Expectations were high that the March meeting of the Federal Open Market Committee (FOMC) would end with an announcement of a 25 basis point increase in the target range for the federal funds rate. Those expectations were met, and at the press conference following the meeting, when asked why the third increase came so quickly, after the first two came in consecutive Decembers, Federal Reserve Chairwoman Janet Yellen’s response boiled down to: the economic outlook was meeting expectations.
Economic growth has been noisy over the quarters but in line with FOMC participants’ forecasts in recent years, payroll employment growth has been strong, and inflation has been moving toward the 2% target. Unexpected adverse shocks to the US economy, both global and domestic, had undercut earlier inclinations to raise rates at a slightly faster pace, but with the risks to the forecast now roughly balanced between upside and downside, an acceleration is appropriate.
Yellen added that the three increases in each of 2017 and 2018 indicated by the median forecast of the appropriate path for the policy rate among meeting participants, should still be viewed as gradual. She compared such a pace (if realized by supporting economic conditions, as expected) to the 17 consecutive increases at FOMC meetings in the tightening cycle that began in 2004.
Yellen emphasized that the economic projections prepared for this meeting differed only slightly from those presented at the December meeting; the outlook hasn’t changed, this is where we’ve been trying to get to. A more rapid pace of increases should be viewed as a vote of confidence in the sustainability of the economic recovery, and the obligatory admission that moving too slowly risks falling behind the curve, with the result of higher than intended inflation and the potential risk to the expansion from an even more aggressive slowing of the economy to tame inflation.
Asked about the significance of modest changes to the language in the post-meeting statement, Yellen counseled not to over-analyze such slight changes in wording. But as any seasoned Kremlinologist can explain, the tone and changes therein are carefully crafted to convey subtle shifts in policy or messaging. In this case, the dropping of certain modifiers and observations have the effect of making the statement less soothing, consistent with the vote of confidence and shifting the tone to recognize a less vulnerable economy.
Much of the Q&A at the press conference focused on market expectations and mismatches between the Fed and the markets with respect to economic growth, the likely impact of fiscal policy developments, how monetary policy would respond, and the implications for financial stability. Yellen pointed to financial markets’ tendency to overreact, time lags between policy formulation and economic impact, and monetary policymakers’ ability to respond to changing conditions. And with the communications blitz associated with preparing markets for the March rate increase, from the minutes of the January meeting to congressional testimony to public speeches, the Fed has demonstrated its ability and determination to shape meeting expectations.