The FOMC meets and, among other things, we discover Jerome Powell has been vaccinated

The FOMC met for the first time in 2021 yesterday. The committee has maintained its accommodating policy stance as the economic recovery slows in the US.

Chair Powell hanging on for dear life like the rest of us

As at the last meeting, the Fed expects to keep this in place for some time:

With regard to interest rates, we continue to expect it will be appropriate to maintain the current 0 to ¼ percent 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 percent and is on track to moderately exceed 2 percent for some time.

The Q&A session with Chair Powell had a few interesting nuggets:

  • He addressed the ‘burst of inflation’ hypothesis (discussed by me here), arguing that any inflation this year is likely to transient and minor“we think its very unlikely that anything we see now results in troubling inflation.” And, even if it did appear, “we’re going to be patient. Expect us to wait and see, and not react.”
  • With the ongoing Gamestop frenzy (expect a write up soon…), there were lots of questions about markets, macro-prudential regulation, and ultra low-interest rates. He reminded everyone that with 9%-10% unemployment, the Fed will continue to prioritise jobs over hedge fund tears.
  • One of the striking parts of the Fed’s language in recent years has been the recurring emphasis on employment, jobs, and minorities. Inflation increasingly feels like a side-show. This conference was no different, Chair Powell discussed joblessness in almost emotive terms.

We’re not just going to look at the headline numbers. We’re going to look at different demographic groups, including women, minorities, and others. We’re not going to say we’ve reached full employment, which is our statutory goal, until we have reached maximum employment. Which you haven’t if there are lots of pockets of people not participating or not employed in the labour market.

We want an economy where everyone can take part, can put their labour in, and share in the prosperity of our great economy.

I’m much more worried about falling short of a complete recovery and losing people’s careers and lives that they’ve built because they don’t get back to work in time. I’m more concerned about that, not just to their lives, but to the US economy. I’m more concerned about that than about the possibility – which exists – of higher inflation. Frankly we’d welcome slightly higher, somewhat higher, inflation. The kind of inflation that people like me grew up with seems far away, unlikely, in the domestic and international context we’ve been in for some time.

This shift in emphasis was partly forced on the Fed. Persistently low inflation despite falling unemployment shone a spotlight on the full employment side of the Fed’s mandate. Its similar elsewhere; as central banks took on on ever larger roles in economic management following the GFC, they needed to maintain legitimacy with a public concerned about joblessness and inequality, not inflation.

From my own analysis of language in all central banking speeches between 01/2007-01/2020

This language creates precedent which could constrain, or influence future Fed decisions, or at the very least, how they are presented and framed. This could have long-term consequences. It is said that the experience of inflation in the 1970s/80s shaped the minds of a generation of economists and policy makers. The Fed’s new attitude and language may have a similar effect on its institutional culture. Might there be a dovish, employment bias, for years to come?

Merry Christmas at the Federal Reserve

The US Federal Reserve held their December FOMC meeting yesterday. They voted unanimously to continue the current accommmodative stance, keeping interest rates at zero and asset purchases at $120 billion a month.

The decision is unsurprising given the impact of Covid in the US, and the ongoing fight in Congress over more fiscal stimulus.

The FOMC meets eight times a year, but every second meeting they release a Summary of Economic Projections. Each member of the committee forecasts the path of GDP, unemployment, and inflation and they are aggregated. The public gets to see the median, central tendency, and range, but not the projections of individual members.

The figures reveal the diversity of opinion on the FOMC, especially when it comes to the path of unemployment. Since September, forecasts have improved, but there is still quite a gap between the optimists and pessimists. Of particular interest is the longer run estimate, which likely reflects participant’s views on the “natural rate of unemployment.”


Where the FOMC thinks the “natural rate” is matters because, up until this year, the Fed would tighten policy preemptively when unemployment neared the “natural rate.” If the estimate was wrong, and there was still slack, the effect would be to unnecessarily throw people out of work.

The experience after 2015, where unemployment dropped below estimates of the natural rate (at that time, ~5%), down to the unprecedented level of 3%, without stoking any inflation, led the Fed to change tact. Under the Fed’s new strategy, policy will not be tightened preemptively, it will instead wait for inflation to pick up sustainably.

Still, estimates of the “natural rate” continue to be an important guide for central bankers around the world. They have real consequences for the stance of monetary and fiscal policy, and are important to keep track of.

The Treasury wants its money back. The Fed would rather it didn’t.

The FT reports that the US treasury has decided not to extend a variety of emergency lending facilities that the Federal Reserve had set up following the Covid crisis. The US Treasury had been backstopping the Federal Reserve’s lending, guaranteeing them against losses, but now wants the allocated funds back. The facilities to be cut include the “Main Street Lending Program,” where the Fed lends to medium sized businesses (novel policy!).

There has been a lot of anger at the decision, including a rare response from the Fed itself, arguing the programs are important while the economy is vulnerable. While I agree that withdrawing support at this time is lunacy, its worth noting that very little of the funds have been used, as this graph from the FT’s article shows:

In the case of the Fed’s facilities to support money markets, their limited use makes sense given how quickly financial markets have rebounded (in part also thanks to the massive QE since March). ‘Main Street’ on the other hand has been struggling, and I cannot help but wonder if the limited take-up of both the MLF and the MSLF are signs the programs were overly restrictive.

Its certainly bad policy that these programs are being cut in the middle of a crisis, but we also need to ask why they were not being used in the first place and whether that was also a policy failure. If i had to venture a guess I suspect it would have something to do with the Fed being risk averse given the political implications of both the MLF and the MSLF.

September FOMC meeting

The Federal Reserve had its September Board meeting yesterday (Australian time). Apart from the time difference, the most frustrating thing is the Fed appears to host the press conference video themselves, and there is no button to adjust playback speed.

The press conference and statement offered some useful clarifications on the big announcements made last month at Jackson Hole (see forthcoming piece – hopefully this week!)

There were a lot of questions about how the Fed’s new average inflation targeting approach would work, how far above 2% would inflation be allowed to go and for how long?

With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent

So what will policy be like in the meantime?

The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time

Low for loooooooong baby! Remember inflation has barely touched 2% over the last decade. The projections of Board members show no one thinks inflation will reach 2% before 2022/3. The median projection for unemployment is 4% in 2023, but the range goes all the way up to 7.5%. The Fed has already issued a mea culpa for raising rates in 2018 when unemployment dropped below 4%, so it is unlikely they will do so again. All this adds up to low rates for the next few years, barring something extraordinary.

Preemptive tightening in the face of unemployment is officially dead and buried.

We view maximum employment as a broad-based and inclusive goal and do not see a high level of employment as posing a policy concern unless accompanied by signs of unwanted increases in inflation or the emergence of other risks that could impede the attainment of our goals

Powell acknowledged the new normal; low interest rates are now part of the furniture.

In turn, well-anchored inflation expectations enhance our ability to meet both our employment and inflation objectives, particularly in the new normal in which interest rates are closer to their effective lower bound even in good times

Aside from all the technical announcements, two short sections caught my eye:

As I have emphasized before, these are lending powers, not spending powers. The Fed cannot grant money to particular beneficiaries. We can only create programs or facilities with broad-based eligibility to make loans to solvent entities with the expectation that the loans will be repaid

Elected officials have the power to tax and spend and to make decisions about where we, as a society, should direct our collective resources. (is monetary policy not?)

Firstly, it is simply not true that the Fed cannot grant money to particular beneficiaries. Legality aside, it is certainly possible operationally. It would be politically momentous, sure, but lets not kid ourselves about what Central Banks can and cannot do.

Secondly, the second paragraph implies that monetary policy, unlike fiscal policy, is not one of society’s collective resources. Again, I disagree. The money supply is a collective resource, and even if its creation and control currently sits outside day-to-day political control, that is a choice. It is neither inevitable nor eternal and we do ourselves a disservice when we blithely reify the specific institutional arrangements we happen to have today.