dramatically in either direction, there would be between 1 and ½ rate increases in 2016. Put less obscurely, one increase was very likely; two was much less likely. Or more in depth, if no reasons for tactical pauses came along early in the year, there would be one rate increase in the first half, and then the Fed might well take a second step late in the year.
The market turmoil in January followed by some bad employment data led to a clearly communicated tactical pause that lasted through mid-year. Thus, by mid-year, the probability of that second rise was very low. Before Chair Yellen’s August Jackson Hole speech, I said that under the framework laid out on behalf of the consensus, conditions pretty clearly warranted a rate increase by year end. That is, if the economy did not break strongly in either direction, one increase by the end of the year was very likely. If this were right, I expected Yellen’s speech to sound much like the earlier communication. And it did. As for the timing of the increase, I said that that timing would not matter much for the macroeconomy, implying that timing could come down to secondary factors that no outsider knows much about. I agreed with many other commentators that it was likely to be a close call in Sept. From what we know, this was right.
The tone of communication on behalf of the consensus has remained steady since August, so my prediction is unchanged: unless the economy breaks dramatically in either direction, one 25 b.p. increase is still coming by year end. Is that a certainty? Clearly not. For example, there is that edifying display that currently must be considered a risk event in the near term and that could, in principle, cause a dramatic shift in the economy—not that I’m taking a position here.
If I were selling Fed watching services, at this point, I would hint that I had special powers (or contacts) that you should pay to access. My point is different: Anybody can do this.
Ignore any FOMC communication—or chatter about that communication—except those statements labelled expressly as being on behalf of the consensus. That means mainly listening to the FOMC statement, press conference, and some other communication by the Chair. The communication on behalf of the consensus takes some interpreting, of course, but you should attempt to interpret it in as straightforward a way as possible—no tea leaves. That’s been the basis of my predictions.
So let’s mention some specifics: What about r-star? What about ‘running the economy hot’? What about Vice Chair Fisher’s discussion of 2 rate increases by year end? What about the timing of speeches by Gov. Brainard? All those things may be dramatic, and carefully figuring out what each might mean would be hard. Don’t bother.
As in earlier posts, I return to the Greek Tragedy analogy. If all you care about is what happens to the hero, you can skip the drama: the hero is laid low in the end. Like most people, I find the drama delicious. But like most people, I’m not surprised by the bottom line. Bring that same thinking to the FOMC.
The process of establishing consensus of the FOMC—a process nurtured by the Chair—has been resulting in very steady, consistent and predictable behavior of the consensus. Finding a workable consensus of a large group is hard. No sane person would take on the task of re-building a different consensus without serious cause. And that’s probably a good thing.
Want more transparency? The CFE and the Hutchins Center at Brookings are co-sponsoring a discussion entitled Understanding Fedspeak on the morning of Nov. 30. Lots of ideas, including those I’ve been peddling, will be discussed by journalists, former policymakers (including Ben Bernanke, Alan Blinder, and Don Kohn), and prominent Fed watchers. Details here.
1. Those predictions could well have flirted with violating the letter or spirit of confidentiality agreements, and in any case, any success might have been attributed to residual inside information. [back]
2. The contingency here is not about the Fed, but about the economy. [back]
3. Echoing essentially every summary since mid-year 2013, Yellen said
Smoothing through the monthly ups and downs, job gains averaged 190,000 per month over the past three months. Although the unemployment rate has remained fairly steady this year, near 5 percent, broader measures of labor utilization have improved. Inflation has continued to run below the FOMC’s objective of 2 percent, reflecting in part the transitory effects of earlier declines in energy and import prices….
Indeed, in light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months.