Outlooks, Outcomes, and Prospects for U.S. Monetary Policy

Today, Fed Vice Chair Richard H. Clarida gave a speech on Outlooks, Outcomes, and Prospects for U.S. Monetary Policy. 

Key Speech Ideas 

1. The recession ended in April according to the NBER. The job recovery lags by about 7 million
2. The Fed projects "core PCE" to surge to 3 percent before falling back tp 2.1 % for the next two years.
3. "The modal baseline outlook for inflation over the three-year projection window reflects the judgment, shared with many outside forecasters, that most of the inflation overshoot relative to the longer-run goal of 2 percent will, in the end, prove to be transitory."
4. "If, as projected, core PCE inflation this year does come in at, or certainly above, 3 percent, I will consider that much more than a 'moderate' overshoot of our 2 percent longer-run inflation objective. Second, as always, there are risks to any outlook, and I believe that the risks to my outlook for inflation are to the upside."
5. "While, as Chair Powell indicated last week, we are clearly a ways away from considering raising interest rates and this is certainly not something on the radar screen right now, if the outlook for inflation and outlook for unemployment I summarized earlier turn out to be the actual outcomes for inflation and unemployment realized over the forecast horizon, then I believe that these three necessary conditions for raising the target range for the federal funds rate will have been met by year-end 2022."
6. "My inflation projections for 2022 and 2023, which forecast somewhat higher inflation than do the SEP medians, would also, to me, satisfy the 'on track to moderately exceed 2 percent for some time' threshold specified in the statement.
7. "Under the June SEP median of modal projections, annualized PCE inflation since the new framework was adopted in August 2020 is projected to average 2.6 percent through year-end 2022 and 2.5 percent through year-end 2023."
8. "In the context of our new framework, it is important to note that while the ELB can be a constraint on monetary policy, the ELB is not a constraint on fiscal policy, and appropriate monetary policy under our new framework, to me, must—and certainly can—incorporate this reality."

Mish Notes and Explanations  

• PCE stands for Personal Consumption Expenditures, extremely poor measurement of inflation. Core PCE excludes food and energy. Core PCE is already 3.5%. 
• SEP stands for "Summary of Economic Projections", specifically economic projections of Fed governors and presidents at the June FOMC meeting.
• ELB stands for Effective Lower Bound of interest rates. It is the point at which the Fed believes further lowering of rates is counterproductive. 
• The Fed, unlike the ECB, believes the ELB is not below zero, but here we are at zero. 

Dot Plot Projections

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Dot Plot Analysis

The above Dot Plot of expected hikes is from the June SEP Supplement to the FOMC meeting. 

The Dot Plots have been nothing but amusing fantasy for years, always penciling in more hikes than will ever happen. I invite the Fed to project interest on the national debt at 3.0%. 

(Click on image to enlarge)

I wish they disclosed the person behind each projection. Those projections are more than a bit funny.

Here are more projections from June 2021.

Summary of Economic Projections

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Welcome Inflation

The WSJ had this amusing line regarding the June meeting: Mr. Powell said the forecasts show that many Fed officials believe they will reach those goals “ somewhat sooner than anticipated,” and “that would be a welcome development.”

PCE Predictions

• Median PCE 2021: 3.4%
• Median PCE 2022: 2.1%
• Median Core PCE 2021: 3.0%
• Median Core PCE 2022: 2.0%

The Fed projects the conditions it wants, nothing more nothing less, ever. 

Has Inflation Worn Out Its Welcome Already?

Year-Over-Year Measures of Inflation

PCE is already at 4.0% with the core at 3.5% vs Fed predictions of 3.4% and 3.0% respectively.

Mish's Observations On PCE

• "The Fed's preferred measure of inflation is nearly as consistent as the returns of Bernie Madoff."
• "Excluding everything that matters, prices are falling.TM"

Does Clarida's Opinion Matter? 

That question came up yesterday. Here was my answer.

Only fed that matters is Powell and immediate circle…the rest are just mouthpieces and not on the inner circle of decision making

— Live Monitor (@amlivemon) August 2, 2021

What about Janet Yellen? Is it "Troika" or "Fourthoika"? 

Fed's Preferred Measure of Inflation is Only 4.0%, Anyone Believe That?

For discussion of the above charts please see Fed's Preferred Measure of Inflation is Only 4.0%, Anyone Believe That?

Also, see "Inflation is Half Our Mandate" and Other Amusing Quotes of the Day

What's Going On?

• The Fed does not want to hike, so it won't. 
• Meanwhile, the Fed mostly pulls numbers out of its rear orifice to justify the policies it wants to take. 
• By the time the Fed gets around to hiking, an economic bust is overdue.
• Expect to be at or near ELB when it happens next.