For immediate release
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I based my dissent at the recent meeting of the Federal Open Market Committee on both communications and policy differences.
Much attention has focused on the changes in the statement indicating that "the Committee judges that it can be patient in beginning to normalize the stance of monetary policy." Yet, in the very next sentence, the statement noted that the new language is consistent with prior forward guidance that stressed a "considerable time" following the end of its asset purchase program in October. This suggests that there is no change in the outlook for policy. Whether saying we will be patient or we will wait a considerable time, the language continues to stress the passage of time as a key determinant of policy. Such date-based forward guidance is problematic since policy should be determined by the data.
While the communication indicated that the forward guidance had not changed, the U.S. economy continues to improve more rapidly than expected. Real GDP growth has been 3.5 percent or higher in four of the last five quarters, and, in 2014, we are likely to see the largest calendar year increase in nonfarm employment since 1999.
While inflation is running somewhat below the Fed's 2 percent target, I and many others anticipate that inflation will gradually move back toward the target as the transitory effects of lower oil prices fade. Although risks and challenges remain, these are not the characteristics of an economy in need of extraordinary monetary accommodation.
Given this strength, I could not support the policy statement at the December 2014 meeting. While the expansion of the balance sheet ended in October, the forward guidance regarding the likely path of the federal funds rate has remained essentially unchanged since last March. By stating that the new language is consistent with prior guidance, the statement makes no change in forward guidance despite the significant economic progress. I do not view this as appropriately data-dependent policy.
The time-dependent language also risks limiting the Committee's flexibility to act in a more timely manner in response to an improving economy. I am afraid the Committee is not leaving itself the flexibility to respond to the data if we continue to see an improving economy.
Many metrics for assessing the appropriate stance of monetary policy suggest that the federal funds rate should be lifting off from zero soon and should be significantly above zero in June 2015. The Committee's forward guidance strongly suggests that such a policy path is highly unlikely. I believe that waiting too long to initiate a gradual increase in rates could result in the need for more aggressive policy in the future, which could lead to unnecessary volatility and instability.
The failure to adjust forward guidance to reflect the improvement in the outlook for the economy and its continued reliance on the passage of time as a governing factor in the decision to increase rates were the underlying factors warranting my dissent.