Fed Policy
Commentators across the ideological spectrum have argued that inequality justifies a more hawkish path for monetary policy. These arguments miss the fact that interest rate policy primarily slows consumer spending and consumer price inflation by slowing down the labor market first.
We provide an update on what our in-house monetary policy framework suggests about the appropriate trajectory for monetary policy using more reliable “real-time” measures of gross labor income
To understand how the Fed is interpreting its “maximum employment” mandate in the current context, it’s worth going through Chair Powell’s remarks and Q&A for the December FOMC meeting.
Critical to the Fed successfully achieving maximum employment over the short run and the longer run is a commitment to, and a communication of, “maximum employment” that is Credible, Broad, and Inclusive.
If the Fed wants to stay true to the "maximum employment" component of its forward guidance, and the "broad and inclusive" nature of that goal, it is imperative that their interest rate policy actions reflect a full recovery on both of these measures.
The policy mistake worth worrying about isn’t the speed of taper per se; it's the signal that taper sends about the timing of liftoff in interest rate policy.
Despite widespread use by commentators and policymakers, the models commonly used to argue for the importance of "inflation expectations" are difficult to confirm empirically, and risk a hawkish policy bias.
Whenever inflation becomes a part of political or economic discourse, policymakers and commentators instinctively reach for narratives and models drawn from the experience of the 1970s inflation. However, these models offer little explanation for even adjacent experiences of inflation.
Given the Fed’s recent framework revisions and forward guidance commitment to maintain current interest rates until “maximum employment” is achieved, the Fed’s communication with respect to its assessment of “maximum employment” is overdue for a clarification.
