Alan Blinder Bio Photo

Economic Outlook by Alan Blinder

December 2017
Alan S. Blinder

Vice Chairman and Co-Founder, Promontory Interfinancial Network
Professor of Economics and Public Affairs, Princeton University

The Federal Open Market Committee (FOMC) met last week and raised interest rates another 25 basis points, thereby surprising nobody. More interesting, it tacitly reaffirmed its intention—if things go as planned—to boost rates another three times (of 25 bps each) next year. Or at least that was the message conveyed by the latest “dot plot,” and Chair Yellen did nothing to disabuse Fed watchers of the notion.

There had been speculation that the Committee might turn more dovish by, e.g., projecting only two hikes in 2018 instead of three, and indeed Chicago’s Charles Evans joined Minneapolis’s Neel Kashkari in dissenting against last week’s rate hike. Two dissents out of nine (there are now three vacancies on the Fed’s Board of Governors) is a lot at the Fed. This is worth watching.

Truly wonkish Fed watchers (including yours truly) found three interesting “dogs that didn’t bark” in the FOMC’s statement and accompanying forecast.

First, despite the continued refusal of inflation to rise in the face of very low unemployment, the Fed did not reduce its estimate of the “natural rate” of unemployment, or NAIRU, which remains at 4.6%. So, with unemployment currently at 4.1% and forecasted to fall further, the FOMC continues to expect inflation to “stabilize around the Committee’s 2 percent objective over the medium term.” Yes, that’s the same incorrect forecast it’s been making for years. But the FOMC has not been alone in making this error.

Second, either because of bureaucratic inertia or because productivity has recently perked up, the FOMC maintained its 1.8% estimate of long-run trend growth. There are two ways to look at this, and both are true.

  • The Fed does not believe the Trump administration’s boastful claims that the tax cuts will boost economic growth.
  • Despite years of subpar productivity performance, the Fed continues to believe that productivity growth will bounce back. (And maybe that process has started; the last two quarters of productivity data look good.)

Third, the Fed maintained its important “forward guidance” about future monetary policy without changing a single word: “The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.”

Janet Yellen will be in the chair for only one more FOMC meeting on January 30-31. Her performance on the job will be viewed by history as a tremendous success. Congratulations to her. For that reason and others, I agree with the overwhelming consensus that her successor, Jerome (“Jay”) Powell will continue the Yellen policies until there is good reason to depart from them. No such reason is apparent now.

Happy holidays to all!