Samuel rines is a very underrated economist and his commentary on FOMC is very thought Provoking
The Fed did not miss its opportunity. It delivered a surprisingly straightforward, easy to understand message of “we aren’t going anywhere”. The Fed stated it was not raising rates until maximum employment can be reached (unemployment around 4%), and inflation ran modestly above 2%. That is very dovish forward guidance from the Fed. By doing so, it locked itself into keep rate policy extremely accommodative for an extended period of time. With employment at the forefront of policy, policy should be more easily understood.Regardless, aiming for two goals is difficult. And the Fed will lean dovish until it manages to get both on target.  “I like to reinvent myself — it’s part of my job.”― Karl Lagerfeld The Fed need to reinvent itself before COVID. Because of COVID, its pivot was all the more necessary. By putting employment at the forefront of its mandate, the Fed creates a easy to understand goal. Here is what the policy setting Federal Open Market Committee (FOMC) said: “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% and is on track to moderately exceed 2% for some time.” What does that mean? It means the Fed will try to hit about a 4% unemployment rate and get inflation higher before raising rates. How do we know it is around a 4% unemployment rate? Because the Fed tells us with its “longer-run projections”.  Interestingly, the FOMC seems to be a bit bullish on the speed of the return to full employment, but the lack of flexibility (having to get there before pivoting policy) is important. In the past, the Fed would “see emerging inflation pressures” or “robust labor market” and decide to tighten its policy stance. That has not worked out well in recent years, and the Fed has abandoned that policy. It is now a wait until it actually comes about- not could or should or might. That means that Fed projections do not matter anywhere near as much. The Fed has not been great at projecting the labor markets or inflation. So why trust those figures now?  Instead of worry about what the Fed thinks will come about (which was paramount a year ago), markets can assess the labor market for themselves and judge the duration and extent of monetary accommodation the Fed will provide. If the labor market recovery slows or accelerates, the duration of low rates and QE will change. Speaking of QE, there is more of that coming too. The Fed made clear that the current $120B monthly pace of US Treasury purchases will continue “at least at the current pace.” But what the Fed thinks will happen simply does not matter. That is powerful forward guidance. There is also an asymmetry in the forward guidance. If there is a downside surprise to the incoming data? “The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.” If there is an upside surprise? Does not matter. There is no movement in accommodation. It only reduces the duration of that accommodation. In other words, the Fed made the pivot official – it is all about employment now and the Fed will only do more, not less. Monetary policy is going to be stimulative for the foreseeable future. And it has more tools to use if necessary. The Fed’s New Rule is in effect, and it is going to try to score two goals. As always, please do not hesitate to reach out with comments, questions, or suggestions. Here is the sign-up page, and here is the archive. Samuel E. Rines Chief Economist Avalon Investment and Advisory Direct: 713-358-6077 2929 Allen Parkway, Suite 3000 Houston, Texas 77019 srines@avalonadvisors.com |