 | Improving Economy, Weaker Guideposts |
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| Posted Under: Employment • Government • Inflation • Research Reports • Fed Reserve • Interest Rates |
Apparently, an improving labor market and higher inflation are not enough to get any signal from the Federal Reserve that short-term interest rates should be higher or QE should end faster than they thought before.
The Fed did what almost everyone expected, leaving short-term rates unchanged and continuing to taper by $10 billion per meeting. As a result, the Fed will buy $25 billion in bonds in August and remains on a path to end quantitative easing at the end of October.
The Fed did make some important changes to the wording of its statement. On the labor market, it removed language saying the jobless rate "remains elevated." It's about time considering how consistently the unemployment rate has been dropping faster than the Fed has anticipated.
But the Fed also added important new language, saying "a range of labor market indicators suggests that there remains significant underutilization of labor resources." So, despite the jobless rate approaching the Fed's long-term objective, the Fed isn't going to provide any firm guideposts on how changes in the labor market are going to influence monetary policy. This is very opaque – the opposite of transparency.
Meanwhile, the Fed acknowledged inflation is approaching its long-term target of 2% and removed language about how inflation running persistently below 2% could hurt the economy. However, it's important to note that what matters most to the Fed isn't actual inflation but its own forecast of future inflation. And the Fed has yet to issue a forecast that shows inflation higher than 2%.
Unlike the last meeting in June, there was one dissent from a Hawk. Philadelphia Fed bank President Charles Plosser, who thought the Fed shouldn't pre-commit to leaving rates low for a "considerable period" after QE ends. After his editorial in the Wall Street Journal, we thought Richard Fisher, President of the Dallas Fed would dissent, but surprise, surprise, he voted with the majority. We assume he was mollified by the minor changes in language to the Fed statement.
Overall, today's statement is consistent with our view that the Fed is already behind the curve and will end up accepting higher inflation in the longer-run than its current 2% target. Fed policy is easy, the Fed is making a commitment to keep its balance sheet larger for longer, and it sees no real urgency to raise rates. All of this will create a boost for equity markets and the economy over the next 12-24 months. And we still think the bond market does not appreciate the danger it faces.
Brian S. Wesbury, Chief Economist
Robert Stein, Dep. Chief Economist
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