On Monday, Richard Clarida delivered a fairly lengthy series of prepared remarks for a webcast “at” the Peterson Institute for International Economics, in Washington.
The vice chair was keen to emphasize the extent to which the changes to the Fed’s strategy unveiled last week by Jerome Powell were indeed “important” and not merely a formal acknowledgement of the way in which policy has been conducted for years.
Smart people can debate the point when it comes to the price-stability side of the mandate, but the tweak to the language around maximum-employment was most assuredly notable, even if it stops short of representing a sea change. It wasn’t just that Powell acknowledged the broken Phillips curve, and the implications of that for running the labor market “hot”. He explicitly outlined a more inclusive lean that seemed to echo some lawmakers’ calls for the Fed to take an active role in reducing inequality.
Clarida underscored that on Monday. “This change conveys our judgment that a low unemployment rate by itself, in the absence of evidence that price inflation is running or is likely to run persistently above mandate-consistent levels or pressing financial stability concerns, will not, under our new framework, be a sufficient trigger for policy action”, he said.
In other words: as long as there’s not concrete evidence to support the notion that unacceptably high inflation is either here or coming soon, the labor market can run as hot as it “wants”.
When you combine that with the Fed’s “new” approach to inflation (i.e., countenancing overshoots to “make up” for shortfalls), you end up with scope for the jobs market to run extremely hot. That is: even if an ostensibly overheating labor market were to resurrect the Phillips curve, the Fed would welcome modest overshoots on the inflation front to make up for the shortfalls since 2012 (figure below).
Commenting on those shortfalls Monday, Clarida stated the obvious.
“At a minimum, the failure of actual PCE inflation—core or headline—over the past eight years to reach the 2% goal on a sustained basis cannot have contributed favorably to keeping inflation expectations anchored at 2%”, he remarked, adding that if you ask him, “the evidence is that the various measures of inflation expectations I follow reside at the low end of a range I consider consistent with our 2% inflation goal”.
That’s just a needlessly academic way of saying that if you never hit a goal, the public’s faith in your ability to do so will be commensurately diminished over time.
Clarida also said the Fed may implement refinements to the SEP by year-end. When it comes to yield-curve control (YCC), he essentially reiterated the message from the July FOMC minutes. “Most of my colleagues judged that yield caps and targets were not warranted in the current environment but should remain an option that the Committee could reassess in the future if circumstances changed markedly”, he remarked, adding that “our new consensus statement does bring greater clarity and transparency to the way we will conduct policy going forward”.
That may disappoint markets a bit at the margins, precisely because it’s a reiteration of the July minutes, which were not digested well. Clarida did seem to go out of his way to make it clear that YCC is not off the table entirely — it’s just shelved for now.
As for negative rates, you can forget it. Or at least that’s what the party line still is, even if the market will never be convinced that a push below zero on the policy rate is totally out of the question.
Perhaps the most amusing bit from Clarida’s prepared remarks comes in the section on the revised approach to the employment mandate. To wit:
This is a robust evolution in the Fed’s policy framework and, to me, reflects the reality that econometric models of maximum employment, while essential inputs to monetary policy, can be and have been wrong, and, moreover, that a decision to tighten monetary policy based solely on a model without any other evidence of excessive cost-push pressure that puts the price-stability mandate at risk is difficult to justify, given the significant cost to the economy if the model turns out to be wrong and given the ability of monetary policy to respond if the model were eventually to turn out to be right.
That’s (almost) too perfect on its own, so I’ll eschew further editorializing other than to quote myself from last week, when, while discussing the same issue, I gently noted that “if there is no discernible link between job creation beyond some imagined threshold for ‘full employment’ and an undesirable, unhealthy rise in inflation, then efforts to deliberately curtail the pace of job creation can only be explained by incompetence, cruelty, or an obstinate refusal to abandon economic orthodoxy in the face of real world outcomes”.