When the Fed’s FOMC policymakers met last month and put it 3-year rate-hike campaign on hold and backed ending a yearlong push to shrink their $4-T balance sheet, that was draining the liquidity out of the system and shrinking the wealth of American house holds by the trillions of dollars, they cited increased risks to US economic growth and the need for more time to sort through the data. Thus, aligning with The Trump Administrations policy demands.
The new policy pause cleans the Fed’s slate ahead of what looks to be a massive overhaul of how they manage the US economy, including what tools it uses and how it communicates to the American public.
Behind the Fed’s decision to spend the next year rethinking how it should go about ensuring that prices remain stable and employment plentiful are some of the same structural economic changes that led the Fed to put its rate hike policy on hold in the 1st place, stimulus and grow the US economy not strangle it, as has been its policy.
The connections between the Fed’s patience stance on policy, its decision to leave its balance sheet bigger than it had previously anticipated, and what looks set to be a lively debate over a possible new policy framework were on full display for the 1st time at a conference Friday on monetary policy in New York.
There, the influential Chief of the New York Fed, John Williams, nodded to the US economy’s new normal, where unemployment is marking its lowest levels in 49 years, but inflation is just tapping at the Fed’s 2% target.
San Francisco Fed President Mary Daly, also speaking at the conference, concurred saying: “Inflation has been below our target for a long time. Complacency can go both ways and it’s important to be vigilant on both sides of the target, not just on the upside but also on the downside.”
A Key Question in the Fed’s policy overhaul is should it react to frames of low inflation by allowing inflation to run Hot for a time, Fed Vice Chairman Richard Clarida said in a speech Friday that outlined the scope of the Fed’s broadened review.
That strategy means the Fed seeks to maintain an average rate of 2% inflation over any given period, rather than its current strategy of targeting its 2% level without regard to whether it has been able to meet that goal so far.
A Fed economic report released Friday and reported here showed why concerns about weak inflation have suddenly taken hold. After raising rates on a faster-than-expected growth through Y 2018, the Fed said a series of developing risks began slowing the economy late in the year and into Y 2019.
St. Louis Fed President James Bullard suggests that the size of the balance sheet really has only “minor” impact on the economy, now that interest rates are well above Zero.
Making and Keeping America Great!
Have a terrific weekend…