Adam Ozimek: _"Okay FOMC tweet storm... https://twitter.com/ModeledBehavior/status/1174386524806438914 The Fed’s pivot to a more dovish stance over the last year is due to multiple factors. One is that the Fed sees an elevated risk of a recession. Given that rates are already low, they’d rather cut early to prevent a downturn than cut late and risk hitting the zero lower bound. The other factors are slower moving. 1st is the stubborn inability of inflation to sustainably hit the target of 2%. 2nd is the closely related trend that the economy is not yet at full-employment. More than the risk of a recession, these slower moving factors provide a stronger basis for cutting rates and are more consequential for understanding the economy today. One reason this is consequential is that labor market slack , and the Fed’s consistent underestimate of it, goes a long way in explaining the troubling inflation trends...
...While the ZLB mattered for the beginning of the recovery, in recent years the failure to consistently hit target inflation is first and foremost a reflection of the Fed’s failure to gauge how far the economy has to improve and set rates and rate expectations accordingly. In addition, that we are not yet at full-employment is an important context for understanding other macroeconomic issues. For example, it helps to understand why wage growth remains modest. It is also potentially consequential for the housing market, which remains a missing piece of the recovery. If labor markets have yet to recover, it is less surprising that housing markets have not either...
#noted
