Ellen Meade spent 25 years at the Federal Reserve in key roles at the Board of Governors in a period which included of one of the most controversial episodes in modern monetary policy history: the pandemic-driven inflation surge which is more than ever in the policy spotlight now as the Fed gets its five-year Policy Framework Review underway.
She joins me from her perch at Duke University where she is a research economist teaching the classes nearest and dearest to a central banker’s heart, and if not his or her policy-making brain: inflation, monetary policy, central banks and policy, and macroeconomics policy. The Federal Reserve has just released the minutes of its January policy meeting where it held its key policy rate steady as expected and and did so with what she sees as a hawkish tilt. And which put the key issues of the 2025 framework, now underway, clearly on the FOMC’s table.
So dive in an hear what Ellen has to say. With the Fed now expected to keep the key policy rate on hold for the first half of 2025 at least, everything it does and says to nail down an expected revised Policy Framework and release it later this year will be closely monitored in financial markets and who knows, maybe by the White House as well. And as someone who played a key role in the 2020 framework review and in the Fed’s 2019 and 2020 Fed Listens initiative in 2019 and 2020 that led up to it, Ellen’s view is and will be exceptionally insightful.
Fed willing to wait 00:01:57:01 - 00:00:21:06
…I took the opportunity to check Bloomberg <and> The Wall Street Journal before we started this discussion. They also picked up with it on this sentence. “Many participants noted the committee could hold the policy rate at a restrictive level if the economy rate remained strong and inflation remained elevated, while several remarked it could be eased if if needed.”
Fed’s language on “many” vs “several” shows it has a tightening not a rate cut bias 00:02:21:07 - 00:03:05:02
So that's a big gap between many and several. So that seems to me that's the tightening bias. We were kind of expecting, but that is how it was expected expressed. And then later on in the minutes, another sort of interesting thing for the people who are into the balance sheet issues is that they seemed to have had a conversation around the balance sheet and what they might want to do after their shoot program comes to an end, which many people think will be maybe late spring, June timetable, when it's all kind of related to the <timing of the>debt ceiling,
Description of clustering density is critical to understanding Minutes’ message 00:04:04:08 - 00:05:26:14
Kathleen asks: But many people who are interested, you know, particularly after all we've gone through with the Fed and inflation and everything else, the importance of these words that each were various several, many, they all mean something
Ellen …Well, you know, when you're writing the minutes, which I used to do, you have the transcript with you on the one hand, and then you have the list of words and the numbers that go with them. And you literally do look for the sentiment that you're writing into the sentence and how many times by different people it was expressed… And so if you get a sentence that has many giving one argument and several giving the other side of the argument, you know, that it's kind of heavily tilted toward the many.
Rhetoric and ‘consensus’ signal uncertainty 00:05:26:16 - 00:05:55:15
So that's the sort of hawkish leaning, you know, yes, there in this time of uncertainty, great uncertainty. And they need to sort of pause and wait and assess, watch the incoming data, watch the new policies that are being announced and get a handle on those. But I think this tells us that they're really leaning, you know, the pricing out of cuts for this year isn't appropriate given that language.
Ain’t misbehavin’…or is it? 00:07:08:11 - 00:08:04:24
I think there are people, given what they've been through, the experience of 21, 22, 23 and now even last year, where they thought they were headed into a year where they might cut relatively early in the year and inflation misbehaved. So they're pretty cautious right now. They want to make sure that they're really going to get back to 2%... So they're pretty cautious right now. They want to make sure that they're really going to get back to 2%.
Dissenting is now less common on the FOMC 00:08:04:24 - 00:08:33:05
…dissents have <Not> been high since the early 1980s, but there used to be a behavior more toward dissenting votes that's effectively gone away the last 25 years. I mean, with some exceptions, obviously.
Predicting voting behavior is complicated 00:08:33:06 - 00:08:54:20
…actually have the transcript in front of you five years later to assess, you have these minutes with these words in them and you have all the speeches and you have to listen to people and sort of see where they are, but it doesn't necessarily match up with the way they're going to vote.
View to attaining 2% shifted 00:10:44:18 - 00:11:12:20
And it looks like they made some changes between the September meeting and maybe the November meeting together with the inflation data that were coming in, because that's them. By November, they had pushed out inflation getting back to 2% to 2027. Remember, that was what I think people noticed and it looks like from what they said in December…now pretty similar trajectory for inflation.
Staff forecast always saw inflation going to 2% 00:12:37:22 - 00:13:19:01
So I actually think they will be pretty dedicated <to the 2% target>. You know, on the credibility point. No, no. Keep in mind, this forecast is a step forecast. It's not the S&P or the policymakers write down. It's a staff forecast, although many people say, boy, that forecast has a lot of weight and so the staff misses a lot. But if you think about from about 2011, 2012 up until inflation picked up in 2021, the staff had a projection that always had inflation getting back to 2%, and yet inflation under ran 2% for many years.
Undershooting/overshooting 00:13:19:03 - 00:13:42:11
And that's part of the underlying rationale for changing the framework in 2020. So I think I think the Fed did think around that experience that you we're constantly thinking inflation is going to get back to 2% and we never hit it. And in that case, it was because it was below. But you're raising the point of it being <high by> about <one>percent...
Inflation targeting took shape 00:15:16:14 - 00:15:50:06So in the 2012 framework, it was a broad statement of principles about how the FOMC would achieve or saw its dual mandate goals and how it would achieve them. It was about a year's worth of work, you know, among first amongst some of the president and then Chair Bernanke. He designated this subcommittee on communications that's run by the vice chair.
Fed tries to set a clear statement of tis goals and priorities to get there 00:16:40:22 - 00:17:15:02
<The original framework agreement> was a very high-level statement of principles. I think what happened in 2020 was because they wanted to address this specific issue of undershooting the inflation goal and which was all coming from the lower neutral interest rate, the time at the zero lower bound, and those risks to downside risks to achieving the goals that and that had been with them for some time.
Then amended in 2020 00:17:38:07 - 00:18:08:05
So, you know, you go from an initial thing that's almost like this broad statement, this constitutional statement of principle. And then in 2020 you get something that's quite different, that's very specific, and that's going to be amended. Right? So I think that's a kind of interesting thing. And it does I'll say one thing about the minutes today. They did a retrospective that's very common to do that at the beginning of any FOMC discussion of a topic.
Fed sets aim for 2% with confusing language 00:20:04:05 - 00:21:18:06
So was the same as the 2012 statement. But then when it went on to say, Look, we really need longer term inflation expectations to be anchored at 2% and the 2020 framework really emphasized the role of the anchoring of inflation expectations at 2%. So it says we need to do that. In order to do that, we have to make sure we hit the 2%, which they hadn't been doing right. And so in order to anchor them at two, the committee seeks to achieve inflation that averages to over time, meaning if you've come through a long period and they say following periods when inflation has been running persistently below as it had been between 2012, 2020, appropriate policy would likely aim to achieve inflation moderately above 2% for some time. So it's not completely clear what they're saying because they use the word average. They use the word moderate, they use the word for the words for some time. You know, there's a lot of room for interpretation there. But it does lead you to understand that, yes, they're really going to make extra efforts, Right, to try to get inflation up to 2%.
Did the meeting interpretative language trump the framework statement? 00:21:18:12 - 00:22:53:19
And then they followed that statement, the framework statement in August with the FOMC statement after the September meeting, which reiterated some of those words. But then it said when they set the target range for the federal funds rate was going to remain unchanged at zero to a quarter percent because we're in the middle of COVID, right? So we were at the zero lower bound that the committee expected it would be appropriate to maintain that target range until labor market conditions have reached levels consistent with maximum employment and inflation has risen too, and is on track to moderately exceed two for some time. Those are very strong words, right. And it means that you need there's the word and in there. So you need both of those conditions to be satisfied in addition to, you know, not only is inflation at two, but it's got a moderately exceed two for some time. Well, what do you end up with in the pandemic? You end up with inflation picking up, getting to two, then exceeding two for some time before the labor market is really back to maximum employment. And the problem is that condition was laid out in the FOMC statement. It wasn't laid out in the framework. Well, the framework deals with the goals separately. It says, here's our inflation goal and here's how we're interpreting it. Here's our maximum employment goal and here's here's how we're interpreting it. And, you know, will will way the two goals if they come into conflict.
Does role of fiscal policy in boosting inflation enter into Framework Review?00:31:34:14 - 00:32:00:15
Was it fiscal policy? Did they misjudge? You know, I think that comes into the whole discussion and debate around demand shocks versus supply shocks. My reading of Chair Powell speech is they mostly still think that the episode was generated by supply shocks and not demand shocks. And the demand shocks would be those that arise from fiscal policy and other sorts of stimulus measures during.
But fiscal policy really did matter and may have been misjudged 00:32:00:15 - 00:32:52:05
But, you know, the jury is still out on that. There are quite a lot of papers coming into that forum. And I would hope, you know, I guess my personal view is that fiscal policy probably it was a very active fiscal policy, unlike after the GFC, maybe monetary policy didn't need to be as active given how active fiscal policy was. And I do think that there, you know, you would be wrong to ignore the role that fiscal policy played. Well, let me thank you so very much. You have done a beautiful job of getting us positioned to know what happened, how the previous framework, how it worked, what the problems were, what the questions are now, what needs to be on the table.
Ellen E Meade CV
Ellen Meade joined the Economics Department at Duke as a Research Professor in July 2022. She teaches classes on inflation, monetary policy, central banks, and macroeconomic policy. In addition, she promotes policy-related internships and jobs in government, think tanks, and the private sector and endeavors to attract students to employment in the non-financial sector.
Previously, she spent 25 years at the Federal Reserve Board and 12 years in academia. Before leaving the Fed, she was a Special Adviser to the Fed Board of Governors and Vice Chair Richard Clarida as well as Senior Adviser in the Division of Monetary Affairs working on monetary policy and communications. She played a key role in the Federal Reserve’s new framework for monetary policy and the Fed Listens initiative in 2019 and 2020.
From late 2021 until joining Duke, she advised private-sector financial institutions on the economic and policy outlook.
Professional Employment Research Professor, Department of Economics, Duke University, July 2022–present Consultant to several major international banks and hedge funds, October 2021–July 2022 Senior Adviser (at the rank of Senior Associate Director and Associate Director), Division of Monetary Affairs, Federal Reserve Board, August 2011–September 2021 •
Special Adviser to the Board of Governors, October 2018–January 2021 Supported Vice Chair Richard Clarida in leading 2019—2020 review of monetary policy strategy, tools, and communication practices
Worked with Chair Jerome Powell and Vice Chair Clarida on revising the FOMC’s Statement on Longer-Run Goals and Monetary Policy Strategy Led and coordinated Fed Listens initiative across the Federal Reserve System in 2019.
Drafted press conference statements, speeches, testimony, FOMC minutes; supported FOMC subcommittee on communications; led completion of Oral History Project; served as Monetary Affairs D&I Liaison to the Board Associate Professor, Department of Economics, American University, August 2005–July 2011 Guest Scholar, The Brookings Institution, September 2004–July 2005 Senior Research Fellow, Centre for Economic Performance, London School of Economics and Political Science, January 2001–June 2004 Senior Economist, Council of Economic Advisers (on secondment from Federal Reserve), July 1994–July 1995 Senior Economist (now termed “Principal Economist”) and Economist, Division of International Finance,
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