Annotation
Speech (cont.)
deep tax cuts, 43 which, if implemented, could amount to about 2 percentage points of GDP in the first few years according to independent estimates. Most estimates suggest that the supply-side effects of these policies would be fairly small, 44 so, if enacted, the net effect could well be a boost to U.S. aggregate demand at a time when the economy could be at full employment. Nonetheless, there is considerable uncertainty about the magnitude and timing of any policy changes. There is also important uncertainty about the deliberations over the debt limit, which are likely to garner increasing attention in the early fall and will factor into my considerations of risks to the outlook. 45
43. Unspoken subtext: “Deep tax cuts are bad, bad, bad. Sub-subtext: “Trump is bad, bad, bad.” 44. Because the Fed doesn't believe in supply-side economics unless, of course, it's the Fed doing the supplying by coining money until the U.S. Bureau of Engraving and Printing explodes. 45. Translation: “I have no idea what's going on.”
Editor’s note: We have abridged the section on the “Path of Policy” because we believe it is useless and much easier said than done.
46. Translation: “There's going to be an itty-bitty interest rate increase. Wouldn't you like to know how much? Wouldn't you like to know when? I'm not telling! Nah, nah, nah-nah, nah!” 47. Cue Pete Seeger to come out and start singing “If I had a hammer...” 48. As Goldilocks put it, “And this bed is just right!” Although, in the real world, bears maul unwanted houseguests.
Conclusion In recent quarters, the balance of risks has become more favorable, the global outlook has brightened, and financial conditions have eased on net. With the labor market continuing to strengthen, and GDP growth expected to rebound in the second quarter, it likely will be appropriate soon to adjust the federal funds rate. 46 And if the economy evolves in line with the SEP median path, the federal funds rate will likely approach the point at which normalization can be considered well under way before too long, when it will be appropriate to adjust balance sheet policy. I support an approach that retains the federal funds rate as the primary tool 47 for adjusting monetary policy, sets the balance sheet to shrink in a gradual and predictable way for both Treasury securities and MBS, and avoids spikes in redemptions. 48 While that remains my baseline expectation, I will be
42 | June 2017
Made with FlippingBook flipbook maker