Category: Equitablog

Must-Read: Noah Smith: Real Business Cycle Theory as Gaslighting

Posted on by Brad DeLong

Must-Read: Noah Smith: Real Business Cycle Theory as Gaslighting: “The basic 1982 Nobel-winning RBC model…

…a complete-markets, representative-agent theory of business cycles where productivity shocks, leisure preference shocks, and/or government policy distortions drive business cycles–has never been very good at matching the data…. Simple patches… didn’t really improve the fit…. The model isn’t very robust to small frictions, either. And one of the main data techniques used… the Hodrick-Prescott filter… [is] very dodgy. Furthermore… Chris Sims showed that the main policy implication of RBC–that monetary policy can’t be used to stabilize the real economy–doesn’t hold up…. [But] RBC fans maintain that RBC is the basic workhorse business cycle model….

Ed Prescott and Ellen McGrattan released a paper claiming that if you just patch basic RBC up with one additional type of capital, it fits the data just fine. As if this were the only empirical problem with RBC, and as if this new type of capital has empirical support!… Gomme, Ravikumar and Rupert… refers to RBC as “the standard business-cycle model”. As if anyone actually uses it as such!… Valerie Ramey says: “Of course, [the] view [that monetary policy is not an important factor in business cycles] was significantly strengthened by Kydland and Prescott’s (1982) seminal demonstration that business cycles could be explained with technology shocks.” As if any such thing was actually demonstrated!…

This strikes me as a form of gaslighting–RBC fans just blithely repeat, again and again, that the 1982 RBC model was a great empirical success…. Why do RBC fans keep on blithely repeating that RBC was a huge success, needs only minor patches, and is now the standard model?… If RBC was refuted [by 1980-84]… it means that the Lucas/Prescott/Sargent revolution looks just a little bit more like a wrong turn…. Or maybe RBC represents a form of wish fulfillment. If RBC is right, stabilization policy–which, if you believe Hayek, just might be the thin edge of a socialist wedge–is just a “rain dance”…. It could also be a sort of high-level debating tactic…. Anyway, whatever the reason, it’s kind of entertaining to watch…

No, the Federal Reserve Is Not a Market Manipulator

Posted on by Brad DeLong

Let me pile on to something Paul Krugman published last week, and make fun of William Cohan for writing and the New York Times for publishing hopelessly confused austerity pseudonomics:

**Paul Krugman**: [Artificial Unintelligence](http://mobile.nytimes.com/blogs/krugman/2015/08/29/artificial-unintelligence/?referrer=): “In the early stages of the Lesser Depression…

>everywhere you looked, people who imagined themselves sophisticated and possessed of deep understanding were resurrecting 75-year-old fallacies and presenting them as deep insights…. [Now] I feel an even deeper sense of despair–because people are still rolling out those same fallacies… So here’s William Cohan in the Times, declaring that the Fed should ‘show some spine’ and raise rates….

>>Like any commodity, the price of borrowing money–interest rates–should be determined by supply and demand, not by manipulation by a market behemoth. Essentially, the clever Q.E. program caused a widespread mispricing of risk, deluding investors into underestimating the risk of various financial assets they were buying.

>Oh dear.

>Cohan’s theory of interest rates is basically the old notion of loanable funds…. As Keynes and Hicks explained three generations ago, this is… inadequate… misses the reality that the level of income isn’t fixed, and changes in income affect the supply and demand for funds…. There are arguments that the Fed should be willing to abandon its inflation target so as to discourage bubbles… but… they have nothing to do with the notion that current rates are somehow artificial, that we should let rates be determined by ‘supply and demand’. The worrying thing is that, as I’ve suggested, crude misunderstandings along these lines are widespread even among people who imagine themselves well-informed and sophisticated. Eighty years of hard economic thinking, and seven years of overwhelming confirmation of that hard thinking, have made no dent in their worldview. Awesome.

Let us suppose that instead of a Federal Reserve Board we have a Federal Potato Board. And let us suppose that the Federal Potato Board wants to peg the price of Idaho potatoes above its market-clearing value–just like, William Cohan claims, the Federal Reserve Board is now pegging the price of bonds above its market-clearing value. Suppose the FPB decides to set the price of potatoes at $12/50 lb. rather than the market clearing $8/50 lb.

What happens in the potato market?

Well, 14 billion pounds of Idaho potatoes are produced each year. And 14 billion pounds are eaten. At a price 50% higher than the market-clearing price, something like 20 billion pounds would be produced. And something like 10 billion pounds would be eaten. The FPB would have to buy the excess 10 billion pounds each year–at a cost of $2.4 billion/year. But it could not then sell them, because that would increase market supply and so drive down the price. It would have to destroy them. That would be a waste: $2.4 billion/year of hard work and sweat rotted away, literally.

What happens in the bond market?

Suppose, as Cohan seems to think, that the equilibrium market price of 5-year-duration bonds ought to be 1000 at a 3%/year interest rate, but the Federal Reserve artificially pushes the price up to 1150 and pushes the interest rate on them down to zero by printing money and buying bonds. Bond producers see that bond production is now highly profitable and they start producing more bonds…

How do you produce a bond, anyway?

Well, one way to do it is that you build an extra factory, and you then commit the profits from that extra factory to amortizing the bond. It was not profitable to undertake this when you could only sell the bond for 1000, but now that you can sell the bond for 1150.

One way to think is then this: You sell the bond for 1150 to the Federal Reserve–if it doesn’t buy it then the supply of bonds is greater than demand and the price of bond would fall. But the Federal Reserve cannot then sell the bond because that, too, would increase the supply of bonds. The Fed has to destroy the bond… No it doesn’t… The Fed can simply hold the bond to maturity, and then roll it over… But the FPB had to tax people to raise the $2.4 billion, and so the FRB would have to… No, it doesn’t: it, after all, simply prints the money… As SF Fed VP Glenn Rudebusch told an audience once: “We print money. We use it to buy bonds, We then clip the coupons. It’s a very good business model…” But just as all the time and energy that went into growing the excess 10 billion lb/year of potatoes was a waste of hard work and sweat because in the end nothing useful was produced… Oops… We know have a useful factory. And all the previously-unemployed people who got to work building the factory had jobs while it was being built. They liked that… And now the factory can employ more people, boosting wages…

If the economy had been at full employment when the FRB lowered interest rates, there would indeed have been a waste: The building of the factory would have pulled people out of jobs where their societal value was greater than their value as factory-builders. And we would have seen this waste reflected in inflation: The lowering of interest rates would have increased total spending in dollars without increasing the total amount of useful goods and services produced, and the result would have been previously-unexpected inflation.

But no unexpected inflation, no waste. As long as we are below full employment, the lowering of interest rates causes production to expand in accord with total spending and demand. It is simply a win.

(Better-prepared students will by now have noticed that the FRB, unlike the FPB, does not have to keep buying more and more bonds each year in order to keep the price at 1150. The extra workers employed building the factory have higher incomes. And they spend and save those higher incomes. And employment rises in other industries as well. And the people put to work in those industries spend and save their incomes. And with their savings they buy the bonds issued to finance the construction of next year’s factory. So all the FRB has to do–unlike the NPB–is get the ball rolling. Thereafter there is no disequilibrium between the supply of and the demand for bonds that requires the FRB to step in.)

But suppose that the FRB decides in the future to lower the price of bonds back down from 1150 to 1000. Doesn’t it then lose 150? Doesn’t it then have to raise taxes to make up for that loss? Aren’t those extra taxes a waste? Somehow?…

The fact is that the costs and waste of pushing interest rates “too low”, when they exist, show up as unexpected inflation. No unexpected inflation, no costs. Those who claim that expansionary monetary policy that lowers interest rates causes people to make bad economic decisions–to think that they are creating more real wealth than they are–are saying that when people go to market they will find that aggregate demand is higher than aggregate supply, and that there is as a result unexpected inflation. Planned investment in excess of desired savings–Cohan’s “widespread mispricing of risk, deluding investors…”–shows up, by the metaphysical necessity of the case, in aggregate demand greater than aggregate supply times the anticipated price level and thus in unexpected inflation.

Cohan’s argument is thus, at bottom, the inflationista argument: that expansionary monetary policy has somehow stored up a lot of inflation that is or is about to reveal itself in a rising-price tsunami. Thus my view: Cohan should join the inflationistas where they wait on their mountain top down-valley in Jackson Hole for their inflationocalypse, and stop bothering the rest of us.

Martin Wolf and I See the Odds on the Different Future Chinas Somewhat Differently

Posted on by Brad DeLong

Martin Wolf calls himself a long-run China optimist–that China is more likely than not following the Korean road, is now where Korea was in the early 1980s, and:

South Korea’s real GDP per head has since nearly quadrupled in real terms, to reach almost 70 per cent of US levels. If China became as rich as Korea, its economy would be bigger than those of the US and Europe combined…

Last week for the Huffington Post I gave my case for China pessimism: that what Japan, Korea, Spain–even Singapore–demonstrate is that escaping the middle-income trap requires institutional convergence to the North Atlantic to generate education and flexibility and to greatly reduce the burdens of corruption and of one-party ossification as nobody dares tell those at the top what a further round of economic growth requires.

The point for Martin’s relative optimism is that I have now been wrong about China’s future for a quarter of a century straight. It has, indeed, astonished the world.

Nevertheless, I cannot help but think that Brazil or Chile–or in the best case Greece–is the image of China’s future. And that is, relative to where China was in 1975, a very, very bright future indeed. It is just not the future that makes the second half of the twenty-first century the Chinese future. And it is not the future the people of China are worthy of:

Martin Wolf: China risks an economic discontinuity: “The important economic fact about China is its past achievements…

…Gross domestic product… from 3 per cent of US levels to some 25 per cent…. This transformation is no statistical artefact. It is visible on the ground. The only ‘large’(bigger than city state) economies, without valuable natural resources, to achieve something like this since the second world war are Japan, Taiwan, South Korea and Vietnam. Yet, relative to US levels, China’s GDP per head is where South Korea’s was in the mid-1980s. South Korea’s real GDP per head has since nearly quadrupled in real terms, to reach almost 70 per cent of US levels…. This is a case for long-run optimism. Against it is the caveat that ‘past performance is no guarantee of future performance’. Growth rates usually revert to the global mean. If China continued fast catch-up growth over the next generation it would be an extreme outlier….

‘Discontinuities’… as in Brazil in the 1980s or Japan in the 1990s?… The core argument for a discontinuity is that it is hard to move smoothly from an unsustainable path. The risk is that the economy slows much faster than almost anybody now expects…. The best approach would be to continue with reforms, while trying to put more spending power into the hands of consumers and investing more in public consumption and environmental improvements…. Moreover, the challenge is not only, or even mainly, technical. A big question is whether a market-driven economy is compatible with the growing concentration of political power. The next stage for China’s economy is a conundrum. Its resolution will shape the world.

Schedules that work for families and the U.S. economy

Posted on by Bridget Ansel

Anyone who has a job knows that the key feature of work is giving someone else control of your time. For some of us, this is a straightforward process. The boss says our hours are nine-to-five, five days a week—end of story. But for millions of workers, selling their time to employers isn’t so simple. Many people have unpredictable schedules, both in terms of when they work and for how long.

About four in ten young workers ages 26 to 32 know their schedule a week or less in advance, according to data from the University of Chicago’s psychology professor Susan J. Lambert, sociologist Peter J. Fugiel, and psychologist Julia R. Henly. For many workers, it’s not just not knowing their schedule, but also being available on short notice—and, if not, then quite possibly having no job at all.

This used to be the case uniformly at the giant clothing retailer The Gap, Inc. Last week, however, the company announced it is changing the way it schedules its employees in stores for all five of their brands: Athleta, Banana Republic, Gap, Intermix, and Old Navy. Employees will no longer have to be available for last-minute shifts. Instead, employees will get their schedule at least 10 days—and in some cases, 14 days—in advance of their shifts.

The Gap made its decision to eliminate on-call scheduling and to give a 10- to 14-day notice of schedules based on a number of factors. But one telling reason was this—The Gap has been working with two of the Washington Center for Equitable Growth’s 2014 grantees, Joan Williams at the Center for WorkLife Law and UC Hastings College of The Law and The University of Chicago’s Lambert. The two scholars are leading the Stable Schedules for Hourly Workers Pilot at The Gap, which began with a Preliminary Pilot that tested out two weeks’ advance notice, elimination of on calls, and several other changes to existing scheduling practices in three GAP stores in the San Francisco area.

Equitable Growth provided funding for this expanded pilot work in our 2015 grantgiving cycle. Over the next 18 months Williams and Lambert will conduct a full pilot study in roughly 30 Gap stores, implementing additional scheduling changes designed to provide more schedule stability for workers while meeting business goals of the company.

The Gap, like many retailers, had been using “just-in-time” scheduling because they thought it was saving them money. Today’s advanced computer technology allows firms to craft sophisticated software algorithms that monitor store traffic. A decade or two ago, store managers had little more than basic insights into customer traffic—whether it’s snowing outside or whether it’s the 4th of July—but now they can program in much wider array of factors. This means store managers can schedule employees to be at work only when they have sufficient customers—or so the theory goes.

There are two problems with this theory. First, just-in-time schedules create havoc in the lives of employees and their families. And second, there’s emerging evidence that it doesn’t even boost the bottom line of businesses.

First the workers and their families. Lack of notice limits the rest of life. Too many workers never know their schedules and cannot afford to turn down work when offered to them. It’s not just that they cannot live without the income from that shift; their bosses may not give them shifts, or possibly even fire them if they complain.

But it seems that just-in-time scheduling isn’t good for firms, either. We won’t know for a while the results of the study by Williams and Lambert, but The Gap apparently finds the early evidence compelling. And we know that other firms are taking a second look at their scheduling practices as well. To take just one example: In 2007, Wal-Mart was one of the first retailers to implement just-in-time scheduling. But, in February 2015, they announced a change in policy. Come 2016, employees will know their schedule two-and-a-half weeks in advance, and they will be able to have some input on when they work. Some employees will even get a fixed schedule.

Maybe the days of just-in-time scheduling are numbered. There’s lots of evidence that schedules that work for employees can be very good for firms—and for the economy more generally—and maybe this is something U.S. businesses are finally seeing for themselves.

 

Must-Read: Mark Thoma: Syllabus for Monetary Theory and Policy

Posted on by Brad DeLong

Mark Thoma: Syllabus for Monetary Theory and Policy): “Everyone seems to be posting the syllabus…

…for the graduate courses they are teaching this fall. Mine is simple. In my Monetary Theory and Policy course we are going to go through this book by Jordi Gali (don’t tell anyone I actually know this stuff): Jordi Gali: Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework

Must-Read: Roger Farmer: Not “Too Simple”. Just Wrong

Posted on by Brad DeLong

Must-Read: Roger Farmer: Not “Too Simple”. Just Wrong: “Simon Wren-Lewis has a nice post discussing…

…Paul Romer’s critique of macro. In Simon’s words:

It is hard to get academic macroeconomists trained since the 1980s to address [large scale Keynesian models] , because they have been taught that these models and techniques are fatally flawed because of the Lucas critique and identification problems … But DSGE models as a guide for policy are also fatally flawed because they are too simple. The unique property that DSGE models have is internal consistency … Take a DSGE model, and alter a few equations so that they fit the data much better, and you have what could be called a structural econometric model. It is internally inconsistent, but because it fits the data better it may be a better guide for policy.’

Nope! Not too simple. Just wrong!

I disagree with Simon. NK models are not too simple. They are simply wrong. There are no ‘frictions’. There is no Calvo Fairy. There are simply persistent nominal beliefs.

Must-Read: Fabian Wahl: The Long Shadow of History: Roman Legacy and Economic Development–Evidence from the German Limes

Posted on by Brad DeLong

Must-Read: Fabian Wahl: The Long Shadow of History: Roman Legacy and Economic Development–Evidence from the German Limes: “This paper contributes to the understanding of the long-run consequences…

…of Roman rule on economic development. In ancient times, the area of contemporary Germany was divided into a Roman and non-Roman part. The study uses this division to test whether the formerly Roman part of Germany show a higher night- light luminosity than the non-Roman part. This is done by using the Limes wall as geographical discontinuity in a regression discontinuity design framework. The results indicate that economic development—as measured by luminosity—is in- deed significantly and robustly larger in the formerly Roman parts of Germany. The study identifies the persistence of the Roman road network until the present as an important factor causing this development advantage of the formerly Roman part of Germany both by fostering city growth and by allowing for a denser road network.

Netflix and the paid family leave debate

Posted on by Bridget Ansel

The on-demand media provider Netflix Inc. made the surprise announcement last month that it will provide its employees with one year of paid, unlimited leave policy following the birth of a child. Call the frenzied media response “maternity-leave madness,” except that it applies to men and women alike. Some saw the policy as an encouraging step forward for working parents, while others declared that the “unlimited” nature of the leave will cause guilty employees taking less time off than they would otherwise.

Yet there is little discussion of Netflix’s failure to extend this policy to their non-salaried, low-skilled workers who labor at the company’s DVD distribution centers. Such a policy in many ways mirrors what is happening nationally: the exclusion of workers who have the fewest resources and would most benefit from such policies.

U.S. federal law mandates 12 weeks unpaid leave through the Family and Medical Leave Act, yet 40 percent of U.S. workers are ineligible for this benefit. According to the U.S. Bureau of Labor Statistics, only 12 percent of private-sector workers have access to paid parental leave. Among the lowest earners, that number drops to 4 percent. So Netflix, in extending its policy exclusively to its salaried employees, is adhering to a national phenomenon: Having the resources to take adequate time off after the birth of a child, with all the benefits for parent and baby alike, is becoming the exclusive domain of the professional class.

That leaves too many workers forced to go back to work too quickly because they cannot afford to take the time off as unpaid leave. But rushing back to work has consequences. Studies show that insufficient maternity and paternity leave is associated with lower rates of immunization and health visits for the new child, lower rates of breastfeeding, and an increased risk of depression for the mother. And accumulating evidence is increasingly showing that such poor care early in life can have negative effects on that child’s skills, health, and development far into the future, costing our society and hampering our economy.

In contrast, access to paid leave raises the likelihood that a new mother will remain in the labor market, and continue to contribute to the economy’s productivity overall. And, a parent’s ability to care full-time for their baby during those early months has a lasting impact on the health and development of their child.

And, as many of these tech companies have discovered, paid parental leave can make it easier to recruit and retain talented workers, which is good for their bottom line. But wealthy companies like Netflix are not the norm. Many smaller businesses cannot afford such an expense, and covering an employee’s salary while they are on leave for an extended amount of time could be disastrous for small companies with modest annual profits. That is where government policy comes in. Many other countries finance their parental leave systems through their social security systems. Among U.S. states, California, Rhode Island, and New Jersey have extended their temporary disability insurance programs to provide paid leave for new parents, although not at full salary.

These programs benefit employers and employees alike. A survey of California employers by Center for Economic and Policy Research’s Eileen Appelbaum and Ruth Milkman of CUNY Graduate Center overwhelmingly reports no noticeable or a positive effect on profitability, turnover, and morale. And a study done by the Council of Economic Advisors at the White House finds that paid family leave as implemented there and in Rhode island and New Jersey “can benefit employers by improving their ability to recruit and retain talent, lowering costly worker turnover and minimizing loss of firm-specific skills and human capital, as well as boosting morale and worker productivity.”

At the state level, paid leave also reduces the burden on government assistance programs. Women who take paid family leave in the year after their child’s birth are less likely to rely on welfare or supplemental nutrition assistance. There is no reason to think that a national program would not boast similar results.

Netflix’s new policy is undoubtedly in response to a growing sentiment among many working Americans that it feels impossible to balance work and family life. But, at Netflix and nationally, policies that could alleviate that stress are concentrated among the economic elites. This imbalance will increase income inequality and hurt the country’s future economic potential overall. Company-based solutions, while an encouraging first step, will not ensure our long-term success. Updating our policies to allow everybody, rich and poor, to balance work and caregiving responsibilities will strengthen families and our economy alike.

 

Measures of U.S. labor market conditions for the Fed to ponder

Posted on by Nick Bunker

The U.S. Federal Reserve’s Open Market Committee faces lots of crosswinds as it ponders whether to start raising short-term rates off of zero percent at its mid-September meeting. Turbulence in global financial markets alongside currency devaluations and plummeting commodity prices could mean the Fed will stay its hand, as University of Oregon economics professor Tim Duy points out on his Fed Watch blog. But as the central bank also considers “measures of labor market conditions,” how are developments going on that front?

When it comes to the labor market, the Federal Reserve is looking to see how close unemployment is to what the Fed calls its long-run rate, or the long-run rate consistent with full employment. Remember part of the Fed’s mandate is to promote “maximum employment.” This means the central bank needs to consider how low the unemployment rate can fall before the economy starts to overheat. High and accelerating inflation would be a sign of such overheating, but there are few signs of that happening.

Another way to determine the Fed’s long-run unemployment rate is to look at wage growth. Accelerating wage growth has yet to show up. Therefore the long-run unemployment rate is lower than the current 5.3 percent. The Fed projects the long-run unemployment rate is somewhere between 5.2 and 5.0 percent, which means the labor market is quite close to that mark. Yet the central bank has been moving down its estimate of the long-run unemployment rate since 2012 because employment gains haven’t turned into wage gains. The Congressional Budget Office has been doing the same, moving down their estimate to 5.0 percent for the 2017-2018 period in a recent report.

How low could unemployment get? In a recent interview, Columbia University economist Joseph Stiglitz said he thinks it could get below 4.5 percent, maybe even down to 3.0 percent.

Translating a 3 percent unemployment rate into another measure of labor market health, the employment-to-population ratio, may be helpful to see how feasible a target that could be. To make such a calculation, we have to make an assumption about the future path of the labor force participation rate, which is key in calculating the unemployment rate. A large chunk of the decline in that participation rate is due to the aging of the U.S. population. The President’s Council of Economic Advisers pegs its effect at about half of the decline from 2007 to 2014.

To make our calculation, then, let’s assume that the participation rate moves up to its current “potential” rate of 63.4 percent, according to the Congressional Budget Office. This 0.8 percentage point increase would grow the labor force by about 1.3 million workers. In addition, if we reduce the unemployment rate to 3 percent, this would mean 5.5 million more workers would be employed. (This calculation assumes that the increase in employment doesn’t affect the potential labor force participation rate.)

The end result would be an employment-to-population ratio of 61.5 percent. Currently, the ratio is 59.3 percent. 2.2 percentage points might not seem like that much, but consider that it took from January 2010 to July 2015 for the ratio to increase 0.8 percentage points. The increase of 2.2 percentage points to 61.5 percent is also more than twice as large as the 0.9 percentage point increase that would result from assuming we only hit an unemployment rate of 5%, as the Fed and CBO suggest our target should be.

Of course, some of the recent decline in the employment-to-population ratio is due to the workforce aging as the Baby Boom generation—now 51 to 69 years of age—enters retirement. But a 3 percent unemployment rate produces an employment-to-population ratio well below levels seen before the two recent recessions and the aging of the labor force.

This isn’t to say the U.S. unemployment rate can go as low at 3 percent. Wage growth might kick up and the Fed may raise interest rates before the economy could get to that level. Still, this exercise shows how much room there could be for the U.S. labor market to continue its recovery.

Must-Read: Mark Thoma: U.S. Inflation Developments

Posted on by Brad DeLong

Must-Read: The highly-estimable Mark Thoma turns Stan Fischer’s Jackson Hole Speech into a Q&A:

Mark Thoma: U.S. Inflation Developments: “A speech by Stanley Fischer at Jackson Hole turned into a pretend interview…

…Let me start be asking about your view of the economy. How close are we to a full recovery?

Although the economy has continued to recover and the labor market is approaching our maximum employment objective, inflation has been persistently below 2 percent. That has been especially true recently… the drop in oil prices… 12-month changes in the overall personal consumption expenditure (PCE) price index have recently been only a little above zero…. Measures of core inflation have been persistently below 2 percent throughout the economic recovery. That said, as with total inflation, core inflation can be somewhat variable….

Isn’t there reason to believe these numbers are true, i.e. doesn’t the slack in the labor market imply low inflation?

Of course, ongoing economic slack is one reason core inflation has been low…. We started seven years ago from an unemployment rate of 10 percent, which guaranteed a lengthy period of high unemployment. Even so… we might therefore have expected both headline and core inflation to be moving up more noticeably toward our 2 percent objective. Yet, we have seen no clear evidence of core inflation moving higher over the past few years…. [The] role for slack in helping to explain movements in inflation… is… modest… and can easily be masked….

If that’s true, if the decline in the slack in the labor market does not translate into a notable change in inflation, why is the Fed so anxious to raise rates based upon the notion that the labor market has almost normalized? Is there more to it than just the labor market?…

A larger effect comes from changes in the exchange value of the dollar…. A higher value of the dollar passes through to lower import prices… restrains the growth of aggregate demand and overall economic activity….

That argues against a rate increase, not for it….

Commodity prices other than oil are also of relevance for inflation….

So you must believe that all of these forces holding down inflation (many of which are stripped out by core inflation measures, which are also low) that these factors are easing, and hence a spike in inflation is ahead?

The dynamics with which all these factors affect inflation depend crucially on the behavior of inflation expectations…. Longer-term inflation expectations in the United States appear to have remained generally stable since the late 1990s… [and so] movements in inflation have tended to be transitory.

Let’s see, lots of factors holding down inflation, longer-term inflation expectations have been stable throughout the recession and recovery, remarkably so, yet the Fed still thinks a rate raise ought to come fairly soon?

We should however be cautious in our assessment that inflation expectations are remaining stable…. Measures of inflation compensation in the market for Treasury securities have moved down somewhat…. But these movements can be hard to interpret….

I have to be honest. That sounds like the Fed is really reaching to find a reason to justify worries about inflation and a rate increase. Let me ask this a different way. In the Press Release for the July meeting of the FOMC, the committee said it can be “reasonably confident that inflation will move back to its 2 percent objective over the medium term.” Can you explain this please? Why are you “reasonably confident” in light of recent history?

Can the Committee be “reasonably confident that inflation will move back to its 2 percent objective over the medium term”?… There is good reason to believe that inflation will move higher as the forces holding down inflation dissipate further…. Slack in the labor market has continued to diminish, so the downward pressure on inflation from that channel should be diminishing as well…. The Committee has indicated in its post-meeting statements that it expects inflation to return to 2 percent. With regard to our degree of confidence in this expectation, we will need to consider all the available information and assess its implications for the economic outlook before coming to a judgment….

I just hope that information includes… the Fed’s own eagerness to see “green shoots” again and again, far before it was time for such declarations. What might deter the Fed from its intention to raise rates sooner rather than later?…

We are interested also in aspects of the labor market beyond the simple U-3 measure of unemployment, including for example the rates of unemployment of older workers and of those working part-time for economic reasons; we are interested also in the participation rate. And in the case of the inflation rate we look beyond the rate of increase of PCE prices and define the concept of the core rate of inflation.

I find these kinds of statement difficult to square with the statement that labor markets are almost back to normal…. When rates do go up, how fast will they rise?

With inflation low, we can probably remove accommodation at a gradual pace. Yet, because monetary policy influences real activity with a substantial lag, we should not wait until inflation is back to 2 percent to begin tightening. Should we judge at some point in time that the economy is threatening to overheat, we will have to move appropriately rapidly….

The Fed has said again and again that it’s 2 percent inflation target is symmetric with respect to errors, i.e. it will get no more worried or upset about, say, a .5 percent overshoot of the target than it will an undershoot of the same magnitude (2.5 percent versus 1.5 percent). However, many of us suspect that the 2 percent target is actually a ceiling… and statements such as this do nothing to change that view…. I wish we had time to hear your response…