Must-Read: I believe that the extremely sharp Jon Faust is completely correct when he says that over the past three years Fed policy has been driven by: (1) as long as employment gains persist, gradually reducing accomodation; and (2) as long as inflation remains below target, pause in the removal of accommodation if it looks as though employment gains might falter. The problem is that there has been an awful lot of information hitting the Fed over the past three years about the economy. For one thing, we have learned that the unemployment rates typically thought of as reflecting full employment now come with prime-age employment-to-population ratios of not 81% or 80% but 78%:

Employment Population Ratio 25 54 years FRED St Louis Fed

And we have learned that financial markets are not looking forward to any maturity of Treasury bonds yielding more than inflation for, well, forever:

30 Year Treasury Constant Maturity Rate FRED St Louis Fed

Both of those pieces of information should have led to a reevaluation of the policy rule. They have not. Both of those pieces of information are not consistent with the economy evolving as the Fed expected it three years ago.

So the great question is: What–if anything–will trigger the Fed’s reevaluation of its policy rule? And what will it change its policy rule to if that reevaluation is triggered? That–rather than people getting distracted by shiny pronouncements from individual FOMC participants–is why transparency has been so damn confusing:

Jon Faust: Why Has Transparency Been so Damn Confusing?: “[Fed] consensus has behaved consistently as if driven by two principles…

…[1] So long as steady job market gains persist, continue a gradual, pre-announced removal of accommodation. [2] So long as inflation remains below target, take a tactical pause if credible evidence arises that the job gains might soon falter…. Over the last three years, we’ve gotten normalization at a preannounced pace as in to the first principle, punctuated only by brief (so far) tactical pauses as under the second…. My story directly contradicts the popular narrative of a skittish, market-obsessed Fed flip-flopping at every opportunity. This is where the well-disguised part comes in….

The 19 policymakers on the FOMC have, since the crisis held widely divergent views…. Under the leadership of the Chair, these views somehow blend in a reasonably coherent compromise policy… fully embraced by no one…. The chosen policy often appears to be an orphan, at best, and can become a whipping boy. But the consensus policy is generally much simpler to understand than those 19 component views…. There is a strong pull toward that ‘skittish, market-obsessed Fed’ narrative…. The FOMC statement and press conference… are the principal places where the communication is unambiguously directed at explaining the consensus…. Communications other than these systematically obscure and confuse much more than they clarify…