FOMC Statement and Powell Press Conference

April 28, 2021

Nothing remarkable emerged from the Federal Reserve today.

  • Monetary policy settings were not changed. The fed funds interest rate target of 0-0.25% was kept, and and so were the amounts of Treasury securities and MBS that the central bank will buy each month.
  • Forward guidance was likewise retained as it’s been. Officials need to see substantial further progress towards the twin goals of maximum employment and price stability before any tapering will be considered. The U.S. economy is far from satisfying those tests, and officials will give the public plenty of advance notice before actually acting.
  • Changes made in the statement were limited to segments that describe economic conditions, and these were predictable, modest, and perhaps even under-stated.

In the press conference among other questions were several that dealt with whether the Fed ought to be taking the acceleration of inflation more seriously. Chairman Powell did a very good job of explaining why the factors behind higher inflation rate will almost certainly prove temporary and in showing why the backdrop now is different from what happened in the 1960s and 1970s.

I thought Powell did not make as compelling a case to fend off the argument that the Fed should be more cautious now in case it is under-estimating non-transitive elements of higher inflation and the risk that higher inflation, even if entirely temporary initially, risks spawning secondary price pressures by creating expectations of higher future inflation. That train of thought can be parried by an argument that Powell did not use, which is that the policy task of lifting inflation that is too low is intrinsically much harder than creating an effective policy that reduces inflation that has become too high. This fact can be revealed by comparing multiyear periods of too little inflation with too much inflation.

  • The U.S. depression was characterized by deflation, not inflation, and took over a decade to escape.
  • When the Federal Reserve got really serious about eradicating inflation in a sustainable way, it took just 3 years and 3 months to reduce the 12-month rate of CPI inflation from a peak of 14.8% in April 1980 to 2.5% in July 1883.
  • The Bank of Japan’s over-zealous inflation phobia from late 1989 through mid-1991 was overkill, transforming on-year CPI inflation that wasn’t above 5% to start to drop to very low positive levels and into negative territory. That economy has experienced on-and-off deflation for more than two decades and still behaves trapped.
  • The Federal Reserve’s current goal of permitting inflation of somewhat more than its 2% target for some time is a response to chronic sub-target inflation for many years.
  • America’s high inflation of the 1970s wasn’t associated with deficient real growth. Real GDP growth averaged 3.2% a year in the 1970s and 3.1% a year in the 1980s. But between 2000 and 2020, U.S. growth has expanded just 1.9% a year.
  • And what about Japan which has dropped into a black hole? In an economy that previously considered growth of less than 3% a recession, real GDP grew 1.2% per annum in 1994-2004 and 0.5% per year on average in fiscal 2005-2019. Astonishingly, the Nikkei-225 even now remains about 25% below its peak of 38,916 at the end to 1989, more than three decades ago.

In light of this history, the responsible thing to do is to treat inflation that falls below 2% more seriously than inflation somewhat above that goal. And until a period of 2%+ inflation that is sustained beyond the impact of current transitory factors, America’s current deviation from “price stability” has to be considered an example of prices rising too slowly, not too fast. Powell and the other FOMC members, who voted unanimously for keeping the current stance, are correct to not even think about whether it’s time to discuss when policy ought to be tightened.

Copyright 2021, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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