The Federal Reserve always thinks we live in unusually uncertain times
One possible explanation for institutional inertia
With US monetary policymakers about to deliver an interest rate decision and updated economic forecasts, only one thing’s for certain: uncertainty.
Each quarter, every Fed official submits their own summary of economic projections, which includes their outlooks for how GDP growth as well as the inflation and unemployment rates will evolve over time.
Then monetary policymakers are asked, “Please indicate your judgment of the uncertainty attached to your projections relative to the levels of uncertainty over the past 20 years” — whether the outlook for that variable is more uncertain, less uncertain, or broadly similar versus the past two decades.
Only once since mid-2011 have more officials found the outlook for any one of these metrics to be less uncertain than usual — core PCE in September 2016.
But for GDP growth…
…and the unemployment rate, things are always allegedly a little more up in the air than normal.
Some of the key global economic milestones that have been in the rolling 20-year rear view mirror as the Fed’s been assessing how uncertain the world is:
The manifold emerging markets crises during the mid and late 1990s, Long-Term Capital Management’s implosion, the dot-com bubble, September 11th and ensuing wars, China’s accession to the WTO, the US housing bubble, global financial crisis, European debt crises, China’s devaluation of the yuan, Brexit... the list goes on.
Something’s always happening. But just as we are not all above-average drivers, not every period can have above-average uncertainty. (Perhaps monetary policymakers’ assessments are just convenient cover to avoid appearing overly confident, lest a tail risk tear their forecasts asunder.)
Otherwise, it’s a bit disconcerting that Fed officials consistently have such a skewed view about how uncertain economic conditions are. Especially because it seems like heightened uncertainty is not being used as an excuse to be more nimble in setting monetary policy.
On the one hand, if you’re always very uncertain, it stands to reason that you should be more adaptive and willing to change your mind in response to new information — to take one step forward and two steps back to navigate a malleable world.
But monetary policymakers don’t operate by that code. A number of Fed officials have said (paraphrasing) that the worst thing they can do is take an action then reverse it — in this case, cut rates and then have to hike rates soon thereafter because they misjudged the persistence of inflationary pressures. In their eyes, this would be very detrimental to the credibility of the Federal Reserve as an institution. (Mary Daly, Raphael Bostic, and Christopher Waller immediately jump to mind as having made this argument, though I’m pretty sure there are others.)
The Federal Reserve is (rightly and wrongly) often accused of always behind behind the curve — too late to ease or raise rates. And one reason there’s a kernel of truth within these critiques is this inherent bias towards inaction coupled with what’s perceived to be never-ending regime of elevated uncertainty.
