Thursday, September 21, 2017

"The Fed’s forecasts imply a tough (recessionary?) 2020"

Yesterday, along with Cardiff Garcia, Matthew Klein was showing off his  Federal Reserve chops in "Macro Live, Janet Yellen presser edition". Today he's going solo.

From FT Alphaville:
I think it’s a myth that expansions die of old age. I do not think that they die of old age.
–Janet Yellen, December 16 2015

The Federal Reserve released forecasts through the year 2020 for the first time on Wednesday. Those forecasts imply that America’s central bankers will deliberately tighten monetary policy to slow the US economy, possibly to the point of outright recession, by the early 2020s.

Every few months, the Fed polls the members of the Open Market Committee, which sets monetary policy, to ask them how they think real output, unemployment, and inflation will behave under “appropriate monetary policy” for the next several years. They also ask everyone where they think short-term interest rates should be at the end of each year.

There is no way to identify each individual set of forecasts. At least some policymakers think core inflation should be 2.2 per cent in 2019 and 2020, compared to the consensus of 2.0 per cent. Are these the same people who think short term interest rates should be unchanged from their current level in 2020, or are they those who want the policy rate to rise by nearly three percentage points? We currently have no way to know, which makes it difficult to assess how individual central bankers view the underlying forces affecting the economy and how monetary policy should respond.

With that caveat, it is possible to look at the distribution of forecasts to assess how the FOMC as a whole is thinking about the economy. Take a good look at the table below, with our highlights:...MORE