This Federal Reserve interest-raising cycle: not just an ex-post but an ex-ante mistake: Adam Ozimek and Michael Ferlez: The Fed’s Mistake: "WWhen the Fed faces similar uncertainty in the future, looks back at the deci- sion to start raising rates in 2015, and judges that the path of monetary policy turned out to be optimal, such an assessment will offer support for raising rates. If instead the Fed looks back and sees that the path was sub-optimal, such an assessment will offer a cautionary tale.... The current Fed estimate of the long-run unemployment rate implies that in December 2015 the gap was 0.55 percentage point instead of 0.1.... The assumption that the LRU will continue to be revised downward is consistent with the pattern over the past few years, and is further supported by recent statements from Powell that indicate a strong possibility that LRU will continue to fall. As the best estimates of the long-run unemployment rate fall, the magnitude of the Fed’s ex ante error will continue to grow.... the Fed made a numerically significant error in underestimating the amount of labor market slack...


#noted

Comments