The Fed is Awakening from Its Slumber

You may have missed it, but this afternoon a slumbering giant with a formidable arsenal of economic weapons began to awake. That giant is the Fed and its formidable arsenal is its ability to further expand its balance sheet and shape nominal expectations. Though the Fed did not fully awake today, it showed signs of awareness that have been absent in the past few months. Specifically, this excerpt from the FOMC press release reveals the Fed is becoming more concerned about the low levels of inflation:

Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate.

The Fed is finally getting concerned that inflation–a symptom of aggregate spending–is not where it should be. As Colin Barr notes, this is the Fed’s first explicit acknowledgment of this worrying development and it implies the Fed is one step closer to a further loosening of monetary policy. Ryan Avent agrees on this point.

So the slumbering giant is awakening. However, there seems to be quite a bit more awakening to do because the excerpt above claims that “long-term inflation expectations are stable.” Take a real close look at my previous post. Using different measures, this post shows that long-term inflation expectations are not stable. This part of the statement leaves me puzzled.

Overall, though, this is an improvement over the outcome from the last FOMC meeting. Maybe Santa Claus Bernanke will grant me my Christmas wish after all.

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