My previous post described the well-disguised, steady predictability of recent FOMC policy. All that\u2019s out the window now. (No.) Brexit changes everything! (We\u2019ll see.) Will the Fed\u2019s intermeeting rate cut go negative? (Get ahold of yourself.)<\/p>\n
But Brexit is putting a wrinkle in this blog: I had promised that the next post would be entitled \u2018Why has transparency been so damn confusing?\u2019 Instead I\u2019ll interrupt that plan with a brief account of what the steady-predictability<\/i> story means post-Brexit. Indeed, Brexit provides a dramatic example of why focusing on the evolution of the Fed\u2019s consensus can be so useful.<\/p>\n
Let\u2019s go back to the basic story. For about 3 years the bottom line regarding the Fed\u2019s 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:<\/p>\n
So long as steady job market gains persist, continue a gradual, pre-announced removal of accommodation.<\/strong><\/p>\n So long as inflation remains below target, take a tactical pause if credible evidence arises that the job gains might soon falter.<\/strong><\/p>\n In light of Friday\u2019s news, let me acknowledge that those principles cover the general stance of monetary policy, but they don\u2019t explain the first responder<\/i> 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]<\/sup><\/a><\/a> and prepared to take the necessary steps\u2014providing liquidity being a main step\u2014to maintain the functioning of the financial system. Nothing broke on Friday (it appears), and central banks around the world behaved according to script.<\/p>\n 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\u2019ll get a bit more evidence on the U.S. job market next Friday. The Brexit vote doesn\u2019t change everything!<\/i> 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\u2019ve seen so far calls for a wholesale re-formulation of the consensus.<\/p>\n Thus, while Brexit could be<\/i> a very nasty development, until there is evidence of some substantial change, I think that the Fed\u2019s 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\u2019re 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.<\/p>\n Brexit surely did affect most sensible folks\u2019 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]<\/sup><\/a><\/a> And right now, the FOMC\u2019s outlook is not likely to be any more reliable than anyone else\u2019s. And the FOMC knows that. Thus, one forecast I\u2019m confident in is that the FOMC will, like the rest of us, monitor developments\u2014either with cautious optimism or cautious pessimism\u2014and respond as things become more clear.<\/p>\n For now, I suspect, no change in the behavior of the Fed\u2019s consensus\u2014tactical pause, and if the job market progress continues, so will gradual normalization. Or, to repeat the end of the previous post:<\/p>\n 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.<\/p>\n But as we await the open of Asian financial markets, it looks to be another day in watchful first-responder mode.<\/p>\n Notes:<\/strong><\/p>\n <\/a>1. And also be on the job<\/i>. 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.\u00a0[back]<\/a><\/p>\n <\/a>2. The modal outlook may or may not have shifted much, depending on your perspective, but the dispersion of possible outcomes surely went up.\u00a0[back]<\/a><\/p>\n","protected":false},"excerpt":{"rendered":" My previous post described the well-disguised, steady predictability of recent FOMC policy. All that\u2019s out the window now. (No.) Brexit changes everything! (We\u2019ll see.) Will the Fed\u2019s 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 […]<\/p>\n","protected":false},"author":472,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[112,113],"tags":[],"coauthors":[151],"acf":[],"_links":{"self":[{"href":"https:\/\/krieger.jhu.edu\/financial-economics\/wp-json\/wp\/v2\/posts\/2080"}],"collection":[{"href":"https:\/\/krieger.jhu.edu\/financial-economics\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/krieger.jhu.edu\/financial-economics\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/krieger.jhu.edu\/financial-economics\/wp-json\/wp\/v2\/users\/472"}],"replies":[{"embeddable":true,"href":"https:\/\/krieger.jhu.edu\/financial-economics\/wp-json\/wp\/v2\/comments?post=2080"}],"version-history":[{"count":2,"href":"https:\/\/krieger.jhu.edu\/financial-economics\/wp-json\/wp\/v2\/posts\/2080\/revisions"}],"predecessor-version":[{"id":6674882,"href":"https:\/\/krieger.jhu.edu\/financial-economics\/wp-json\/wp\/v2\/posts\/2080\/revisions\/6674882"}],"wp:attachment":[{"href":"https:\/\/krieger.jhu.edu\/financial-economics\/wp-json\/wp\/v2\/media?parent=2080"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/krieger.jhu.edu\/financial-economics\/wp-json\/wp\/v2\/categories?post=2080"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/krieger.jhu.edu\/financial-economics\/wp-json\/wp\/v2\/tags?post=2080"},{"taxonomy":"author","embeddable":true,"href":"https:\/\/krieger.jhu.edu\/financial-economics\/wp-json\/wp\/v2\/coauthors?post=2080"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}