Fed on Inflation: ‘Stabilize' … ‘Sustained' … ‘Symmetric'
March 16, 2017

Rich Clarida, PIMCO Global Strategic Advisor, assesses yesterday's interest rate rise executed by the US Federal Reserve Bank.

Although there was no drama in the Federal Reserve's decision to remove 25 basis points of accommodation (also known as a policy rate hike), there was a surprising – and laudable – amount of substance in the changes to the accompanying Fed statement. This is a Fed that likes to say it's data-dependent, but as we've written, data dependence by itself is not a monetary policy. The statement goes some way in laying out what the monetary policy goal is and – via the "dot plot" – what the path to a neutral policy rate may look like.

First and foremost, the normalization path implied by the median ‎dot is unchanged from the previous projection in December 2016: three hikes (including today) in the fed funds rate in 2017 and three hikes in 2018. What's also important is that in today's statement the Fed added new language that this lift-off path is expected to be consistent with inflation that will "stabilize" and be "sustained" and "symmetric" around the Fed's 2 percent target. (Recall that the Fed's preferred measure of US inflation is Personal Consumption Expenditures, or PCE. The more widely quoted Consumer Price Index was 2.2 percent as of the end of February 2017 for annualized core inflation.)

So far, Fed statements and comments from key officials had been preoccupied with risk management. With this interest rate hike and confirmation of a gradual but regular pace of hikes, the Fed is conveying a level of confidence in the economy as well as reinforcing that the 2 percent inflation target is symmetric – that is, inflation overshoots are neither more nor less tolerable than undershoots.

Of course, little is known about the ultimate shift in US fiscal policy that is likely to take place under the Trump administration, but the Fed is saying today that even before the potential fiscal boost is factored in, the US economy no longer requires emergency policy rates.





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Rich Clarida, PIMCO Global Strategic Advisor, assesses yesterday's interest rate rise executed by the US Federal Reserve Bank.

Although there was no drama in the Federal Reserve's decision to remove 25 basis points of accommodation (also known as a policy rate hike), there was a surprising – and laudable – amount of substance in the changes to the accompanying Fed statement. This is a Fed that likes to say it's data-dependent, but as we've written, data dependence by itself is not a monetary policy. The statement goes some way in laying out what the monetary policy goal is and – via the "dot plot" – what the path to a neutral policy rate may look like.

First and foremost, the normalization path implied by the median ‎dot is unchanged from the previous projection in December 2016: three hikes (including today) in the fed funds rate in 2017 and three hikes in 2018. What's also important is that in today's statement the Fed added new language that this lift-off path is expected to be consistent with inflation that will "stabilize" and be "sustained" and "symmetric" around the Fed's 2 percent target. (Recall that the Fed's preferred measure of US inflation is Personal Consumption Expenditures, or PCE. The more widely quoted Consumer Price Index was 2.2 percent as of the end of February 2017 for annualized core inflation.)

So far, Fed statements and comments from key officials had been preoccupied with risk management. With this interest rate hike and confirmation of a gradual but regular pace of hikes, the Fed is conveying a level of confidence in the economy as well as reinforcing that the 2 percent inflation target is symmetric – that is, inflation overshoots are neither more nor less tolerable than undershoots.

Of course, little is known about the ultimate shift in US fiscal policy that is likely to take place under the Trump administration, but the Fed is saying today that even before the potential fiscal boost is factored in, the US economy no longer requires emergency policy rates.



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