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Economic Outlook by Alan Blinder

September 2018
Alan S. Blinder

Vice Chairman and Cofounder, Promontory Interfinancial Network
Professor of Economics and Public Affairs, Princeton University

Sometimes the most exciting thing about a statement from the Federal Open Market Committee (FOMC) is blank space—something they don’t say. That was the case on Wednesday.

Everyone on earth who pays attention to U.S. monetary policy knew that the FOMC would raise its target range for the federal funds rate by 25 basis points—from 2 to 2¼ percent. The modest rate hike came right on schedule.

The “debate” over what the Fed would do, which engaged only true aficionados, was over whether it would drop or possibly modify a phrase it has been using to describe its monetary policy decisions ever since it started raising rates in December 2015: “the stance of monetary policy remains accommodative.” Those words are now gone.

Not that I want to turn this molehill into a mountain, but I read this change in language as a bit dovish. Think about it. With the funds rate now just a hair below the inflation rate, the real federal funds rate is essentially zero. It is hard to find a serious person who believes the neutral real funds rate—often called r*—is that low today (the depressed past is another matter). While there may be no consensus on r* today, the central tendency—if I may borrow that phrase—is probably more like 1 percent than zero. If so, the Fed’s current policy rate is still 75-100 basis points below neutral. In the usual jargon, the Fed would call that accommodative.

So does dropping the accommodative phrase from Wednesday’s statement mean that some FOMC members, maybe even the majoritymaybe even Chairman Powell, think that 2¼ percent might be neutral? That seems implausible to me. But it’s a tantalizing possibility..