Bernanke Blog: Lower for Longer

Interesting recent blog post by retired Fed Chairman Ben Bernanke who is now over at the Brookings Institute. As the "maestro" of QE, he has a unique perspective on how the Fed views the overall economy and its likely actions with respect to overall tightening or easing.

The takeaway from his post is what we have been seeing (and stating) for quite a while, and that is that rates will be lower for longer than previously anticipated. While the Fed may be "boxed in" to one more short term rate hike of 25 basis points in the next few months (just to save face), this will most likely have no impact on the longer term rates that influence what we do in the commercial real estate market. In fact, the 10-year bond yield is lower today than it was prior to the Fed's most recent rate increase in December of last year.

A few highlights from Bernanke's post:

The headline on a recent piece by Ylan Mui of the Washington Post—“Why the Fed is rethinking everything”—captured the current moment well. The Federal Reserve has indeed been revising its views on some key aspects of the economy, and that’s been affecting its outlook both for the economy and for monetary policy. In this post I document and explain the ongoing shift in the Fed’s economic views. I then turn to some implications, suggesting among other things that, for now at least, Fed-watchers should probably focus on incoming data and count a bit less on Fed policymakers for guidance...

Over the past couple of years, FOMC participants have often signaled that they expected repeated increases in the federal funds rate as the economic recovery continued. In fact, the policy rate has been increased only once, in December 2015, and market participants now appear to expect few if any additional rate rises in coming quarters.

What happened? Market commentary on FOMC decisions typically focuses on short-run factors, such as the uncertainty created by the recent vote in the United Kingdom on whether that country should leave the European Union. While such factors do affect the meeting-to-meeting timing of monetary policy decisions, they can’t account for extended deviations of policy from its expected path. The more fundamental reason for the shift in policy trajectory is the ongoing change in how most FOMC participants view the key parameters of the economy.​..

The two changes in participants’ views that have been most important in pushing the FOMC in a dovish direction are the downward revisions in the estimates of r* (the terminal funds rate) and u* (the natural unemployment rate). As mentioned, a lower value of r* implies that current policy is not as expansionary as thought. With a shorter distance to travel to get to a neutral level of the funds rate, rate hikes are seen as less urgent even by those participants inclined to be hawkish. Likewise, the decline in estimated u* implies that bringing inflation up to the Fed’s target may well take a longer period of policy ease than previously believed. The downward revisions in estimated u* likely have also encouraged FOMC participants who see scope for further sustainable improvement in labor market conditions.​..

The bottom line is that, broadly speaking, FOMC participants’ views of how the economy is likely to evolve have not changed much: They still see monetary policy as stimulative (the current policy rate is below r*), which should lead over time to output growing faster than potential, declining unemployment, and (as reduced economic slack puts upward pressure on wages and prices) a gradual return of inflation to the Committee’s 2 percent target. However, the revisions in FOMC participants’ estimates of key parameters suggest that they now see this process playing out over a longer timeframe than they previously thought. In particular, relative to earlier estimates, they see current policy as less accommodative, the labor market as less tight, and inflationary pressures as more limited. Moreover, there may be a greater possibility that running the economy a bit “hot” will lead to better productivity performance over time. The implications of these changes for policy are generally dovish, helping to explain the downward shifts in recent years in the Fed’s anticipated trajectory of rates.

The entire post can be found here, and is really worth a read:

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