Comment on FOMC Statement, Forecasts, and Powell Press Conference

December 11, 2019

The Federal Open Market Committee left the federal funds target unchanged at 1.25-1.50% and reached that decision unanimously. A policy change was not expected, and there was nothing meaningfully new presented in the formal statement released today. Likewise, the updated forecasts included nothing remarkable. Projected GDP growth of 2.0% next year, 1.9% in 2021 and 1.8% — which  is below its longer run tendency — in 2022 are the same as those presented in the previous quarterly forecast. PCE total and core inflation are seen at the same levels as in the September update, namely 1.9% in 2020 followed by 2.0% in 2021 and 2022. Expectations regarding the federal funds rate still show a modest rise in 2020 and little subsequent movement. Descriptions of the economy continue to cite a strong but not tight labor market, moderate growth in GDP, solid jobs growth, low unemployment, weaknesses in investment and exports related to trade uncertainties, and inflation significantly shy of the 2.0% symmetrical target. Expected inflation is also under target, and  the current policy stance after this year’s trio of 25-basis point cuts is considered accommodative yet appropriate.

Chairman Powell’s press conference didn’t elicit much to move financial markets. His personal view is that inflation needs to rise significantly and sustainably so to justify an increase in the federal funds target. By the same token, he seemed uncomfortable about hypothetically discussing factors that would justify further cuts. Policy will be data dependent, and it will take considerable further time for the full effect of the three rate cuts to be felt. He conceded that trade uncertainty exerts a drag and that the dispute with China is more influential than issues involved in trade with America’s southern and northern neighbors. Powell defended the four rate hikes of 2018, saying they were appropriate given the information policymakers had available at the time including the perception that GDP was growing 3% a year ago and that inflation was nearer 2%. The challenges of 2019 that led to the easing moves weren’t apparent at the start of the year, namely weak growth elsewhere in the world and the impact of trade uncertainty.

For me perhaps the most intriguing question raised at the press conference was whether the FOMC’s employment mandate could be framed in a symmetrical way as officials are doing about the price stability mandate. Since many years have passed in which inflation has undershot the 2.0% target, it’s not heresy to consider accepting some span in which that object is overshot. One could perhaps create a two-sided response to the labor  market mandate by focusing on the level of employment rather than unemployment. Yes, unemployment below 4% for more than the past year suggests labor market tightness, but wage growth of only 3% doesn’t confirm that picture. Labor market slack is  more easily found if the focus is on employment, which coincidentally expanded at identical annualized rates of 1.83% in both the 1980s and 1990s.  As a result, there were 44% more non-farm jobs at the end of 1999 than at end-1979.

If the same employment growth trendline had been maintained over the ensuing two decades, we’d be looking at an end-December 2019 level of 187.9 million workers in next month’s jobs report. That’s not going to happen, and it will not be remotely close. In November according to last Friday’s jobs data release, there were only 152.3 million non-farm payroll jobs. Even accounting for changes in working population growth, the 35 million discrepancy between the present number of jobs and the old trendline shows a continuing deficiency of workers. A Fed commitment to return to the old job growth trendline adjusted for changes in labor force growth and other pertinent factors could give policymakers a response function that treats both its mandate for price stability and for full employment in a symmetrical manner. Too little inflation is now treated just as seriously as too much inflation. The modification I suggest could enable too  few jobs to likewise evoke a similar monetary policy response  as would having too many workers.

Copyright 2019, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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