Thoughts From The Divide – The Fed’s Unified Messaging

“Patient rather than preemptive”

With the conclusion of the FOMC meeting last week, the blackout period muzzle has been removed from Fed officials, and Fed speakers are back on the wires in droves. While the different perspectives evidenced by the spread in the dot plot are clear, the speakers are sticking to a unified message.

As this article from Reuters details, Dallas Fed’s Kaplan has “a forecast for removing accommodation that’s more aggressive than the median” (perhaps helped by Texas being one of the first states to completely reopen). But despite being one of the rogue dots indicating liftoff, Kaplan was not dogmatic, but pragmatic, stating he would need to see “substantial further progress” before reining in Fed support. “It’s an outcome-based test”, he said.

Richmond Fed’s Barkin was less forthright about his outlook in an interview with Reuters. Though he expected strong growth, helped in part by excess savings, and some attendant inflation “for a while”, he declined to provide details on “how he expects that strong outlook to influence the Fed’s… policies”. Instead, he echoed Kaplan, reiterating, “I think what matters is the outcomes we actually get”. Barkin went further, asserting, “When we hit the guidance I want to normalize as much as the next guy. But I want to hit the guidance”.

Finally, from this past week was a speech from Fed Governor Lael Branard, “Remaining Patient as the Outlook Brightens” (handy when the title lets you know where the speaker is heading…). Speaking at the NABE’s virtual policy conference, she discussed a variety of economic data, from the potential dynamics of pent-up demand, to “distributive questions” and labor market undercurrents. But through it all were references to “taking a patient approach based on outcomes rather than a preemptive approach based on outlook”. Brainard also preempted counter arguments by saying that the “preemptive approach” has strong negative consequences, including “an unwarranted loss of opportunity for many of the most economically vulnerable Americans and entrenching inflation persistently below its 2 percent target”.

Roger, understood, the Fed is going to focus on outcomes. But however much Branard and company may believe the “FOMC has communicated its reaction function under the new framework and provided powerful forward guidance that is conditioned on employment and inflation outcomes”, there’s still uncertainty. As Mike Dolan writes in a recent article, financial markets have not “played this particular game before”, and futures pricing has its own view while emerging markets and Europe are both facing the problem of “second-guessing the gradual evolution in Fed thinking”.

What’s more, while the emergence of a data-dependent lean at the Fed may seem roughly “business as usual”, the shift from acting based on outcomes rather than outlook could be part of a larger secular turn, or so argues Anusar Farooqui.