Should-Read: Tim Duy: Fed Changing Its Tune

Should-Read: Tim Duy: Fed Changing Its Tun: “Julia Coronado of Macropolicy Perspectives catches the topic of Federal Reserve Governor Lael Brainard’s speech next week…

…“Navigating Monetary Policy as Headwinds Shift to Tailwinds.”… That’s kind of hitting us over the heads to prepare ourselves for changes in the forecasts and the statement…. Yes, inflation is below the 2 percent target, so on this surface this change in tone seems ludicrous. But the median policy maker forecast in the most recent Summary of Economic Projections is also quite frankly ludicrous. Those forecasts indicate growth well above potential growth in 2018 yet only a small decline in the unemployment rate. And stabilizing unemployment in 2019 with yet another year of growth above potential. And the inflation rate only returns to 2 percent when the temporary factors lift, but by the Fed’s Phillips curve approach the beyond-full employment economy should be much more inflationary when those factors lift, well above the 2 percent target. It all screams for a faster than 3 rate hike pace in 2018, but that was the median policy maker forecast.

I tend to think, and have thought for a long time, that the forecast was essentially reverse engineered as much as possible to keep the rate forecast at three hikes in 2018. Now, with the additional tailwinds sustaining momentum in the economy, they can no longer maintain this façade. Hence the change to the threat of “overheating.” Bottom Line: I don’t think this is just about three or four hikes. It strikes me as something bigger, a more fundamental change in the policy objective…


Brad DeLong


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