Goldman’s top economist Jan Hatzius is out with a new call: It is now the baseline expectation at the bank that at the March 2014 Fed meeting, the FOMC will lower the level at which it would start considering rate hikes.
Currently the Fed is operating under something called Evan’s Rule, which says that that the Fed will not think about rate hikes until either unemployment falls to 6.5% or inflation rises to 2.5%.
Hatzius believes that the Fed will lower the unemployment threshold from 6.5% to 6.0%. This constitutes easing in that it implies low rates for a longer time.
Hatzius has been talking about this possibility for a while, but for the first time he sees this as his “base case.”
Because two key economists at the Fed have just published research which supports this move.
The most senior Fed staff economists for monetary policy analysis and domestic macroeconomics, William English and David Wilcox, have published separate studies that imply a strong case for a reduction in the 6.5% unemployment threshold for the first funds rate hike. We have proposed such a move for some time, but have been unsure whether it would in fact happen. And while the uncertainty around near-term Fed policy remains very considerable, our baseline view is now that the FOMC will reduce its 6.5% threshold to 6% at the March 2014 FOMC meeting, alongside the first tapering of QE. A move as early as the December 2013 meeting is possible, and if so, this might also increase the probability of an earlier tapering of QE.
It is hard to overstate the importance of two new Fed staff studies that will be presented at the IMF’s annual research conference on November 7-8. The lead author for the first study is William English, who is the director of the Monetary Affairs division and the Secretary and Economist of the FOMC. The lead author for the second study is David Wilcox, who is the director of the Research and Statistics division and the Economist of the FOMC. The fact that the two most senior Board staffers in the areas of monetary policy analysis and domestic macroeconomics have simultaneously published detailed research papers on central issues of the economic and monetary policy outlook is highly unusual and noteworthy in its own right. But the content and implications of these papers are even more striking.
The upshot of both is that the US economy remains operating well below potential, and the benefit of much more easing heavily outweighs the risks.
Further evidence that a drop in the unemployment threshold will be the Fed’s preferred method of easing is that in the William English paper, there’s little discussion of further QE as a useful tool for the Fed to hit goals.
There’s still a debate, as Hatzius notes, about whether the Fed will do anything in December of March (Hatzius obviously leans March). But this is the Fed’s next move.
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