{"id":2067,"date":"2016-06-12T20:06:55","date_gmt":"2016-06-12T20:06:55","guid":{"rendered":"http:\/\/cfe.econ.jhu.edu\/?p=2067"},"modified":"2022-05-17T12:50:54","modified_gmt":"2022-05-17T12:50:54","slug":"what-will-the-fed-do-june-2016-edition","status":"publish","type":"post","link":"https:\/\/krieger.jhu.edu\/financial-economics\/2016\/06\/12\/what-will-the-fed-do-june-2016-edition\/","title":{"rendered":"What will the Fed do? (June 2016 edition)"},"content":{"rendered":"\n
Over the last several weeks, we\u2019ve seen what Michael Mackenzie in the FT<\/a> called a renewal of the market\u2019s tortured dance with the Fed. The basic story seems to be that the Fed \u201cmoved policy to the sidelines\u201d at its March meeting, causing market participants to discount any risk of a near-term rate increase. The Fed\u2019s March minutes and a series of Fed speeches then returned a summer rate increase to the discussion. But just as the markets began to follow that lead, the bad jobs report led to a pirouette, dashing hopes\/fears of near-term rate increases, and completing a bruising turn around the dance floor.<\/p>\n\n\n\n We\u2019ve been telling a different in which there have been no policy surprises this year. And while the most recent jobs report was an unsettling surprise from the economy, we believe it causes no Fed pirouette. This is the same low-drama story we at the CFE have been telling since I returned to Hopkins a couple years ago after my time as special advisor to the Fed\u2019s Board.[1]<\/sup><\/a><\/a> The main claims are these:<\/p>\n\n\n\n For nearly 3 years and right up until that latest jobs report, we\u2019ve seen a bizarre constancy in the main summary of progress on the Fed\u2019s dual mandate. Policy in response has been very consistent and, thereby, predictable.<\/p>\n\n\n\n Of course, these claims leave a bit of a puzzle about that tortured dance: Why is everybody so confused? I\u2019ll mainly leave that for future posts, but the quick version is that the Fed wraps a coherent policy in a thicket of systematically confusing communications. This, in turn, provides the Fed\u2019s volatile audience ample material to enthusiastically conjure what it may. I\u2019ll ask you to read this post as if you ignore most Fed communication\u2014as I do and as I\u2019ve been recommending. For simplicity, then, imagine that you had tuned in only for the main event, the FOMC statements and post-FOMC press conferences.<\/p>\n\n\n\n After a recent FOMC press conference<\/a>, the Fed chair offered the following summary:<\/p>\n\n\n\n The labor market has continued to improve, with gains in private payroll employment averaging about 200,000 jobs per month over the past six months\u2026 Inflation has been running below the Committee\u2019s longer-run objective of 2 percent for some time\u2026. The Committee believes that the recent softness partly reflects transitory factors, and with longer-term inflation expectations remaining stable, the Committee expects inflation to move back towards this 2 percent longer-term objective over time.<\/p>\n\n\n\n Well, recent<\/em> may be stretching it: this summary is from Chair Bernanke in June 2013. But the quote could have come from any press conference for the last 3 years. At the most recent press conference<\/a>, for example, Chair Yellen offered:<\/p>\n\n\n\n The labor market continues to strengthen. Over the most recent three months, job gains averaged nearly 230,000 per month, similar to the pace experienced over the past year. \u2026[T]he earlier declines in energy prices and appreciation of the dollar could well continue to weigh on overall consumer prices. But once these transitory influences fade and as the labor market strengthens further, the Committee expects inflation to rise to 2 percent over the next two to three years.<\/p>\n\n\n\n Up until this week\u2019s FOMC meeting, at each for the past three years, the state of progress on the dual mandate has been this: continued steady job market gains as reflected in monthly nonfarm payroll advances near or somewhat above 200,000 (Fig. 1) and pesky transitory shocks holding down inflation but expected to abate. I suspect that the core policy developments have never been so static for so long.<\/p>\n\n\n\n