Fed Chairman Ben Bernanke made it clear... again. Interest rates will
remain low, even when the labor market shows stronger signs of growth.
He said that if inflation doesn't exceed an annual rate of 2.5%, and
unemployment stays above 6.5%, the Fed would keep its target rate near
zero percent. Laying out "thresholds" is something new, but the basic
message remains the same: low rates and no plans to change the status
quo any time soon.
As Bernanke explained at yesterday's press conference:
First, as the statement
notes, the committee reviews policy as likely to be appropriate at
least until a specified threshold is met, reaching one of those
thresholds will not automatically trigger immediate reduction in policy
accommodation.
If unemployment was to decline at a time inflation and
expectations were subdued... the committee might judge an increase in
target for the federal funds rate to be inappropriate and ultimately in
deciding when and how quickly to reduce policy accommodation the
committee will follow a balanced approach in seeking to mitigate
deviations of inflation from the longer run 2% goal and deviations of
employment from estimated maximum level.
The 2.5% ceiling for pricing pressure is a "conditional inflation targeting," as Menzie Chinn labels it.
As it happens, the market appears to have been anticipating that level
in recent days. Yesterday's inflation forecast via the 10-year Treasury
yield less its inflation-indexed counterpart was 2.51%, about where it's
been all week. It's also interesting to note that the Treasury market's
assumption for future inflation has been inching higher this month
after bottoming out at around 2.4%.late last month.
It's also clear that inflation expectations and the stock market
remain tightly bound. The new abnormal, as I like to call it, is still
with us. Expecting higher inflation, in short, is still considered
bullish, as this month's dual rally in equities and inflation
expectations through yesterday remind.
Another observation: inflation expectations seem to have some upward
momentum. Progress, one might say, from the central bank's perspective:
convince the crowd that higher inflation is destiny. The market is
inclined to agree, albeit on the margins, and only relative to a low
base in recent years.
There are, of course, limits to everything, including the market's
perception that more inflation is productive. Exactly when that limit
will be reached is unknown, of course, but Bernanke is eager to reach
that state of mind sooner rather than later. But the road for getting
from here to there is still riddled with potholes. The Fed's new GDP growth projection
is a bit lower for next year compared with its September outlook: a
2.3%-to2.5% projection via the "central tendency" forecast, or down from
2.5%-to-3.0% range previously published. The Fed also sees slightly
lower inflation and unemployment in the new year.
The struggle to juice the economy goes on, with mixed results. One
can make an argument that Bernanke and company are winning, but not
enough to convince the man on the street. Perhaps a better way to see
the big picture is that the Fed isn't losing, at least not any more so
than in recent months. We are, it seems, still stuck somewhere in a
macro never-never land, floating between a genuine recovery and a
shrinking economy.