Dallas Fed’s Richard Fisher on why he thinks the FOMC is closer to its goals
“I will be arguing at the upcoming FOMC meetings that while it is difficult to define ‘maximum employment,’ labor-market conditions are improving smartly, quicker than the principals of the FOMC expected,” said Dallas Fed Chief, Richard Fisher speaking at the Annenberg School for Communication and Journalism, at the University of Southern California on Wednesday, July 16. In his speech titled “Monetary Policy and the Maginot Line,” he discussed why adjusting the Fed’s monetary policy stance may be more appropriate because the Fed is closer to its dual mandate of ensuring full employment and price stability, than many people believe.
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Fisher’s take on the acceleration in the labor market
The labor market is tightening much faster than forecast. Major indicators to support this include:
Fed’s inflation goal
Fisher outlined inflation measures such as the Consumer Price Index (or CPI), the Atlanta Fed’s sticky prices inflation, and the Cleveland Fed’s median CPI which had crossed the Fed’s targeted 2% mark. Although the Fed uses the change in Personal Consumption Expenditure (or PCE) as its measure of inflation, he said the Dallas Fed’s trimmed mean PCE inflation rate had also averaged 1.7% on a 12 month basis—up from 1.3% just recently.
Due to these factors, he believes the FOMC may be approaching the inflation target of 2%, earlier than expected.
Importance of inflation expectations for fixed income and equity markets
Inflation expectations are important for fixed income investors (AGG). Increases in inflation can increase nominal interest rates on bonds and also reduce the real value of principal repayments for the holders of debt securities (IEF).
Fostering price stability is one of the Fed’s most important goals. Stable prices promote confidence in the debt markets, including Treasuries, investment-grade debt including municipal securities (MUB), and high-yield bonds (HYG), among others. Inflation and inflation expectations also influence the operating environment for businesses—for example, companies in the S&P 500 Index (VOO).
In the next section, we’ll discuss why Fisher believes that policymakers should determine monetary policy stance based on the better-than-expected economic recovery. Please continue reading the next section in this series.