Convoluted Statement Becomes More So
As always, Kremlinologists can check the WSJ’s trusty FOMC statement tracker to see what has actually changed. Ever since the first ‘taper’ announcement in December, the statement has become a lot more convoluted. As far as we can tell, the reason for this is that there is a plan underway to slowly replace actual money printing with something called ‘forward guidance’. This consists of promises about the future conduct of policy that are worth precisely nothing, since the Fed can definitely not see the future. Not only are there no trained fortune tellers in its employ, but what insights into the future state of the economy it tends to offer have a well-worn record of being worse than a coin flip, especially near economic turning points.
This is not necessarily a complaint, mind. One cannot fault people for their inability to correctly anticipate the future, least of all bureaucrats. If they were able to make correct forecasts, they wouldn’t be bureaucrats, but businessmen or speculators. In that sense, ‘forward guidance’ is a waste of ink. In fact, the statement itself indicates as much:
“In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including  measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.
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 inflation of 2 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 Committee views as normal in the longer run.â€
Incidentally, the above excerpt used to include the 6.5% unemployment threshold, which has now been removed – in other words, from ‘fixed targets’ it’s now back to ‘we’ll make it up as we go along’. Of course neither one nor the other is going to improve the insight of the central planners regarding the ‘correct’ height of interest rates.
