On December 18th, the Fed officials voted to reduce the fund’s rate by 25 basis points, tightened their forward guidance on future cuts, and issued a new Summary of Economic Projections (SEP) with more inflation and fewer cuts expected.
I believe it is time to retire the SEP. The fomc should publish a decision and do their best to summarize their reasoning. A brief summary of the varying views of the committee, along with a brief outlook of the next 6-9 months should suffice. Time to retire long discussions about R* and long run neutral rates. As Keynes said, "In the long run we are all dead".
I don't agree at all with the lack of rate cuts and especially due to the fact that Trump will likely implement tariffs and firms will use the cover of those tariffs to further hike their prices. Keeping rates elevated somewhat won't help at all. Feel free to disagree if you want to.
That's a great explanation of this problem. I think it's also a problem for any "consensus" forecast these days, because the assumptions about fiscal policy and about the potential impact of that policy vary so widely.
I would like to add one thing: part of the problem is how market participants see the Fed. They tend to read entirely too much into relatively minor changes---case in point, the tendency to parse out the Fed statement after each meeting. I think that's part of what makes the SEP so problematic.
The "hawkish" cut is clearly a political message and warning, intentional or otherwise. Any protestations to the contrary merely reinforces the underlying threat.
I do not see a problem with different people having diffing forecasts of the effects of policy acting on a changing future environment. The problem is in forecasting future values of policy instruments. That can have the unintended consequence of affecting future decisions.
How would shoehorning participants views into a single scenario be more helpful? You may get a different set of numbers but it still won’t tell us what participants really think. The status quo does tell us what they think right now. That has value. We get value from these projections by recognising they are not promises. What we learned is that participants are now way less sure that more easing will be required in 2025. Some are further advanced in their thinking than others. All that makes sense.
They have to "shoehorn" them to get a policy decision. What I want to understand are those decisions. The SEP is fine as an input (a gauge of individual thinking) but should not stand in for the consensus. Also, Dec is a mess because of the uncoordinated range of fiscal assumptions.
Actually many of us just want to know how participants might adjust their views in future meetings and what data points are of most importance. The SEP helps with this as members have the freedom to make their own assessments on what’s important - such as fiscal. Indeed it’s probably reasonable to say that the SEP might be a lower bound for the Fed funds rate in 2025 if Trump does anything like he says he will - as presumably those who didn’t factor the changed fiscal environment into their views will do so. I guess that’s why the balance of risks assessments are as they are. I don’t think we get much out of a model where the chair or staff tell members what the assume/think and make their forecasts on the back of that. If you want that then ask them to publish the staff forecast in real time.
I suppose we need to thank you for a clear explanation of the muddy mess the "Fed" has created.
I believe it is time to retire the SEP. The fomc should publish a decision and do their best to summarize their reasoning. A brief summary of the varying views of the committee, along with a brief outlook of the next 6-9 months should suffice. Time to retire long discussions about R* and long run neutral rates. As Keynes said, "In the long run we are all dead".
I don't agree at all with the lack of rate cuts and especially due to the fact that Trump will likely implement tariffs and firms will use the cover of those tariffs to further hike their prices. Keeping rates elevated somewhat won't help at all. Feel free to disagree if you want to.
That's a great explanation of this problem. I think it's also a problem for any "consensus" forecast these days, because the assumptions about fiscal policy and about the potential impact of that policy vary so widely.
I would like to add one thing: part of the problem is how market participants see the Fed. They tend to read entirely too much into relatively minor changes---case in point, the tendency to parse out the Fed statement after each meeting. I think that's part of what makes the SEP so problematic.
Excellent column. Very informative.
The "hawkish" cut is clearly a political message and warning, intentional or otherwise. Any protestations to the contrary merely reinforces the underlying threat.
Blessings to you and yours in this new year.
I do not see a problem with different people having diffing forecasts of the effects of policy acting on a changing future environment. The problem is in forecasting future values of policy instruments. That can have the unintended consequence of affecting future decisions.
Dr Sahm best wishes for new year and for keeping up the good work. Also wish you good health and full recovery.
How would shoehorning participants views into a single scenario be more helpful? You may get a different set of numbers but it still won’t tell us what participants really think. The status quo does tell us what they think right now. That has value. We get value from these projections by recognising they are not promises. What we learned is that participants are now way less sure that more easing will be required in 2025. Some are further advanced in their thinking than others. All that makes sense.
They have to "shoehorn" them to get a policy decision. What I want to understand are those decisions. The SEP is fine as an input (a gauge of individual thinking) but should not stand in for the consensus. Also, Dec is a mess because of the uncoordinated range of fiscal assumptions.
Actually many of us just want to know how participants might adjust their views in future meetings and what data points are of most importance. The SEP helps with this as members have the freedom to make their own assessments on what’s important - such as fiscal. Indeed it’s probably reasonable to say that the SEP might be a lower bound for the Fed funds rate in 2025 if Trump does anything like he says he will - as presumably those who didn’t factor the changed fiscal environment into their views will do so. I guess that’s why the balance of risks assessments are as they are. I don’t think we get much out of a model where the chair or staff tell members what the assume/think and make their forecasts on the back of that. If you want that then ask them to publish the staff forecast in real time.