Bearish Long Run Fed Forecasts Are Hawkish Policy

The Financial Times attached a bizarre headline to a recent news story:

Jay Powell delivers dovish message to financial markets

Jay Powell could have used this week’s meeting of Federal Reserve policymakers to project confidence that the US economy had turned a corner after the shock of the coronavirus pandemic, with the jobs market showing signs of early recovery and equity prices continuing to rally. 

Instead, the Fed chairman and his fellow monetary policymakers reinforced their dire assessment of the country’s economic prospects for the coming years, which will require a heavy dose of support from the US central bank just about as far over the economic horizon as they can see.

In their first economic projections since December, Fed officials estimated that by 2022, the US would still be facing 5.5 per cent unemployment, far higher than pre-coronavirus levels, with core inflation at 1.7 per cent, still below its target of 2 per cent.

Fed economic forecasts are different from private forecasts for the same reason that a ship captain’s forecast of the ship’s path is different from a passenger forecast.

The Fed expects prices to rise by 4.2% between 2019 and 2022, assuming appropriate policy, far below the 6% increase they have targeted. They have provided no explanation as to why this policy stance is appropriate.

Despite the FT headline, this is a very hawkish policy.

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Comments

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William K. 1 month ago Member's comment

Once again, "The Fed" is seeking to benefit those who will be making the larger profits. Clearly, keeping inflation to an absolute minimum will provide the benefit to the populace, even though it does reduce the income of the shareholders and top executives.

Has it ever been considered that "the misery of the masses" is what eventually leads to revolutions? Hopefully Ballot-box revolutions rather than the more violent ones.

Gary Anderson 1 month ago Contributor's comment

Sounds deflationary. Hawkish if the Fed is brave.