Professor, loving your blog, it brings back some good memories of your advanced macro class! Some thoughts below but it's been a while since I've been in an econ class so there are definitely some cobwebs!
1) Firstly, I think the Fed has a tendency towards the conservative. I mean that to say the idea of a surprise/out of forecast adjustment of the federal funds rate while not unprecedented, is not typically in the style of the Fed. I think the Fed Chairs tend to want to avoid a moment of "Irrational Exuberance". So since they hadn't previously mentioned an early 2022 rate hike, they may want to avoid the jolt to the market. However I don't think this is quite playing out the way they had hoped if you go look at 10 year treasuries today, or even over the last few months. If the fed is trying to play the expectations game, I'm not convinced the market is taking them seriously yet (though the 10 year rate is still <2% so even the market thinks that at least in the mid/long term the fed is going to keep inflation controlled).
2) If I look back at the last PCE release, the inflation rate excluding energy and food was "only" 4.5% year over year. If I'm remembering back to some of my Econ classes, there is some benefit to removing Energy/Food from inflation measurements in order to get a more consistent feel for inflation's actual effect (since food and energy can be more cyclical and price sensitive in nature). That could be part of why there feels like a disconnect between where the Fed is at in terms of their response and both the headline grabbing 7% number and all of our collective lived experience of what it feels like to buy something right now (Things definitely feel more expensive!)
3) As far as why the Fed would forecast a declining rate of GDP growth while forecasting a decrease in the unemployment rate could that be partly due to participation factors? There are simply still something like 3.5 Million fewer employed people than there were prior to the pandemic/recession, and the labor force participation rate doesn't seem to be improving dramatically, so the Fed may see some of that reduction in unemployment rate as caused by people choosing to leave the work force. This may also play into the rate decrease question as I think Fed Chair Powell has shown at least to some extent that he thinks the natural rate of unemployment is lower than people may think, so the Fed may view us as farther from "full employment" than the general market might.
Overall I agree it definitely feels like the Fed should have done a bit more, or read the tea leaves a bit better to realize they were undershooting the market's expectations, but I think these may be some of the reasons they didn't.
Great insights, James! Great to hear from you and your thoughts. I think you're on the money in each of your points. And completely agree that the Fed, and all central banks, are tentative to change policy, especially when the economy is doing well (they are quick, however, to change policy when the economy is tanking, of course). Good thoughts, too, on the natural rate of unemployment. I anticipate writing about that topic next week.
Professor, loving your blog, it brings back some good memories of your advanced macro class! Some thoughts below but it's been a while since I've been in an econ class so there are definitely some cobwebs!
1) Firstly, I think the Fed has a tendency towards the conservative. I mean that to say the idea of a surprise/out of forecast adjustment of the federal funds rate while not unprecedented, is not typically in the style of the Fed. I think the Fed Chairs tend to want to avoid a moment of "Irrational Exuberance". So since they hadn't previously mentioned an early 2022 rate hike, they may want to avoid the jolt to the market. However I don't think this is quite playing out the way they had hoped if you go look at 10 year treasuries today, or even over the last few months. If the fed is trying to play the expectations game, I'm not convinced the market is taking them seriously yet (though the 10 year rate is still <2% so even the market thinks that at least in the mid/long term the fed is going to keep inflation controlled).
2) If I look back at the last PCE release, the inflation rate excluding energy and food was "only" 4.5% year over year. If I'm remembering back to some of my Econ classes, there is some benefit to removing Energy/Food from inflation measurements in order to get a more consistent feel for inflation's actual effect (since food and energy can be more cyclical and price sensitive in nature). That could be part of why there feels like a disconnect between where the Fed is at in terms of their response and both the headline grabbing 7% number and all of our collective lived experience of what it feels like to buy something right now (Things definitely feel more expensive!)
3) As far as why the Fed would forecast a declining rate of GDP growth while forecasting a decrease in the unemployment rate could that be partly due to participation factors? There are simply still something like 3.5 Million fewer employed people than there were prior to the pandemic/recession, and the labor force participation rate doesn't seem to be improving dramatically, so the Fed may see some of that reduction in unemployment rate as caused by people choosing to leave the work force. This may also play into the rate decrease question as I think Fed Chair Powell has shown at least to some extent that he thinks the natural rate of unemployment is lower than people may think, so the Fed may view us as farther from "full employment" than the general market might.
Overall I agree it definitely feels like the Fed should have done a bit more, or read the tea leaves a bit better to realize they were undershooting the market's expectations, but I think these may be some of the reasons they didn't.
Great insights, James! Great to hear from you and your thoughts. I think you're on the money in each of your points. And completely agree that the Fed, and all central banks, are tentative to change policy, especially when the economy is doing well (they are quick, however, to change policy when the economy is tanking, of course). Good thoughts, too, on the natural rate of unemployment. I anticipate writing about that topic next week.