Wednesday, August 20, 2014

Guest Commentary: Economic Outlook

By Dr. Alan Blinder

I’ve been saying in this space for months that the Federal Reserve would be boring for a while, which it certainly was again after its July 29-30 meeting. There were no surprises. There weren’t even many changes in wording. Markets barely budged.

The FOMC statement no longer calls the unemployment rate “elevated.” But it notes, in new prose, that “a range of labor market indicators suggests that there remains significant underutilization of labor resources.” (You have heard that before from Fed Chair Janet Yellen.) And inflation, which had been characterized for months as “running below the Committee’s longer-run objective,” now “has moved somewhat closer to the Committee’s longer-run objective.” Subtle changes, to be sure, but indicative of an FOMC that is thinking more seriously about when it should start raising interest rates.

Speaking of higher rates, the heat is starting to rise in the Committee — the first sign being the dissent from the Philadelphia Fed’s Charles Plosser, a well-known hawk. Up to now, Plosser and the other hawks have been content to go along with gradual “tapering” of the path of the Fed’s asset purchases by $10 billion per month at each meeting. But on Wednesday, Plosser dissented from the FOMC’s 9-1 decision, objecting to continued use of the phrase — which has been central to the Fed’s forward guidance for months — that the FOMC will likely “maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends.” (That end will be announced in October.) Plosser wants interest rates raised sooner, and you should be prepared for more such clamoring in the coming weeks and months.

Explicit monetary policy won’t be changed for months to come; Yellen and the FOMC majority are far from ready. But there will be plenty of talk about higher rates — starting now. And as markets have come to understand, talk is policy.

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