Fed Remains Attentive to Its Dual Mandate (March 22, 2021)

Tyler Mathisen: I'd like to begin with here is this Fed meeting feels like something may happen that we've had quite a few where you kind of knew that they were on a course, on a trajectory, that the policy was set and we were going to say all along. John Bellows, set the background and context for this meeting and tell me whether I'm right or not right that something tonally, texturally may be different this time.

John Bellows: Well, I think it's undisputable that there has been a big move in terms of the outlook in the inter-meeting period. We got a lot of fiscal policy, vaccines are coming faster and more successful than people anticipated, and that's led to a big market move. So a lot has happened. And I think you're right to kind of raise the prospect that maybe that's going to mean the meeting is going to reflect that. I think my own view, though, is that the Fed is going to be much slower in terms of making an adjustment than the market has. The Fed has been making arguments for a very accommodative policy. Those arguments really haven't changed. The labor market recovery really hasn't yet begun. Inflation questions persist over the medium term, where it's not clear that we're going to get a persistently higher inflation outlook. And so I think in contrast to the market, and in contrast to the big change to the outlook, the Fed's going to be a little bit slower and the Fed's going to be still worried about those big questions. And so if they do make any adjustments, I think they're going to be much smaller than than you might expect if you're just looking at the market or just thinking about the outlook.

Courtney Reagan: John, you know, Mona made a number of points there. Of course, one of them was the continuation of this accommodative policy. Is there a danger in remaining too easy for too long? And what should we all be on the lookout for?

John Bellows: You know, I agree with Mona that it was at the margin more accommodative than expected and not changing the dots I do think is somewhat of a dovish surprise. But, I also think it's a useful reminder--the Fed is not reacting to GDP numbers and they're not reacting to the outlook for the next six months. And I think the market has really gotten focused on big GDP numbers this year and really gotten focused on what's going to happen, especially with the stimulus and the re-opening over the next six months. And it's a useful reminder the Fed has a dual mandate--inflation and labor markets--not GDP. Both of those have big question marks on them. Again, the labor market recovery hasn't started. Inflation is unclear what's going to happen over the medium term. And the Fed also has kind of a more medium-term objective that they're aiming for. So I think the Fed did add some accommodation today. I would agree with Mona about that. And I think really what they're doing is they're reminding you they're not reacting to GDP and they're not reacting to six months. They're reacting to labor markets and inflation, both of which demand dovish policy right now. And they have a more of a medium-term outlook. Let me finally say, you know, you asked about risks. You know, I think the Fed is very focused on the downside risks and what could happen. And there's a lot of them. And that's traditionally where the Fed has run into trouble--when the economy slows and they can't add enough accommodation. Yes, there's people who are worried about upside risks: What if the economy gets too hot? I think the Fed's reasonably confident in their ability to deal with that. And I would say, what's the Fed worried about? You know, they're worried about the same thing they always are. What if they need to add accommodation? And where would that come from, given we're at the zero lower bound? I don't think that focus has changed from the Fed.