Must-read: Tim Duy: “FOMC Recap”

Must-Read: Once again: if the economy comes in weak, then the FOMC will wish that it had not raised interest rates in December and will find it impossible to induce an offsetting deviation from the ex post interest rate path it will wish it had followed in order to balance things out. If the economy comes in strong, then the FOMC will wish that it had raised interest rates even earlier than December, but it will then find it easy to induce an offsetting deviation from the ex post interest rate path it will wish it had followed in order to balance things out. This ain’t rocket science. This is the simple logic of optionality near the zero lower bound and the liquidity trap.

So why does this logic evade the FOMC? What are they thinking?

Tim Duy: FOMC Recap: “Now they have slow GDP growth and fast employment growth…

…That will make brains explode on Constitution Ave. They don’t know what to do with that when unemployment is at 5%…. If the recessionistas are correct, then they already made a mistake in December. If the optimitistas are correct, they will fall behind the curve if they hold in March. And that is without the uncertainty of the financial markets. Did the Fed release a little steam by shifting into a tightening cycle, the avalanche control of Mark Dow?  Or did they set in motion the next financial crisis? And recognize that this is within the context of a no-win political situation….

So, considering all this, you can’t really blame the Fed for taking a pass on quantifying the balance of risks…. Bottom Line: The Fed got lucky this month. They weren’t expected to do anything, which takes the pressure off. But in March they might have a real decision to make. We have only six weeks of data to digest. Even assuming that labor markets hold solid, will that be enough? Doubtful. They will need more.

January 28, 2016

AUTHORS:

Brad DeLong
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