Home Federal Reserve Reading Between the Fed’s Lines – Robert Aro (03/22/2021)

Reading Between the Fed’s Lines – Robert Aro (03/22/2021)

The conclusion of the March Federal Open Market Committee (FOMC) meeting, on Wednesday, reiterates that low rates and perpetual increases to the money supply should now be considered permanent features of the economy. Federal Reserve Chair Powell would never say this explicitly, but the  Q & A provides further clues that the Fed has unofficially committed to this path:

We expect to maintain an accommodative stance of monetary policy until these employment and inflation outcomes are achieved.

While it sounds like the accommodative stance is temporary, once his Fedspeak (“employment and inflation outcomes”) is deciphered, doubt comes to light as to how temporary the policy stance will be.

Keep in mind the keyword: transitory, meaning “not permanent.”

With regard to interest rates, we continue to expect it will be appropriate to maintain the current 0 to .25% target range for the federal funds rate until labor market conditions have reached levels consistent with the committee’s assessment of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time. I would note that a transitory rise in inflation above 2%, as seems likely to occur this year, would not meet this standard.

Powell expects price inflation, measured through various inflation calculations like the CPI Index, should rise to over 2% this year, and if this were to happen it would be “transitory.” There is little explanation why this would be the case, except for a hypothetical example where supply bottlenecks are created due to the reopening of the economy, potentially causing a “one-time increase” to prices. 

Since all inflation calculations are problematic as is, this adds a new layer of cherry-picking, whereby even when the inflation data is relatively high, the Fed can dismiss it by calling it transient. This may be easy for central planners to say, but it is difficult for the general public to live through high inflation, even if it is transient.

Powell reiterates this stance through their guidance, as they continue to look for:

inflation that has reached 2% and not just on a transitory basis, and inflation that’s on track to run moderately above 2% for some time.

Further problems are created which cannot be answered; does six months of transient data equate to a moderate run of inflation for “some time,” or are they looking for a consistent twelve months of transience?

As for assessing maximum employment:

We look at a very broad range and you hear us talk all the time about participation, about employment to population… about different measures of unemployment. So it’s wages, it’s the job flows, all of those things, they go into an assessment, disparities of various groups, all of that goes into an assessment of maximum employment.

Strangely enough, what looks like a vague explanation becomes quite clear; it seems he’s saying that maximum employment will be achieved after the Fed has looked at enough data to determine that maximum employment has been achieved.

Of course, for all that’s been said about the Fed looking to achieve the appropriate unemployment and inflation rate, it seems even stranger that near the end of the Q & A, Powell says:

There was a time when there was a tight connection between unemployment and inflation. That time is long gone.

It remains unclear why he would spend a considerable amount of time discussing the two supposedly inextricably linked mandates, unemployment and inflation, but then offer the idea that the connection between them is gone.

At the conclusion of the FOMC meeting, we are assured that no rate hikes or decreases to the Fed’s asset purchase programs should happen within the next several years. However, between achieving that elusive maximum employment figure or accepting inflation data that is not transient, we should start to wonder if the Fed has any intentions of becoming less accommodative ever again.