The Federal Open Market Committee today announced a 25 bp hike to 4.50%-4.75% in the Fed funds target.
In the context of the entire yield curve, Fed funds in this range seems appropriate. But the Fed has emphasized forward guidance to prevent what it itself has referred to as an unwarranted easing in financial conditions. According to the Fed’s own measure, then, a falling dollar and soaring stocks, amid resurgent commodity prices and continuing labor cost inflation, show this tactic to have produced unwanted results and therefore to have been a failure.
As I predicted Monday, the FOMC has doubled down on its folly.
The Fed therefore should re-examine its misplaced obsession with forward guidance. Deciding what it will do three or four meetings in advance is inherently inconsistent with being responsive to the data. Talk about it is not a binding commitment, and the markets know it. Mere talk has failed to restrain financial conditions and a rational response to this reality would be a change in tactics. If more aggressive rate hikes aren’t called for, stepping up QT has to be on the table.
Treasury securities are a legitimate and neutral monetary asset. Mortgage securities however play favorites with economic sectors, are an incursion into fiscal policy, and so are not. Especially in light of existing concerns, justified or not, about Treasury market liquidity, it’s appropriate to increase runoff of MBS. Should financial conditions tighten excessively, the Fed can always slow the runoff of Treasury securities or even reintroduce purchases. Being open to fine tuning policy in response to evolving data would produce better results with less financial and economic volatility.
What stands in the way? Only the Fed’s rigid doctrine of “transparency”, a mere euphemism for predictability, introduced by former Fed head Alan Greenspan. The ensuing boom-and-bust, inflation-and-deflation, wealth-gap-expanding and debt-addled economy shows this dogma to have failed.