The members of the Shadow FOMC would like to apologize for our extended absence; we were held under house arrest by the agents of Stanley Fisher.
Release Date: January 28, 2015
For immediate release
Information received since the Shadow Federal Open Market Committee met in September suggests that economic activity has been expanding at a pretty reasonable pace. Labor market conditions have improved further, with strong job gains and a lower unemployment rate, and the employment to population ratio has improved, albeit off a low base. The end of extended unemployment insurance seems to have significantly boosted employment; we suggest that the federal government would benefit from privatizing and making optional the remaining unemployment insurance. On balance, a range of labor market indicators suggests that underutilization of labor resources continues to diminish. Household spending is rising moderately; recent declines in energy prices have boosted household purchasing power, though we worry they may have been caused by a fall in global aggregate demand. Business fixed investment is advancing, though recent profitability among industrial companies has been disappointingly weak. The recovery in the housing sector remains slow. House prices remain well below the net present value of avoided future rent payments, probably due to regulation hindering the supply of mortgage financing, though recent data there has been encouraging. Inflation has declined further below the Light Committee’s longer-run objective, as predicted by the Shadow FOMC, and they should not blame energy: while energy prices have fallen dramatically, inflation ex. shelter has been running below target for years, due to the unconsciously tight monetary policy the light committee has followed. Market-based measures of inflation expectations have declined substantially in recent months, and are now indicating that the Light Committee will miss its target for the next 10 years. We are highly disappointed that the Light Committee chose the Orwellian step of renaming them ‘inflation compensation’ instead of ‘inflation expectations’, ignoring the enormous predictive power the market gives us. Yes, survey-based measures of longer-term inflation expectations have remained stable, but who cares? These surveys have been awful forecasters in the past.
The recent rise in the value of the dollar against a trade-weighted basket of other currencies (or, indeed, virtually any other currency other than the Swiss Franc) shows the high level of global demand for the USD. Since this is a product that can be created at basically zero cost, the Shadow Committee would accommodate this demand and print some more USD.
Inconsistent with its statutory mandate, the Light FOMC is failing to foster maximum employment and price stability. Unemployment is low, so the Light Committee’s actions could be justified if it was targeting that… but it is ostensibly targeting employment instead. Employment is still pretty awful; both employment and inflation suggest the need for loser monetary policy. The Shadow Committee expects that, even with a lack of appropriate policy accommodation, economic activity will expand at a moderate pace, as free markets have a tendency to grow. As the economy is kind of like a martingale; risks to the outlook for economic activity and the labor market will always be nearly balanced. Inflation is anticipated to decline further in the near term, and though the Committee expects inflation to rise gradually as energy is a one-time shock and the oil forward curve is very steep, we have no idea why the Lighties expect it to reach the target at any point in the foreseeable future. The Shadow Committee continues to monitor inflation developments closely; evidently more closely than the Light FOMC!
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. However, we wish to remind people that this by no means represents a lower bound on interest rates; in the event the economy deteriorates further, we would be willing to lower interest rates further, or to deploy an array of other policy tools. In determining how long to maintain this target range, the Committee will assess progress–both realized and expected–toward its objective of a certain NPGDP level, which increases by 6% a year. This assessment will take into account a wide range of information, including market indicators, what people say on facebook, and the behaviour of our cats.
We regret that the Light Committee completed the taper of its bond holdings, though we believe that resuming the program now could be destabilizing and reduce the credibility of the Bed. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and NPGDP of 6 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Shadow Committee views as more consistent with the fundamental level of human time preference, which implies long-run real rates of around 3-4%. Over the longer term, the Shadow remains concerned about value drift resulting in a future devoid of moral significance.
Voting for the SFOMC monetary policy action were: everyone, because I rule with an Iron Fist.