Decoding the latest Fedspeak

Central bankers tend to speak in jargon that financial markets can understand or at least can interpret with a modicum of guidance. Clarity has its rewards whereas hyperbole and words in quotation marks are strictly off limits. When new words are introduced into the policy discussion, financial analysts parse the words with unending zeal until their implication for monetary policy is better understood. So when the latest policy directive from the Federal Reserve was released in March, much attention was directed at the reference to the Fed’s “symmetric inflation goal”, which seemed to imply a tolerance for running the economy hot or more precisely above its inflation-stable potential.

On the surface, this leap of logic makes some sense. After all, FOMC participants repeatedly have said that the US economy is operating close to full employment. Indeed, unemployment fell to 4.5% of the labour force in March, which is one of the lowest levels in the standard (so-called U3) measure of joblessness since the 1960s. We can debate why other aspects of the job market have changed, including the rise in part-time work and the decline in labour force participation especially among young persons. The bottom line, though, is that employers are struggling to find workers with the requisite skills to fill vacancies. The clear implication would seem to be that a strong economy – abetted by the Fed’s still-accommodative monetary stance – will put pressure on costs and prices. In those circumstances, highlighting the inflation goal as symmetric would seem to imply some tolerance for letting inflation drift higher in lieu of applying the monetary brakes more aggressively.

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