Thousands of years ago, Roman soothsayers would visit the oracles and interpret the entrails of slaughtered animals. We haven’t advanced much since then.
Fortunately, no animals are slaughtered today, but many brain cells seem to die in the reading and interpretation of policy statements of the Federal Open Market Committee. Like the soothsayers of old, today’s economists, journalists and pundits interpret the news and report it as fact – even though they generally haven’t a clue about what’s being said. We’re not even sure the FOMC has a clue about what’s being said. 
The policy statements themselves are an anachronism. In today’s world, most news is immediate. By the time a newsworthy event ends, it’s been tweeted, blogged and reported on by anyone and everyone who is interested.
Yet the Fed issues policy statements on its Federal Open Market Committee meetings two months after the meetings take place. Apparently, it takes the FOMC that long to agree on language that says nothing and can be interpreted however the reader would like it to be interpreted.
Many well-paid experts make a living off of these interpretations. They will tell you, with certainty, that the Fed will definitely maybe raise interest rates sometime this year – or maybe next year – but they’re just guessing.
Consider, for example, that when Fed Chair Janet Yellen used the word “patient” to describe the Fed’s approach to raising rates, they knew, without a doubt, that at least two meetings would pass before rates would be raised.
How did they know? Why two meetings and not three? And what’s to be made of the absence of the word “patient” or any derivative of it in the latest pronouncement from the Fed?
Since the Fed doesn’t do much, except issue occasional policy statements and print money, being an interpreter of Fed-speak has to be a good gig. I want in. So here’s my interpretation of the Fed’s latest policy statement. I’ll be expecting a call from CNBC any day now.
What It Says vs. What It Means
Information received since the Federal Open Market Committee met in January suggests that economic growth has moderated somewhat. $3 trillion plus in bond buying and the economy still stinks!
Labor market conditions have improved further, with strong job gains and a lower unemployment rate. It’s a good thing we have the U-3 unemployment rate to fall back on. The workforce participation rate is still abysmal, but no one pays any attention to it.
A range of labor market indicators suggests that underutilization of labor resources continues to diminish. The best that can be said is that fewer people are flipping burgers at McDonald’s – although that may be because of a downturn in McDonald’s business, not because of any improvement in the U.S. economy.
Household spending is rising moderately; declines in energy prices have boosted household purchasing power. Personal income is still down, but, because our efforts to boost inflation have failed, consumers have more money to spend.
Business fixed investment is advancing, while the recovery in the housing sector remains slow and export growth has weakened. I guess, we’ll need to be “patient” a little longer before we increase interest rates.
Inflation has declined further below the Committee’s longer-run objective, largely reflecting declines in energy prices. I’d better not mention that after buying more than $3 trillion worth of bonds that we’re now in a period of deflation. Oh, well. At least we’re not Europe! Maybe it’s time to reconsider that arbitrary 2% inflation target.
Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations have remained stable. Sooner or later (OK, later), inflation will increase. When it does, we’re ready to take credit for it.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. I’m not sure how 2% inflation equals “price stability,” but no one is going to call me out on that one.
The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. There’s no way we’re going much beyond the 2% growth we’ve had since President Obama took office. That’s the best you can expect when you hand control of the economy over to the Fed.
The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. We’re not sure how the labor market is supposed to balance economic risks, but saying something is “nearly balanced” sounds like we’re in some sort of equilibrium, so we’ll leave this sentence in.
Inflation is anticipated to remain near its recent low level in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of energy price declines and other factors dissipate. The Committee continues to monitor inflation developments closely. So the best thing that could happen to the economy would be for oil prices to increase. Didn’t we just say that lower oil prices boosted consumer spending?
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. We have no idea when we’re going to raise interest rates, but if we wait until we achieve our “dual mandate,” they may remain near zero for as long as we’re alive.
This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. Maybe I should refer here to macroprudential supervision? Nah. That one was never much of a market mover.
Consistent with its previous statement, the Committee judges that an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. We’re in no hurry to raise rates. When we do, the stock market will tank and we’ll have to start picking up the tab when we visit Wall Street for lunch.
This change in the forward guidance does not indicate that the Committee has decided on the timing of the initial increase in the target range. I’ve been saying the same thing for months, but I didn’t use the word “patient,” so it qualifies as a “change in the forward guidance.”
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions. Let’s ignore the risk of all of those long-term holdings. When I retire, it will become someone else’s problem.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. In other words, you can expect this drama to continue for many years to come … at least through this administration, anyway.
The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run. I did it! I made it through a policy statement without using the word “patient!” Is it time for lunch yet?