The Fed's Three Options

The Fed has three choices, as I’ve discussed in the past. Normalization would be great in theory. In reality, the odds increasingly favor “none and done,” more so than even “one and done.” While the labor market warrants tightening sooner rather than later, inflationary expectations are falling fast as oil prices plunge and the dollar strengthens.

On October 13, FRB-Chicago President Charles Evans gave a speech titled “Monetary Policy Normalization: If Not Now, When?” Back then he said:

Looking ahead, I am concerned about the possibility that inflation will not return to our 2 percent PCE target within a reasonable period of time. First, the recent monthly inflation numbers have been low, so there is not much upward momentum. Second, as I mentioned earlier, wage growth has been relatively low for some time. While wages don’t predict future inflation, the two often move together. And, third, it does not appear as if inflationary expectations are exerting much of an upward pull on actual inflation at the moment. ...

To summarize, I am very uncomfortable with calls to raise our policy rate sooner than later. I favor delaying liftoff until I am more certain that we have sufficient momentum in place toward our policy goals. And I think we should plan for our path of policy rate increases to be shallow in order to be sure that the economy’s momentum is sustainable in the presence of less accommodative financial conditions. I look forward to the day when we can return to business-as-usual monetary policy, but that time has not yet arrived.

(Based on an excerpt from YRI Morning Briefing)