Fed knoopt losse eindjes aan elkaar

“Yesterday’s Federal Reserve announcement tidied up the loose ends of the strategic review from last month, by tying their policies to longer-run goals and strategy. Since their goals are ambiguous, so too is their policy guidance. The Fed seeks to achieve maximum employment and inflation at 2 percent over the longer run. To do so, they will aim to get inflation “moderately” above 2 percent for “some time.”

De Visie van Vincent Reinhart, econoom Mellon, voorheen werkzaam bij het Federal Open Market Committee (FOMC). This lack of specificity gives them plenty of scope for discretion, which fits Chair Powell’s style. They also broadened their rationale for asset purchases from supporting market function to include providing financial accommodation.

It is not to everyone’s liking, as two Fed officials dissented. This reflects a healthy internal debate, as one wanted to be less specific and the other one more. The former, President Kaplan of the Dallas Fed, wanted to retain more flexibility, and the other, President Kashkari of the Minneapolis Fed, want them to commit to not tightening until inflation was at 2 percent on a sustained basis. Where they were forced to be specific was in their Summary of Economic Projections, which requires them all to submit point forecasts. There, they all agreed that it will likely be appropriate to keep the funds rate at zero through 2021 and almost all see it there through 2023, at least.

At this point in the economic cycle, the Fed wants to avoid leading investors to fear that they would tighten policy too soon. Hence, the chair downplayed the better economic data of late, emphasized the longer-run difficulties in attaining a recovery, and stressed the need for additional fiscal stimulus at his press conference. The core message is that, more than tolerating, they desire inflation to move above 2 percent for some time. They also underscored this will take considerable time, in that the central tendency of their inflation forecast tracks below their goal through 2023.

Messaging matters. The word the chair repeated most often in his press conference was “powerful” to describe an unspecific policy rule. This was essentially a plea to the public that the Fed will use its considerable discretion to foster a return to maximum employment. Like the Marvelous Oz, he would prefer that no one look behind the curtain, only trust that the Fed will do its job.”

Categorised in: Monetair, Research