But what does the word — from the Latin \u201cgradus,\u201d or step — mean in Fedspeak? Janet Yellen and her colleagues aren\u2019t really saying, and the science of semantics can only offer limited insight.<\/p>\n
\u201cIt only means something when used in a given situation and even then can be quite vague,\u201d said Molly Diesing, director of graduate studies at Cornell University\u2019s department of linguistics.<\/p>\n
In other words, it can mean pretty much whatever Yellen and her colleagues want it to mean — and that\u2019s probably no accident.<\/p>\n
\u201cFrom the Fed\u2019s point of view, it\u2019s an ideal phrase,\u201d\u00a0said Lee Ferridge, head of macro strategy at State Street Corp.\u2019s asset management unit in Boston. \u201cIt tells you they\u2019re not going to hike at every meeting, but it doesn\u2019t commit them to any sort of pace.\u201d<\/p>\n
<\/div>\n
Though it\u2019s attracting more attention now, the Fed has been making use of \u201cgradual\u201d for more than two years. In its quarterly Summary of Economic Projections, or SEPs, the Fed has repeatedly said policy makers expect to raise rates \u201crelatively gradually\u201d or \u201cfairly gradually.\u201d<\/p>\n
Yellen has used versions of the term in public comments since at least March. She\u2019s also been particular about what \u201cgradual\u201d doesn\u2019t mean.<\/p>\n
Mechanical Approach<\/h3>\n There is \u201cno plan to follow any type of mechanical approach to raising the federal funds rate,\u201d she told the media after the June FOMC meeting.<\/p>\n
Under Alan Greenspan, the Fed hiked by 0.25 percentage points at 17 consecutive sessions, from June 2004 to June 2006 — an increase it usually described as \u201cmeasured.\u201d<\/p>\n
But that created too much predictability, and encouraged too much risk-taking by investors, according to a now-widespread view — one reason the Fed generally avoids the term now.<\/p>\n
More recently, investors have wondered how long a period was \u201cconsiderable time.\u201d That\u2019s how long the Fed, beginning in September 2012, pledged not to raise rates while it waited for the economy to heal.<\/p>\n
Not Impatient<\/h3>\n In December 2014 the FOMC moved on, now pledging to be \u201cpatient.\u201d Just when Fed-watchers were beginning to figure out what that meant, the word was dropped in March 2015. Yellen\u2019s gloss on the move: \u201cJust because we removed the word \u2018patient\u2019 from the statement doesn\u2019t mean we are going to be impatient.\u201d<\/p>\n
As for gradualism, that may simply be how the Fed sees the economy behaving. In the quarterly summaries, the Fed has to say how it sees output expanding in the coming years. Since April 2012, the term of choice has been — you guessed it — \u201cgradually.\u201d<\/p>\n
That\u2019s essentially what Mester told her questioner in Cleveland.<\/p>\n
\u201cWhen we say \u2018gradual,\u2019 we\u2019re trying to express what our read is of current conditions and the outlook,\u201d she said. \u201cIt\u2019s going to depend on how the economy evolves.\u201d<\/p>\n
Mester and Richmond Fed President Jeffrey Lacker say investors trying to interpret \u201cgradual\u201d should consult the so-called dot-plot portion of the quarterly report, which graphs policy makers\u2019 projections for the fed funds rate.<\/p>\n\n<\/div>\n<\/figure>\n
The Fed\u2019s benchmark is currently in a range of zero to 0.25 percent, where it\u2019s been since December 2008. September\u2019s median forecasts imply four quarter-point increases next year, pushing the rate toward 1.5 percent, and another five in 2017.<\/p>\n
Individual Predictions<\/h3>\n Roberto Perli, a former Fed economist now at Cornerstone Macro LLC in Washington, is skeptical of the dots. He says the median or mean of 17 individual predictions isn\u2019t a good guide to how Yellen will forge a consensus from a divided committee.<\/p>\n
\u201cThe dots don\u2019t care about compromise, they\u2019re probably not the best predictor of what will actually happen,\u201d he said. Perli thinks reality will be more gradual than the dots: he predicts three hikes a year following liftoff.<\/p>\n
Richard Clarida, global strategic adviser at Pacific Investment Management Co., dislikes the dots for a different reason.<\/p>\n
They\u2019re fine, he said, if the underlying economic projections — on unemployment, inflation and growth — that drive the rate forecasts prove accurate. But if they\u2019re not — and they\u2019ve consistently been wrong in the past — investors are left guessing again.<\/p>\n
\u201cWhat we don\u2019t know is\u00a0what will be the rate path if the economy doesn\u2019t look like the SEPs,\u201d Clarida said. Because Fed officials haven\u2019t done a good job of explaining their decision-making methodology, their response to alternative scenarios can\u2019t be predicted, he said.<\/p>\n
Fear not, says James Bullard, president of the St. Louis Fed. The fog will start to clear, and investor angst will ebb, when the Fed makes its second rate increase of the new cycle, he told reporters Nov. 12.<\/p>\n
Until that time, whenever it is, he said, \u201cwe will not have credibility on the issue of how gradual is \u2018gradual\u2019.\u201d<\/p>\n<\/div>\n<\/section>\n<\/div>\n","protected":false},"excerpt":{"rendered":"
This Bloomberg article on gradualism and Fedspeak is quite unique. In thirty five years of reading analysis of the Fed I do not believe I have ever come across quotes from a linguistics professor and an etymology of a word. You learn something new each day. Via Bloomberg: Yellen’s contribution: `gradual’ doesn’t mean `mechanical’ `Join […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2}},"categories":[1],"tags":[],"class_list":["post-23975","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"jetpack_publicize_connections":[],"jetpack_featured_media_url":"","jetpack_shortlink":"https:\/\/wp.me\/p9YXi-6eH","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/acrossthecurve.com\/index.php?rest_route=\/wp\/v2\/posts\/23975","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/acrossthecurve.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/acrossthecurve.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/acrossthecurve.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/acrossthecurve.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=23975"}],"version-history":[{"count":1,"href":"https:\/\/acrossthecurve.com\/index.php?rest_route=\/wp\/v2\/posts\/23975\/revisions"}],"predecessor-version":[{"id":23976,"href":"https:\/\/acrossthecurve.com\/index.php?rest_route=\/wp\/v2\/posts\/23975\/revisions\/23976"}],"wp:attachment":[{"href":"https:\/\/acrossthecurve.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=23975"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/acrossthecurve.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=23975"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/acrossthecurve.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=23975"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}