FOMC Projections Provide No Hint Of Further Action

Dave Altig, executive vice president and research director at the Atlanta Fed, has this to say about monetary policy (my emphasis):

I'm not really aware of any models matched to real-world data that suggest monetary policy actions can (at acceptable cost) quickly and completely overcome all of the shocks and headwinds that may present themselves.

You may believe otherwise—that is, you may believe that, for current circumstances, monetary policy is a panacea. Or, less dramatically, you may believe that more monetary stimulus would surely yield something better than what was implied in the June SEP. Fair enough. But you should not believe that lackluster numbers in the SEP tell you anything about individual FOMC participant's views on the efficacy, desirability, or likelihood of further monetary actions, one way or the other.

You may want to reread that last sentence, which got my attention. A significant amount of time and effort is currently being spent trying to understand why FOMC participants are not pursuing greater action in light of forecasts that don’t quickly meet the Fed’s mandated goals. If Altig is correct, which I believe he is, than much of this effort is wasted. In my opinion, the FOMC’s mandate is to maximize employment and maintain stable prices over the medium-to-long run, not at every moment.

Proponents of further monetary stimulus, who will be disheartened by Altig’s message, are also usually reluctant to acknowledge the Fed’s success in stabilizing prices. There are certainly reasons one might prioritize the employment mandate, but that is also the far more difficult mandate for the Fed to achieve. Given the Fed’s determination to sustain its credibility and independence, it should come as no surprise that the more easily achievable target is seemingly favored.

So when the next Summary of Economic Projections (SEP) is released, don’t be surprised if a less than ideal short-run forecast is combined with a lack of action.

(Based on Altig’s statement I can only assume that he reads or accepts little from market monetarists, who frequently claim that NGDP targeting offers a practical panacea for monetary policy.)

(h/t Mark Thoma)