Thinking about statements I’ve heard about the Fed being a conservative organization in the past, given market indicators for inflation and chances for recession, how I wish it were true. The current risk rate is about 50/50 for a recession in 2020 – showing some doubt that the Fed has the “tightening cycle” under control.
If the goal were to tighten to neutral, as a few of the FOMC members have stressed that it is, it has already gone too far because it is influencing what people are doing with their money with noticeable impact and actively slowing the economy down.
Some have argued that policy over the last 12-18 months has been too expansionary and the Fed taking steps to actively slow the economy down now is likely on the side of necessary. Though, because the era of persistently tight money only recently faded into history and, under the current official regime, the justification for continued tightening is somewhat lacking as it isn’t clear that the PCE inflation target has been hit and sustained long enough to achieve an average of 2%, slowing things down now appears to me as premature. In the absence of any collection of indicators to point to that indicate tightening is appropriate, persistent outsized wage gains and tips spreads sustained in the rage upward of 2.5-3.0%, for example, the direction the Fed is taking isn’t necessarily defensible – at least in terms of inflation targeting.
In terms of NGDPLT, the case for tightening now would be a little more justifiable if the Fed had set the target at 5% at the end of 2016 as the Hypermind market is indicating that the growth rate of NGDP for 1Q ’18-1Q ‘19 will be in the area of 5.3% while the pervious 12-month period was 4.6, and if it were trying to level target 5%, the Fed right now would be somewhere in the vicinity of “on the nose” in relation to the 5% target should the market forecast be accurate. It could very well stop what it is doing, and we’d be fine. Doing more is doing too much, and I can’t see how it can go to tighten more this year and three more times next year and not add more weight to the recession risk or, at the very least, cause unnecessary damage and loss.
Of course, the Fed didn’t set a NGDPLT target in 2016, 2017, or at any other time and we can’t reliably say that NGDPLT is what the Fed is doing with monetary policy. Some FOMC members say the Committee wants a neutral policy, but in the members’ own words, it isn’t planning to deliver a neutral policy in either of the ways of considering what a neutral policy stance could be, in terms of NGDP or inflation; and the idea that perhaps the Committee is really just “winging it” presents itself as more and more a possibility with each passing day.
I truly hoped for better policy conduct with the new Fed than this. But while I am somewhat disappointed, knowing that the Fed’s tradition of conservatism only applies to policy expansion and tightening is nearly always overdone, I don’t have the nerve to be surprised.
PS: The silver lining here is that, over the last decade, I always dreamed of the day that the policy conversation would consist of quibbling over 10-20 basis points off-target. As uneasy as I feel about how much tightening will actually happen over the next year, the grandness of this particular moment is duly noted.