Words have meaning - Fed and "sufficiently restrictive"

 

Language matters, yet so often there are not clear definitions for terms that have popular usage. Take the current case of the terms often invoked by the Fed to describe its policy choice - "sufficiently restrictive" to reach the target of 2%. This is similar to the language that rates with have to be held higher for "considerable time", that the Fed viewed inflation as "transitory", or that the Fed would like to see a "soft landing". If these words are used frequently enough, investors will nod their heads in agreement as if it is common knowledge that everyone knows what these terms mean. 

This is similar to using the term "data dependent". Who is not data dependent? The question is what data and what is the dependency? No one usually answer that question. The simple questions are avoided when it is assumed that some information is common knowledge. We are expected to know the answer. 

So, what is "sufficiently restriction"? It could just mean that rates will keep going higher until inflation goes down, but then that could be stated more directly. Sufficiently restrictive could been that rates will rise until we see pain in the real economy and labor market.  Rates are too high if we put too many people out of work or the economy turns negative. This, again, could be made clearer by just saying the Fed believes there is a trade-off between unemployment and inflation. Of course, using language that is not well-defined provides cover for future action. Use phrases repeatedly but leave the meaning to the imagination. This is called forward guidance.