Williams acknowledges what the market figured out a long time ago
The speech from San Francisco Fed President John Williams today was a declaration of defeat.
He talked about a New Normal, aging demographics and lower productivity. Most importantly, he acknowledged that they're likely to be permanent fixtures.
Three years ago, those would have been groundbreaking statements, pushing him far to the dovish side of the spectrum. Today, they're seen as accepting reality.
The Fed had previously blamed a number of 'temporary headwinds'. One by one they fell by the wayside and the predicted return to the Old Normal never materialized.
What's happening at the moment is the Fed is recognizing that it was wrong. That markets were right and that +5% nominal growth isn't coming.
Even if it's late, it's a huge admission and when combined with the weak GDP print (and revision) today, it points to a Fed that will hike once a year, at best. If that best-case scenario works out, you're looking at -- maybe -- a 1.25% top in the Fed funds rate because the US starts to hit a demographic cliff in 2019.
The bottom line is that if the Fed accepts that slow growth is here to stay then it changes the entire playbook. It leaves the Fed grasping for 2% inflation with 3.5% nominal growth.
I'm not sure there is anything the Fed can do to change that dynamic, but the first step is acceptance.
For more see:
- The question the Fed has to answer on slow growth is: Why is it happening?
