Where Next for Monetary Policy?
This blog began with a strong focus on monetary policy. That was in part because I believed -- and still do -- in its possibilities. The other part was that I just find monetary policy to be one of the most interesting parts of the field. So I'm happy that I could write what might be my first long post about monetary policy in a good while for Bloomberg. Excerpts below, continue reading here.
What else is the Fed watching? What news and what sorts of numbers will convince its members that they can withdraw stimulus -- or that they need to extend or even boost their injections?
Payroll employment. The Fed has tied policy to the unemployment rate, now at 7.5 percent, but officials understand its limitations. (The rate falls when workers are so discouraged they stop looking for work, for instance -- hardly a sign of progress.) They could be looking for three to six months of growth in payroll employment of 200,000 or more each month. That could be the “substantial improvement in the labor market” they have in mind.
Inflation. The Fed’s preferred measure of inflation, the annual change in the PCE price index, stood at 1.0 percent in March. The Fed keeps an eye on other price indexes, too, and they all suggest that near-term inflation could run below target. The "core" PCE price index, which excludes volatile food and energy prices, rose by 1.1 percent. The consumer price index, and its corresponding “core” variant, are both slightly below 2 percent. Another measure of “core” inflation known as "trimmed-mean inflation" -- obscure to the public but closely monitored inside the Fed -- stands at 1.4 percent and is poised to keep falling.
More than is recognized, the decision to exit may ride on inflation. James Bullard, the president of the Federal Reserve Bank of St. Louis, said recently that the Fed should hold fast to its “price stability” goal, and that inflation has lately fallen too far below target. If inflation drops below 1 percent -- a psychologically significant threshold -- there’d be strong internal pressures to increase bond purchases.