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Is Jerome Powell Ignoring His Own Models?
If you're not exhausted with the neutral rate discussion by now, something's wrong with you. You need more friends, probably.
I'm tired of it, but apparently not exhausted, because I keep writing about it and otherwise editorializing around it. What does that say about me? Nothing great. But nothing that hasn't been said before, I suppose.
Bear with me. This'll be mildly interesting and, more importantly I'm sure, very short.
On March 22 (so, a few days ago), the New York Fed released its lat
The FOMC hasn’t been slavishly adhering to its internal models for some time, and maybe never did.
Powell has, IIRC, acknowledged that the Fed’s models have not worked that well during the pandemic/post period. Every time he says “data dependent” he’s implicitly saying “not model-dependent”.
Possible explanations for Powell’s all-but-promise of rate cuts starting this year despite two months of disappointing inflation data – FOMC might
1. consider current rates restrictive, notwithstanding a dynamic stochastic general something or other
2. see increasing financial risk +/o economic weakness
3. have confidence that inflation will be ~2% by end 2026, regardless of visibility on the near-term path
4. be coordinating with Treasury and administration economic team on one or both mandates
5. factor in institutional implications of political outcomes
6. be using market anticipation of cuts as tool
I sometimes think about what part of the economy does the Fed have more information about than investors do, seems that would be financial system plumbing.