Federal Reserve Chairwoman Janet Yellen’s main point at the press conference following the conclusion of the March 17-18 Federal Open Market Committee (FOMC) meeting was that the Fed was prepared to be “less patient, but not impatient” with regard to the timing of the first hike in interest rates, presumably to rattle the cage of the June meeting consensus that has formed. But the underlying, unspoken message was an effort to more broadly rekindle an element of mystery in the conduct of monetary policy and deter the market complacency that can result from a too predictable Fed.
Yellen took the April meeting off the table for the first rate increase, but insisted that a June liftoff was a very real possibility, and that no June liftoff was also a very real possibility. After liftoff the pace of rate increases will be gradual in the sense that even after achieving the dual mandate of maximum employment and 2% inflation, the federal funds rate may remain below its longer-term normal level for some time. But it would not be gradual in a mechanical sense of a fixed increment per meeting as some analysts have interpreted.
Both liftoff and the pace of subsequent increases will be data dependent, and no decision on either has been made yet. As to what data and what numerical targets would drive Fed policy, Yellen was expansive and non-specific. Acknowledging recent progress, she noted further improvement in the labor market would include further declines in the unemployment rate, as well as the numbers of discouraged and part-time workers, but pointed to a below trend labor force participation rate and the absence of significant wage pressure as indicators of continuing cyclical weakness.
Questions on specific confidence-inspiring inflation signals were answered with the expectation that downward pressure from declining energy prices, restraint from import prices and an appreciating dollar would be transitory. Survey based measures of inflation remain stable and market based measures moving up from their current low levels would bolster confidence. Answered and not answered.
Yellen’s response to a question about standard formulas or mechanical rules for monetary policy illustrated that her responses were not intended to be evasive, but rather to emphasize the complexity and uncertainty inherent in the economy, and that simple rules, while useful for thinking about how the theoretical economy functions in the long run, are impractical for conducting monetary policy in the real economy in real time.
To the point of policy being forward looking and data driven, economic projections prepared by committee members for the March meeting lowered expectations of GDP growth, the unemployment rate and more substantially inflation since the December meeting. In the March projections the unemployment rate in 2016 and 2017 is projected to fall below its longer-term equilibrium level in an environment of low inflation, implying continuing absence of wage pressures and “hidden” slack in the labor market (i.e., discouraged and part-time workers).
The downgrade in the outlook coupled with a general downward revision among meeting participants in expectations as to the level of the federal funds rate at year-end in 2015, 2016 and 2017 suggests that liftoff may be pushed past June into the second half of 2015, whether FOMC members have decided or not.
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