The Federal Reserve's public view of the likely path of the economy now lacks coherence. This is a bad thing. It may mean that the Federal Reserve's private view of the likely path of the economy now lacks coherence, in which case policy will lack coherence. It certainly means that market participants can no longer plan on the Federal Reserve having a known coherent view of the economy: Joe Gagnon: Tension Remains at the Heart of the Fed’s Forecast: "The Federal Open Market Committee (FOMC, or Fed) surprised no one at its September meeting by raising the target for the federal funds rate a quarter of a percentage point to a range of 2.00 to 2.25 percent. The FOMC has been tightening monetary conditions very slowly since late 2015...

...The only notable change in the FOMC’s policy statement was the dropping of a sentence that characterized Fed policy as “accommodative.”... The FOMC raised its projection of GDP growth in the near term but otherwise made little change to its projections besides extending them to 2021. The projections show the unemployment rate roughly a percentage point below its long-run level through late 2021, yet inflation remains firmly fixed at 2.1 percent. These projections seem to defy the standard Phillips curve model of inflation that says inflation should increase as long as unemployment is below its long-run, or natural, rate. When asked about this tension, Chair Powell stated that the effect of low unemployment on inflation is likely to be very small because inflation expectations are anchored so strongly. He said that it might take a very long time to return to the natural rate of unemployment.... It strains credulity that a 1 percentage point gap between the unemployment rate and its natural rate would be expected to have essentially no effect on inflation over more than three years....

In the press conference, a reporter asked Chair Powell about the FOMC's view on the supply-side impacts of the tax reform passed last December. Powell said he hopes it raises the economy's potential growth rate a lot, but the FOMC projections show no upward revisions in long-run growth. Last fall the White House argued that the tax reform would raise the economy's growth rate from 2 percent to "3 percent or more" over the next 10 years. Between September 2017 and September 2018, the median FOMC projection of long-run growth was unchanged at 1.8 percent and the range across all FOMC participants narrowed from 1.5 to 2.2 percent to 1.7 to 2.1 percent. Not a single FOMC participant, including Chair Powell, projects growth in 2021 and beyond above 2.1 percent...


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