So the June FOMC meeting minutes were released a few days ago and they are a mixed bag. For all of the rather impressive talk of doubt whether the Phillips curve has meaning and interest expressed in the notion of getting people off their couches contained therein, the staff has something important to say about what actually happened in May that doesn’t rhyme with the overall theme of discussion:
Real GDP appeared to be rising at a much faster pace in the second quarter than in the first, and it was forecast to increase at a solid rate in the second half of this year. Over the 2018-20 period, output was projected to rise further above the staff’s estimate of its potential, and the unemployment rate was projected to decline further below the staff’s estimate of its longer-run natural rate. Relative to the forecast prepared for the May meeting, the projection for real GDP growth beyond the first half of 2018 was revised down a little in response to a higher assumed path for the exchange value of the dollar.
With real GDP rising a little less, on balance, over the forecast period, the projected decline in the unemployment rate over the next few years was a touch smaller than in the previous forecast.
Policy tightened in May as to bend down GDP and employment estimates. Therefore, I wonder about whether the surprising and new intellectual atmosphere of the meeting is anything more than just idle musing because tighter policy isn’t going to get us anywhere that is consistent with even the very basic meaning of the 2% symmetrical inflation target, a concept that has been stressed in the minutes and statements for years that is still left undone.
It is likely safe to view the discussions in the minutes as expressing a desire for clean streets absent the details of who will be picking up the broom.
The last vestige of the “hawk” camp remains, with one astounding sentence in the minutes dedicated:
Some participants raised the concern that a prolonged period in which the economy operated beyond potential could give rise to heightened inflationary pressures or to financial imbalances that could lead eventually to a significant economic downturn.
With potential being a murky topic, my concern here has a lot to do with both relevance of this statement to reality and competence. I certainly have my doubts that estimates of potential are any more accurate than estimates of the natural rate of unemployment, and potential is not static. So discussions about it are more or less based on a finger to the wind rather than anything resembling a tautology. It appears to me that there are those on the FOMC who, rather than expanding their own understanding of our dynamic reality, are happy to stuff the economy into their box of rigidly defined parameters even if the obviousness that it doesn’t fit is inescapable, breaking the law to do so. After all, that is one guaranteed way such a concerning outcome could occur; and at the very least, I am fearful of their incompetence and think they should step aside.