{"id":6669614,"date":"2016-12-14T18:16:11","date_gmt":"2016-12-14T18:16:11","guid":{"rendered":"http:\/\/cfe.econ.jhu.edu\/?p=6669614"},"modified":"2021-05-19T16:11:22","modified_gmt":"2021-05-19T16:11:22","slug":"will-fed-dec-2016-edition","status":"publish","type":"post","link":"https:\/\/krieger.jhu.edu\/financial-economics\/2016\/12\/14\/will-fed-dec-2016-edition\/","title":{"rendered":"What will the Fed do? Dec. 2016 edition"},"content":{"rendered":"
Like most folks who focus on such things, I expect a 25 basis point increase in the federal funds rate target range at the December FOMC meeting. Since mid-August, I\u2019ve said that under the Fed’s consistent MO, if the economy did not break strongly in either way, we\u2019d get one rate rise this year\u2014most likely in December. The macro data have not broken strongly either way, and while the financial market data have changed markedly since the election, they are not signaling a faltering economy. Thus, a rate increase is likely upon us.<\/p>\n
If this is right, then the main news coming out of the meeting will be what the FOMC says about the future. This moment is a lovely illustration, in my view, of several of the issues raised in the paper I prepared<\/a> for the recent CFE\/Hutchins\/Brookings Fedspeak event<\/a>. Here is how I see these issues playing out.<\/p>\n We do not yet have clear, post-election data on inflation or real activity that suggest any significant change due to the election. But the labor market gains have continued, taking up more of any remaining slack. Thus, ignoring the election, there is not much news that would warrant changing the characterization of future policy. In light of the lack of major change in macro fundamentals, and in light of the current circus atmosphere surrounding all kinds of policy, the FOMC is likely to lean even more than usual toward minimal changes in its characterization of likely policy. It would be silly to inject needless material into the already weird situation. Thus, a wait and see stance seems most likely.<\/p>\n Is it really prudent for the Fed to largely ignore the election and the big financial market moves? As I\u2019ve been arguing, financial market moves like this almost never lead to a fundamental change in the stance of policy unless and until macroeconomic indicators support what the financial market data may be signaling. As Bob Barbera and I note in a related post<\/a> today, the recent market moves look remarkably like a limp version of what we saw in the taper tantrum. Based on these financial market moves alone, there is no more reason to significantly raise the pace of tightening than there was during the tantrum.<\/p>\n So what besides an acknowledgement of recent progress and \u201cwait and see\u201d might the FOMC attempt to communicate? The modal, or most likely, outcome for the economy has probably shifted in the perspective of most analysts. A Clinton win, amid gridlock, was the pre-election consensus, and we now have Trump, with the GOP in control of both houses. This is sensibly leading many to project significant fiscal stimulus and to mark up growth and\/or inflation projections.<\/p>\n But in my view, more important than any change in the modal outlook is the fact that the range of likely scenarios\u2014and the range of plausible tail risks\u2014may have increased markedly. This poses two problems for FOMC communication.<\/p>\n First, even if the FOMC had a unified view, effective communication about uncertainty in peculiar circumstances borders on impossible. And the FOMC must represent 17 views of uncertainty. The FOMC will probably find it difficult to do better than the drug companies\u2014this drug has been associated with a heightened risk of [insert list of hideous maladies], in rare cases resulting in death. For the consensus of the FOMC right now, the analogous message amounts to some version of \u201clots of good and\/or bad stuff might happen, we\u2019ll react as appropriate.\u201d<\/p>\n