Just as subtle changes like rearranging chairs or removing a portrait gave birth to Kremlinology, the art of determining Soviet policy through the intensive search for clues, so too do market observers comb through the nuances of Federal Reserve lingo in hopes of ascertaining the future of monetary policy.
That may be especially important after Chairwoman Janet Yellen’s Capitol Hill testimony earlier this week, which generated contrasting headlines, with some reporters hearing a hawkish stance and others a dovish one.
Possible clues into Fed thinking can be found at the 2015 U.S. Monetary Policy Forum, held Friday in New York, where William Dudley, presedent of the Federal Reserve Bank of New York, gave a highly technical talk with decidedly dovish tendencies.
While Dudley was explicit in stating that the views he was expressing were his own, the New York Fed president also serves as vice chairman of the policy-setting Federal Open Market Committee, a position of obvious influence.
The need for professional “Fedology” was apparent in a talk focusing on the “equilibrium real federal funds rate,” and liberally sprinkled with terms such as “Taylor-type rule,” “non-stationary” and “inertial policy rule.”
But the upshot, that Dudley is an advocate for caution with respect to raising rates within internal Fed policy meetings, seems unmistakable.
The New York Fed president’s remarks were an extended commentary on a technical paper about what federal funds rate is implied by financial market conditions.
Dudley said he was in broad agreement with the paper’s five conclusions — that several factors such as GDP growth, risk aversion, bubbles and busts and regulation influence short-term rates; that there is insufficient evidence to assume the persistence of zero-bound rates; that short-term rates won’t necessarily revert to some long-run average; that the integration of global markets will force short-term rates here and abroad to move in tandem; and that short-term rates should be allowed to rise only slowly amidst profound uncertainty.
Dudley explains how he arrives at his cautious policy approach by focusing on three questions. The first involves the technical question of how real potential GDP growth affects real short-term interest rates. The FOMC member regards the relationship as “very loose,” and suggests breaking down GDP growth to smaller constituents such as labor force growth and productivity growth.
A rapidly growing work force — as the U.S. experienced in the 1970s as baby boomers began their careers and women’s labor force participation surged — implies rising short-term rates. So too does rising productivity, as people bid up capital, as the late ’90s tech boom demonstrated.
But today’s environment implies quite the opposite, as Dudley explained in a key comment: