Is it “impatiently patient?” Or “patiently impatient.”
Either way, the discussion of the Fed hiking rates for the first time in a decade reached a crescendo this week, as the FOMC removed “patient” from the policy statement, but reiterated that they will remain data dependent in assessing the optimal time to raise rates.
This leaves me with a couple of thoughts:
1) This is pure behavioral economics at work.
This was a clever move by Janet Yellen. It really gives the Fed more runway in deciding what to do next. Because if anything, perception becomes reality – how the market interprets the policy stance can easily become the truth, something the Fed is sincerely trying to avoid. And on this, they did a terrific job.
2) Wage growth is still non-existent
We have had the best run of job growth in decades, and yet the Employment Cost Index has barely budged. The Committee thought NAIRU was at 6.0% – and it wasn’t. Then they thought it was 5.5% – and it wasn’t. Then they thought it was 5.2% – and it wasn’t. Since the Fed keeps adjusting their own expectations, they’re obviously watching the data to validate their assumptions – and based on the behavior and statements from Committee members in recent years, basing policy from faulty assumptions would just beirresponsible.
Wage growth is obviously top of mind to Yellen and Co., and fulfilling the dual mandate requires wage growth. The numbers are just too far off to ring the alarms on Chair Yellen’s data dashboard. Similarly…
3) Employment reports are strong – but there is still plenty of room to go
Every employment report we still (rightfully) hear grumblings that the participation rate is still entirely too depressed to feel good about the labor market situation. The risk of raising rates slowing down the pace of hiring, which would put further downward pressure on the participation rate. I’m totally confused by this logic – if the real level of employment is significantly higher than it currently is, why do think the loose policy stance is going to spike prices anytime soon?
4) The Committee has broader concerns than just the U.S. economy
What the Fed does has huge implications globally, and in turn, what happens globally has implications on the U.S. economy. As noted by the FT this week,
Stanley Fischer, vice-chairman of the Fed, said in October he recognised that it was “not just any central bank” and that it took account of feedback effects between the US and the rest of the world. He added, however, that the most important contribution it could make to the health of the global economy was to “keep our own house in order”.
The level of sensitivity between what the Fed does and what the rest of the world does is exceptionally high these days, so making sure that the Fed can make a managable transition – for both the U.S. and the rest of the world – is a serious consideration.
Put all of these together, and I’m banking on the Fed to delay rate hikes. As I said before, I don’t see the FOMC moving until we see actual, significant moves on the wage side, and similarly, I see them overshooting rather than undershooting – that is, they can manage inflationary pressure a lot better than deflationary pressure. Just ask Haruhiko Kuroda or Mario Draghi.
This article is brought to you courtesy of Jonathan H. Todd.