My previous post described the well-disguised, steady predictability of recent FOMC policy. All that’s out the window now. (No.) Brexit changes everything! (We’ll see.) Will the Fed’s intermeeting rate cut go negative? (Get ahold of yourself.)

But Brexit is putting a wrinkle in this blog: I had promised that the next post would be entitled ‘Why has transparency been so damn confusing?’ Instead I’ll interrupt that plan with a brief account of what the steady-predictability story means post-Brexit. Indeed, Brexit provides a dramatic example of why focusing on the evolution of the Fed’s consensus can be so useful.

Let’s go back to the basic story. For about 3 years the bottom line regarding the Fed’s dual mandate has, at least until very recently, been unchanged: steady progress in the job market continues and inflation is low in the face of pesky transitory shocks, but expected to return to 2 percent. The consensus of a large, diverse committee tends to be hard to build, and once built it is difficult to dislodge. With the core dual mandate picture largely unchanged, the consensus delivered policy as if steadfastly 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.

In light of Friday’s news, let me acknowledge that those principles cover the general stance of monetary policy, but they don’t explain the first responder role central banks play in response to possible emergencies. The central bank playbook here is entirely familiar. Until something really breaks, remind folks that you are on the job^[1] and prepared to take the necessary steps—providing liquidity being a main step—to maintain the functioning of the financial system. Nothing broke on Friday (it appears), and central banks around the world behaved according to script.

So what will Brexit mean for U.S. monetary policy? The two principles still pretty much cover it. At the time of the vote, the Fed was in the midst of a pause in normalization, mainly in light of recent signs that job market gains might be dwindling. We’ll get a bit more evidence on the U.S. job market next Friday. The Brexit vote doesn’t change everything! in the U.S. macro picture, but it surely underscores the justification for pausing. Moreover, if post-vote dollar strength and commodity price weakness persist (or grow), we have another dose of pesky transitory shocks that will put downward pressure inflation. But nothing we’ve seen so far calls for a wholesale re-formulation of the consensus.

Thus, while Brexit could be a very nasty development, until there is evidence of some substantial change, I think that the Fed’s response is pretty clear. First see where the dust settles in the near-term aftermath, and then go back to checking whether the steady progress in the labor market continues. And if we find ourselves on the other side of whatever gulf we’re facing with normally functioning financial markets and a reaffirmation of solid job market gains? Resume that gradual normalization, following the predictable pattern of the last 3 years.

Brexit surely did affect most sensible folks’ assessments of how likely it is that the solid, but unspectacular, scenario will reassert itself. We should all be reassessing the probability that the causes of the tactical pause metastasize into something much more. But more important right now is the fact that sensible people must view their outlook as a bit up in the air.^[2] And right now, the FOMC’s outlook is not likely to be any more reliable than anyone else’s. And the FOMC knows that. Thus, one forecast I’m confident in is that the FOMC will, like the rest of us, monitor developments—either with cautious optimism or cautious pessimism—and respond as things become more clear.

For now, I suspect, no change in the behavior of the Fed’s consensus—tactical pause, and if the job market progress continues, so will gradual normalization. Or, to repeat the end of the previous post:

Going forward, if the economy falters or booms, or if inflation moves decisively in either direction, we will again be facing unprecedented conditions and the FOMC will face the challenge of communicating a new strategy in response to the new environment. For now, no strategic upheaval, just a tactical pause.

But as we await the open of Asian financial markets, it looks to be another day in watchful first-responder mode.

Notes:

1. And also be on the job. That is, be effectively monitoring and regulating the system and have emergency tools in place. In the run up to the crisis, many central banks and other policy institutions around the world seemed to forget that they not only had to reassure folks that they were on the job, but that they actually had to be on the job. For now at least, I believe that central banks are on the job. [back]

2. The modal outlook may or may not have shifted much, depending on your perspective, but the dispersion of possible outcomes surely went up. [back]