Must-Read: Tim Duy: The Federal Reserve Turns Hawkish

Must-Read: I do not get this: it was 21 years ago that I learned–from an early draft of Staiger, Stock, and Watson (1997)–that nobody had any business thinking or acting on any belief that they had the correct estimate of the natural rate. The natural rate shifts. And because the natural rate shifts there is no way to estimate it precisely, even in retrospect, let along in prospect:

Tim Duy: Fed Turns Hawkish: “The FOMC raised the… federal funds rate by 25bp today, as expected…

…But the tone of the press conference and the summary of economic projections were more hawkish than I anticipated…. Rather than showing up in a declining estimate of the natural rate, the unemployment drop showed up as a rise in the rate forecast. This is important. It is almost as if the Fed is drawing a line in the sand with an increased confidence that they have the correct natural rate estimate. Their tolerance for further declines below that line is wearing thin…. You should anticipate that further declines in unemployment will be met with a more aggressive Fed in 2017….

Federal Reserve Chair Janet Yellen exuded confidence in the economic outlook during the press conference…. She repeatedly argued that her run a “high-pressure” economy comments from October were misinterpreted. She was recommending a research program, not a policy path. If you were expecting otherwise, time to get over it. She did not dismiss the possibility of staying on as a board member after her term as Chair ends…