Reuters Wednesday August 29, 2018 18:42
Excerpt of: Fed staff research anchors subtle shift that could lead rates higher
by Howard Schneider
WASHINGTON – The U.S. Federal Reserve should be ready to lift interest rates for a longer period or even more quickly than currently expected to insure against a jump in inflation in a U.S. economy operating in the vicinity of full employment.
That is the message that has been percolating up from senior central bank staff economists to policymakers including Fed Chair Jerome Powell in research that has helped inform a subtle shift in how Powell plans to steer policy amid growing uncertainty about concepts such as full employment and the neutral level of interest rates.
Powell on Friday signaled he was wary of how accurately the Fed can estimate some of the variables that are important to the U.S. central bank’s models of the economy, including the level of full employment and the “neutral” rate of interest, and was thus hesitant to be guided strictly by how they interact.
“A skeptic would say that the models aren’t working – and this is what Powell is indirectly saying,” Robert Eisenbeis, chief monetary economist with Cumberland Advisors, wrote this week. “His answer is to fall back on risk management,” or weighing the cost of a mistake in either direction and choosing the less costly option.
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