The Federal Reserve hasn’t yet given up on its estimate of the longer-run rate of unemployment that is consistent with stable inflation. That estimate, combined with the Fed’s commitment to a Phillips curve framework, has both potentially hawkish and dovish implications for the path of monetary policy. I currently think the risk is higher that the implications break on the dovish side.
The Fed moved to the sidelines at the January policy meeting and now anticipates holding interest rates steady through at least the first half of the year. This reflects an expectation revealed in the minutes of the January Federal Open Market Committee meeting that growth will likely slow in 2019 to close to trend, thereby preventing the unemployment gap (the difference between unemployment and its longer run estimate) from widening further. Under such a scenario, inflationary pressures would not be growing.
