By Steven K. Beckner
Continued:
But agreeing on specific thresholds, especially for unemployment,
is difficult. Views differ on what the “natural” or “non-accelerating
inflation rate of unemployment” (NAIRU) is, and there are a host of
complicating factors, such as the rate of labor force participation.
A drop in labor force participation or an increase in involuntarily
part-time or temporary workers can reduce the unemployment rate without
truly showing improvement in the labor market.
Numerical threshold skeptics say such factors render an
unemployment threshold useless or, worse, misleading. But proponents say
that, however imperfect, the unemployment rate would still be useful as
a numerical threshold and suggest that it could be accompanied by
qualitative caveats, stipulating that the FOMC will also consider labor
force participation and other indicators.
Lest anyone think the Fed is hitching monetary policy entirely to
an unemployment rate target, officials also stress that an
accompanying inflation threshold would provide an inflation
“safeguard” or “safety valve,” allowing the FOMC to tighten monetary
policy even if unemployment is still above the FOMC’s long-run
goal if inflation and/or inflation expectations rise too much.
But there is a growing reluctance to signal too much adherence to
the FOMC’s announced 2% inflation goal, which is increasingly being
referred to as an “objective,” not a target.
“If 2% inflation is the Committee’s goal, 2% cannot be viewed as a
ceiling for inflation because that would result in deviations that are
more frequently below 2% than above and thus not properly balanced with
the goal of maximum employment,” Yellen said Nov. 13.
“Instead, to balance the chances that inflation will sometimes
deviate a bit above and a bit below the goal, 2% must be treated as a
central tendency around which inflation fluctuates,” she said. “The same
holds true for fluctuations of unemployment around its longer-run normal
rate.”
Yellen said “a policy that reduces unemployment may, at times,
result in inflation that could temporarily rise above its target.”
Indeed, she said, “the FOMC can tolerate transitory deviations of
inflation from its objective in order to more forcefully stabilize
employment without needing to worry that the public will mistake these
actions as the pursuit of a higher or lower long-run inflation
objective.”
Kocherlakota, who dissented against monetary easing in 2011 but
was supportive of the September easing actions, said last month that
“allowing the medium-term outlook for inflation to deviate from 2% by a
quarter of a percentage point in either direction would provide
sufficient flexibility to the Committee, while posing no threat to the
credibility of the long-run target.”
But there is a good deal of skepticism about using any kind of
quantitative thresholds, let alone “triggers,” a word that verges on
anathema in policy circles.
Lacker told MNI he favors abandoning the calendar date method of
signalling the duration of zero rates and doing “whatever we can do to
help the public understand how we’re likely to respond to incoming
data.” But he added, “I think we also need to avoid spurious precision.”
And when MNI asked San Francisco Fed President John Williams where
he stands on the issue recently, he confessed he is still “wrestling”
with whether the FOMC should take a “quantitative” or “qualitative”
approach to communicating about how long it will hold the funds rate at
zero.
Williams said announcing a 7% unemployment threshold might put “a
bright light” on that number and lead people to believe the Fed is
targeting that rate of unemployment. In reality, he said, the Fed bases
rate decisions on other factors, not just the unemployment rate.
“If you’re going to go quantitative you really have to be careful
about explaining the qualifiers,” he said.
“The status quo is that we have a date, and the question is do you
add something to that qualitatively,” he said. “The date has been a very
effective way to convey a simple message. It’s a pretty powerful clear
signal of its own even if it doesn’t satisfy all the” critics.
“To me (the question is) can we come up with quantitative thresholds
that are better than what we do today, recognizing that we do today is
imperfect?” Williams said.
Williams is not alone in wanting to stick with the calendar date
until something better can be devised.
Minutes of the Oct. 24 FOMC meeting acknowledge the problems with
agreeing on thresholds: “Most participants judged that, given the
diversity of their views about the economy’s structure and dynamics, it
would be difficult for the Committee to agree on a fully specified
longer-term path for monetary policy to incorporate into a quantitative
consensus forecast in a timely manner, especially under present
conditions in which the policy decision comprises several elements.”
Meanwhile, another area in which earlier communication progress
could conceivably be made is the FOMC’s quarterly, three-year Summary of
Economic Projections (SEP). Launched in 2007 as a compendium of economic
forecasts by all 17 FOMC participants, the FOMC began including federal
funds rate forecasts in January.
But it hasn’t taken long for FOMC members, particularly voters, to
become dissatisfied with the SEP, which is due to be updated at the Dec.
11-12 meeting.
The Oct. 24 minutes say, “Participants agreed to continue to
explore ways to increase transparency and clarity in the Committee’s
policy communications, and they indicated a willingness to look into
modifications to the SEP.”
Yellen said two weeks ago that one approach “under active
consideration” is for the FOMC to “build on the individual projections
of macroeconomic variables and policy already included in its quarterly
SEP (Summary of Economic Projections) to provide at least some further
information about how these individual projections inform the
Committee’s collective policy judgment….”
In the minds of many, the SEP is not as useful as it could be
because voters’ forecasts are mixed in with those of non-voters, and
individual funds rate forecasts are not linked to individual economic
projections.
One possible avenue of communication improvement — short of
agreeing on a set of economic conditions that would prompt rate hike
discussions — is to revamp the SEP so FOMC voters’ funds rate
predilections and economic projections are separated out from those of
non-voters.
The whole communications strategy remains in flux, however, and it
is difficult to say when any significant changes will be made.
It may be awhile.
(4 of 4)
** MNI **
[TOPICS: M$U$$$,MFU$$$,MGU$$$,M$$CR$,MT$$$$,MMUFE$,M$$BR$]
