The Federal Reserve's approach to policy is to spend a lot of time looking ahead and trying to make sure it is making policy for the future. May I question whether in this process the Fed is spending too little time making policy for today?
Boston Celtic coach Red Auerbach used to light a victory cigar on the sidelines when he was sure his team had won. What the Fed is doing is the equivalent of lighting the cigar at halftime with a thin lead.
Policy must look ahead but we make a reasonable case for where we are going by looking at where we are and at our current momentum. I do not get the sense that the Fed is putting enough emphasis on current conditions or to put it in a different way, that it sees the current situation only in the light of how it fits into its forecast. Analyzing the current situation for the Fed is not as crucial as it is to use it to build a forecast.
For one thing I think the Fed tends to look too much for the future equilibrium. There is all this talk about the sustainable full employment path. Right now most Fed members see us below that path for a substantial period ahead (although not below it by much).
And this is fed to us as though it is a situation that puts the economy in some jeopardy, but then Janet Yellen opines that it's OK for unemployment to be 'too low' because we need to get the inflation rate higher. Well…which is it?
But none of this has much to do with our economy or why it is behaving this way. Or why we can have an unemployment rate below its long terms path and still have a bloated mass of discouraged workers – and that is not expected to change. And how these conditions persist and yet we have skills shortages and at the same time wages that are not seeing very much pressure. And despite all this alleged job market tightness and low jobless claims we find that the quit rate is still relatively moderate.