The Fed can take its time, if it wants to

By most accounts — the musings of Wall Street strategists and media Fed watchers, speeches by FOMC members, countless online FOMC previews — momentum is building for the Fed to soon change its “considerable time” language, and to give clearer guidance on when and why it will start raising rates.

Will such changes be included in the FOMC statement that will be released on Wednesday?

Maybe, but it’s worthwhile to recall how inflation and employment indicators have performed in the past few months.

Here is year-on-year headline and core PCE inflation (the Fed’s preferred measure) since the start of 2014:

And here is headline and core CPI:

After accelerating earlier in the year, inflation moderated in the summer, even declining slightly in June and July. Call it an early vindication for Janet Yellen’s comment at the June FOMC presser that some of the inflation pickup was “noisy”.

Here’s the past year of monthly jobs growth from the establishment survey:

And the unemployment rate:

That data are noisy also applies to plateaus and downturns, of course, and these measures all come with big standard errors.

But the monthly jobs growth figures have nonetheless disappointed lately, having declined meaningfully for two straight months. The unemployment rate has fallen by a lot in the past year, but it has been flat since June — and, of course, its reliability as an accurate marker of labour market health remains cloudy because of the interminable labour market slack debate.

Don’t get us wrong: the economy very likely is doing better than it was in prior years. Other economic indicators support this.

Yet the mild summer slowdown in inflation and monthly jobs growth — whether the result of measurement problems, a temporary blip, or more fundamental causes — at least could raise some doubts about the sustainability of the recovery’s accelerated pace going into the summer. And inflation and employment are the Fed’s explicit priorities.

The worry is that a change to the language, even if only meant as a neutral shift to a more data-contingent guidance, could be interpreted as more hawkish than was intended, especially because the recent slowdown in jobs growth and inflation fails to provide justification for an optimistic reassessment of the FOMC’s outlook since the June meeting.

So although it’s quite possible that some incremental change will be introduced on Wednesday, we wouldn’t be surprised if Janet Yellen decides that the Fed should hold off for another meeting or two before sending a firmer signal about its future plans.