Tag: Lael Brainard

Must-read: Paul Krugman sending us to Gavyn Davies, Lael Briainard from last October, and himself from a year ago

Posted on by Brad DeLong

Must-Read: James Fallows will be upset as I buy into the myth of the boiling frog. The Federal Reserve’s decision to raise interest rates last December was, it thought, a marginal move that was running a small risk. But as evidence has piled in suggesting that the risks on the downside are larger and larger, the Federal Reserve has done… nothing…

Paul Krugman orders and inspects the arguments:

Paul Krugman sends us to Gavyn Davies, Lael Briainard from last October, and himself from a year ago:

  • Gavyn Davies today: The Fed and the Dollar Shock: “The dismal performance of asset prices continued…. The weakening US economy. This weakness seems to be in direct conflict with the continued determination of the Federal Reserve to tighten monetary policy. Janet Yellen’s… attitude was deemed by investors to be complacent about US growth. (See Tim Duy’s excellent analysis of her remarks here.) Why is the Federal Reserve apparently reluctant to respond to the mounting recessionary and deflationary risks faced by the US? It is human nature that they are reluctant to admit that their decision to raise rates in December was a mistake. Furthermore, they believe that markets are often volatile, and the squall could yet blow over. But I suspect that something deeper is going on. The FOMC may be underestimating the need to offset the major dollar shock that is currently hitting the economy…”

  • Lael Brainard: Economic Outlook and Monetary Policy–October 12, 2015: “The risks to the near-term outlook for inflation appear to be tilted to the downside…. Over the past year, a feedback loop has transmitted market expectations of policy divergence between the United States and our major trade partners into financial tightening in the U.S. through exchange rate and financial market channels…. The downside risks make a strong case for continuing to carefully nurture the U.S. recovery–and argue against prematurely taking away the support that has been so critical to its vitality…. These risks matter more than usual because the ability to provide additional accommodation if downside risks materialize is, in practice, more constrained than the ability to remove accommodation more rapidly if upside risks materialize…”

  • Paul Krugman: The Dollar and the Recovery: “Consider two pure cases of rising US demand…. #1, everyone sees the relative strength of US spending as temporary…. In that case the dollar doesn’t move, and the bulk of the demand surge stays in the US…. #2, everyone sees the strength of US spending relative to the rest of the world as more or less permanent. In that case the dollar rises sharply, effectively sharing the rise in US demand more or less evenly around the world. It’s important to note, by the way, that this is not just ordinary leakage via the import content of spending; it works via financial markets and the dollar, and happens even if the direct leakage through imports is fairly small. So, what’s actually happening? The dollar is rising a lot, which suggests that markets regard the relative rise in US demand as a fairly long-term phenomenon…. The strong dollar probably is going to be a major drag on recovery.”

Must-Read: Tim Duy: And That’s a Wrap

Posted on by Brad DeLong

Must-Read: The principal question the Federal Reserve should be discussing right now is: When the next adverse macro economic shock comes, the Fed needs to be in a position to cut the federal funds rate by up to 500 basis points. What should we be doing now to create an economy as fast as possible that is strong enough to allow for such a federal funds rate? Yet I am seeing no chatter around this question at all. Perhaps the silence is simply a consensus of despair?

Tim Duy: And That’s a Wrap: “The service sector number continues to bounce around a respectable range…

…A bit less so for… manufacturing…. The Fed is betting that a.) this data is noisy and b.) that the service sector is much, much more important to the economy than manufacturing and c.) some of the weakness in manufacturing will be alleviated as the oil/gas drilling and export drag soften over the next year in relative terms. Speaking of exports, the trade report came with a larger-than-expected deficit, a factor that added another hit to GDP nowcasting…. The Atlanta Federal Reserve Bank’s GDPnow indicator is currently tracking at 1.5%…. No fear, though… Janet Yellen… highlighted total real private domestic final purchases as the number to watch:

Growth this year has been held down by weak net exports…. By contrast, total real private domestic final purchases (PDFP)… has increased at an annual rate of 3 percent this year….

That sent everyone to FRED (the code is LB0000031Q020SBEA)…. When they search through the data for the happy numbers, you know they are looking to hike. Indeed, the clear takeaway from Yellen’s speech was that a rate hike was coming….

We are now well beyond the issue of the first rate hike. The new questions are how gradual will ‘gradual’ be and when will the Fed begin widening down the balance sheet…. Federal Reserve Governor Lyle Brainard argued to hold the balance sheet at current levels until interest rates are sufficient to provide a cushion for the next recession…. Brainard knows she has lost the battle to forestall the first rate hike further and has now chosen to stake out a position on one of the next big issues…. The pace of subsequent tightening, the normalization–or not–of the balance sheet, and the countdown to the next easing are all issues now on the table.

Must-Read: Martin Sandbu: Mutiny at the Fed

Posted on by Brad DeLong

Martin Sandbu: Mutiny at the Fed: “Two governors, Lael Brainard and Daniel Tarullo…

…have publicly spoken out against the rush to raise US interest rates. This is significant for a number of reasons. First, because most noises from individual Fed interest-rate setters have been in the hawkish direction. Chair Janet Yellen herself, while not a hawk, has unwisely tied herself to the calendar…. Tim Duy, the most perceptive Fed-watcher out there….On his reading, Brainard lays down a clear marker….Jared Bernstein, too, annotates the key parts of Brainard’s speech…. She judges the risks of things going worse than expected as more weighty than the chance of things going better…. She takes seriously that it is easier to wait too long and then tighten sharply if necessary, than to make up for the damage caused by a premature rate rise. That is because with very low interest rates it is challenging to make policy much looser…. This ‘option value of waiting’ argument is explained by Brad DeLong in a recent comment on Brainard and Duy…. Tarullo relied on the same two points….

Brainard and Tarullo now echo the dovish arguments of outsiders from the left such as Lawrence Summers, when those arguments have seemingly fallen on deaf ears in the rest of the FOMC…. Both the grumbling governors hail from that political milieu… of the Obama administration. Duy’s explanation is… that Yellen’s professional formative years were the high-inflation period of the 1970s (the same is true for vice-chair Stanley Fischer); Brainard’s experience, meanwhile, ‘is dominated by the Great Moderation’…. Paul Krugman offers a nuance: rather than the Great Moderation, he suggests what most shapes Brainard’s economic world view is… ‘internationally oriented macro types were aware earlier than most that Depression-type issues never went away’…. Hawks are now encountering more determined opposition at the Fed. That is a good thing.

The Extremely-Sharp Tim Duy Sees the Fed Moving Away from Contractionary Policy

Posted on by Brad DeLong
FRED Graph FRED St Louis Fed

The extremely-sharp Tim Duy sees a much bigger potential impact than I do from Fed Governor Lael Brainard’s recent speech telegraphing future dissents on her part if the Federal Reserve raises interest rates in the current situation. Briefly, this: The failure to raise interest rates over the next nine months will call forth dissents from those whose analytical perspectives have been wrong pretty much all the time since 2007. Raising interest rates will call forth dissents from those whose analytical perspectives have been pretty much right all the time since 2007. Moreover, it is straightforward to undo the damage from being behind the curve in raising interest rates. It is impossible to undo the damage from being ahead of the curve in raising interest rates.

It would be one thing to raise interest rates if it were the unanimous consensus of the committee that it was time to do so. It is quite another, in a world of uncertainty and the need for prudent risk management. It’s quite another to risk making unrecoverable errors by endorsing those whose positions have been wrong in the past over the objections of those whose positions have been right.

Tim Duy: Brainard Drops A Policy Bomb: “Lael Brainard dropped a policy bomb…

…a direct challenge to Chair Janet Yellen and Vice Chair Stanley Fischer. Is was, as they say, a BFD. That, at least, is my opinion…. [She] stands in sharp contrast with Yellen and Fischer. Their efforts have been spent on explaining why rates need to rise soon. Hers… on why they do not…. Brainard asserts….

I do not view the improvement in the labor market as a sufficient statistic for judging the outlook for inflation. A variety of econometric estimates would suggest that the classic Phillips curve influence of resource utilization on inflation is, at best, very weak….

Recall that Yellen, in her most recent speech, made the Phillips Curve the primary basis for her case that rates will soon need to rise…. While Yellen sees the risks weighted toward rebounding inflation, Brainard sees the opposite. Moreover, policymakers have been twiddling their thumbs as the world economy turns against them:

Over the past 15 months, U.S. monetary policy deliberations have been taking place against a backdrop of progressively gloomier projections of global demand. The International Monetary Fund (IMF) has marked down 2015 emerging market and world growth repeatedly since April 2014.

While all of you have been arguing about when to raise rates, the case for raising rates has been falling apart!… [Brainard] calls for different risk management:

These risks matter more than usual because the ability to provide additional accommodation if downside risks materialize is, in practice, more constrained than the ability to remove accommodation more rapidly if upside risks materialize….

The Fed can’t cut rates quickly, but they can raise rates quickly…. Suppose that the Fed needs raise rates at twice the pace they currently anticipate.  What does that mean? 25bp at every meeting instead of every other meeting? Is that really an ‘abrupt tightening?’ Not sure that Yellen has a very strong argument here. Or one that would withstand repeated attacks from her peers…. I think Yellen wants to raise interest rates. I think Fischer wants to raise rates.  I think both believe the downward pressure on inflation due to labor market slack is minimal, and the Phillips Curve will soon assert itself. I think both do not find the risks as asymmetric as does Brainard…. I think that Brainard knows this. I think that this speech is a very deliberate action by Brainard to let Yellen and Fischer know that she will not got quietly into the night…. And now that Brainard has laid down the gauntlet, it will look very, very bad for Yellen and Fischer if their plans go sideways….

Brad DeLong suggested the Fed commit to one of two policy messages:

I must say that they are not doing too well at the clear-communication part. I want to see one of following things in Fed statements:

  1. We will begin raising interest rates in December at a pace of basis points per quarter, unless economic growth and inflation fall substantially short of our current forecast expectations.

  2. We will delay raising interest rates until we are confident that it will not be appropriate to return them to the zero lower bound after liftoff.

If we had one of these, we would know where we stand.

But Stan Fischer’s speech provides us with neither.

I think that Fischer wants the first option, but knows Brainard’s views, and hence knows that December is not a sure thing if Brainard can build momentum for her position. Hence the muddled message. Brainard could be the force that drives the Fed toward option number two… closer to that of Evans and… Kocherlakota…. This is the most exciting speech I have read in forever…

As a matter of economic reality, Brainard is correct: The lesson of Staiger, Stock, and Watson (1997) is that the Phillips Curve is much too imprecisely-estimated to weigh as more than a feather in the scales to reduce uncertainty about the state of the economy two years from now. The risks are asymmetric: The option to change course and quickly neutralize the effects of your past year’s policies is a very valuable one. Raising interest rates and starting a tightening cycle throws away that option. You can always raise interest rates quickly and further and undo the effects of being behind the curve in withdrawing monetary stimulus. You cannot lower interest rates below zero and undo the effects of premature tightening away from the zero lower bound.

As I have repeatedly said, the mystery is why the lessons of SSW and the asymmetry of the risks have not been the decisive arguments among the serious members of the FOMC all along.