Tag: Macroeconomics

Must-read: Tim Duy: “FOMC Minutes and More”

Posted on by Brad DeLong

Must-Read: But being “behind the cycle” is good, no? On a lee shore you need more sea room, lest the wind strengthen, no?

Tim Duy: FOMC Minutes and More: “The Fed may be turning toward my long-favored policy position…

…the best chance they have of lifting off from the zero bound is letting the economy run hot enough that inflation becomes a genuine concern. That means following the cycle, not trying to lead it. And I would argue that if the recession scare is just that, a scare, they are almost certainly going to fall behind the curve. The unemployment rate is below 5 percent and wage pressures are rising. The economy is already closing in on full-employment. If we don’t have a recession, then how much further along will the economy be by the time the Fed deems they are sufficiently confident in the economy that they can resume raising rates? And note the importance of clearly progress on inflation….

Bullard noted that the FOMC has repeatedly stated in official communication and public commentary that future monetary policy adjustments are data dependent. He then addressed the possibility that the financial markets may not believe this since the SEP may be unintentionally communicating a version of the 2004-2006 normalization cycle, which appeared to be mechanical…. You might forgive market participants for believing that the SEP infers some calendar-based guidance when Federal Reserve Vice Chair Stanley Fischer says things like:

WELL, WE WATCH WHAT THE MARKET THINKS, BUT WE CAN’T BE LED BY WHAT THE MARKET THINKS. WE’VE GOT TO MAKE OUR OWN ANALYSIS. WE MAKE OUR OWN ANALYSIS AND OUR ANALYSIS SAYS THAT THE MARKET IS UNDERESTIMATING WHERE WE ARE GOING TO BE. YOU KNOW, YOU CAN’T RULE OUT THAT THERE IS SOME PROBABILITY THEY ARE RIGHT BECAUSE THERE’S UNCERTAINTY. BUT WE THINK THAT THEY ARE TOO LOW. 

Saying the markets are wrong implies that the policy direction is fairly rigid. In any event, I am not confident there is yet much support for Bullard’s position…. Bullard has also gone full-dove. He remembered that he thought inflation expectations were supposed to be important, and the decline in 5-year, 5-year forward expectations has him spooked. And he thinks that the excess air has been released from financial markets, so his fears of asset bubbles has eased. Hence, the Fed can easily pause now….

Bottom Line: The Fed is on hold, stuck in risk management mode until the skies clear. If you are in the ‘recession’ camp, the path forward is obvious. The Fed cuts back to zero, drags its heals on more QE, and fumbles around as they try to figure out if negative rates are a good or bad thing. Not pretty. But if you are in the ‘no recession’ camp, it’s worth thinking about the implications of a Fed pause now on the pace of hikes later. Being on hold now raises the risk that by the time the Fed moves again, they will be behind the cycle.

Must-read: Paul Krugman: “Bonds on the Run”

Posted on by Brad DeLong

Must-Read: Paul Krugman: Bonds on the Run: “Something scary is going on in financial markets…

…Bond prices in particular are indicating near-panic…. Bond markets are a bit less flighty than stocks, and also more closely tied to the economic outlook. (A weak economy has mixed effects on stocks–low profits but also low interest rates–while it has an unambiguous effect on bonds.)… Plunging rates tell us is that markets are expecting very weak economies and possibly deflation for years to come, if not full-blown crisis…. A very bad place into which to elect a member of a party that has spent the past 7 years inveighing against both fiscal and monetary stimulus, and has learned nothing from the utter failure of its predictions to come true.

Email chatter:

JGB ten years at 0. Wow. Just wow. What a widowmaker…. Excepting buying assets at the dawn of QE, every EXPLICIT trade that hinged on relying on industrial core Central Bank inflation credibility has been a widowmaker…

It is starting to look, I must say, that [the U.S. Fed’s] triggering the taper tantrum and then doubling down on the proposition that triggering the taper tantrum was not an error is going to be judged very harshly when people look back at this decade or so from now…

I’m adding [U.S.] Q4 at a bit over 1%…. Q1 gets to 2%, but some of that is the mild winter. I do have growth staying in the 2 to 2 1/2% range after that, but I have to admit that assumes that exports crawl back to some growth, the consumer stays steadfast, there’s some inventory rebuilding, and S&L spending holds up–much of that is a wing and a prayer…

I have been much more wrong about, and much more worried by, their failure to deliver in the last 12-18 months when their intent was to raise inflation. Nowhere so more than Japan, where they did everything largely as prescribed…

it is over-ambitious to assume that projections about exchange rate expectations dominate over other factors. There is long demonstrated home bias, reinforced by Reinhart-esque longstanding structures and practices of financial repression. In the data, it is bizarre but evident over decades that Japanese private capital flows are opposite of most places: when the economy slows (speeds up), net capital flows are in (out), so the exchange rate moves the ‘wrong’ way…

Richard Koo has been saying that stout talk from the Fed about boosting rates (Jim Bullard is one thing, but say it ain’t so, Stan) is helping to spook the market. I’m getting inclined to agree…

“Whatever it takes” worked for Draghi as a signal of long-term commitment and a regime shift from Trichet. From Kuroda, my take is it was viewed as an act of desperation. Accordingly, Japanese investors took more about this as bad news on the Japanese economy and about BOJ capabilities than they did as evidence of stimulus…

The tendency of my dear friends to never admit error or wish to retrace steps bug[s] me…. Independence is to be used, and stop being so frigging afraid of Paul Ryan! QE4, anybody?…

The broader and more significant issue of why what the BOJ has done has not been enough to sustainably raise inflation, and it hasn’t worked in EU and US either…

Must-read: Donald Kohn and David Wessel: “Eight Ways to Improve the Fed’s Accountability”

Posted on by Brad DeLong

Must-Reads: Perhaps the most frustrating thing about monetary policy making since the taper tantrum has been that we outsiders find that (a) asymmetric risks plus (b) uncertainty about the true state of the labor market and (c) uncertainty about the position and slope of the Phillips Curve are dispositive. They make the case for keeping the monetary-expansion pedal to the metal overwhelming. Yet the Federal Reserve has not felt compelled to engage with outsiders making these arguments in any sustained and deep technocratic way. And those doing oversight at congress have been incapable of doing the job–what we have seen has been either blathering or, worse, ravings about the gold standard.

The extremely-sharp Don Kohn and David Wessel have good suggestions for procedural reform:

Donald Kohn and David Wessel: Eight Ways to Improve the Fed’s Accountability: “1. The Fed should… have monetary policy hearings quarterly…

…2. The now semi-annual Monetary Policy Report… should become quarterly…. 3. The Fed should publicly release the Monetary Policy Report three days before the relevant hearing…. 4. The Monetary Policy Report should continue to include the Fed’s assessment of financial stability risks…. 5. Fed staff should continue to brief and field questions from the congressional staff…. 6. Congress should establish a process for obtaining and publishing the views of outside experts…. 7. Each quarterly hearing in the House should allow only half the committee members to question the chair…. 8. The Fed should hire outside experts to periodically evaluate the procedures used to generate… economic projections….

None of these suggestions would reduce the Fed’s independence. Rather, they would improve Congress’s oversight and the Fed’s accountability, at a time when our economic discourse would greatly benefit from better public understanding and increased confidence in the efficacy and appropriateness of the central bank’s actions.

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: “Fed Yet to Fully Embrace a New Policy Path”

Posted on by Brad DeLong

Must-Read: Tim Duy: Fed Yet to Fully Embrace a New Policy Path: “The Fed will take a pause on rate hikes. An indefinite pause…

…The sooner they admit this, the better off we will all be. Indeed, the sooner they admit this, the sooner financial markets will calm and the sooner they would be able to resume hiking rates. Federal Reserve Chair Janet Yellen had two high profile opportunities this week to make such an admission. Yet she failed to do so….

By the end of 2015, the economy was near full-employment…. A combination of factors would work in tandem to slow activity… higher dollar, higher inflation, higher wages, and higher short term interest rates (tighter monetary policy). How much monetary policy tightening is consistent with the new equilibrium depends on the evolution of the other prices. A reasonable baseline at the end of last year was that 100bp of tightening would be consistent with achieving full-employment. That was the Fed’s starting point as well….

A key factor in keeping the US economy on the rails is acknowledging that tightening financial conditions via the dollar obviates the need to tightening conditions via monetary policy…. But the Fed has yet to fully embrace this story. And that leaves them sounding relatively hawkish…. Yellen & Co. don’t need to emphasize the direction of rates. They just can’t stop themselves. Worse yet, they feel compelled to describe the level of future rates via the Summary of Economic Projections. A level entirely inconsistent with signals from bond markets, no less. They don’t really know what the terminal fed funds rate will be, so why keep pretending they do? The ‘dot plot’ does nothing more than project an overly-hawkish policy stance that leaves market participants persistently fearful a policy error is in the making. It is time to end the ‘dot plot.’ 

Must-read: Ken Rogoff: “The Great Escape from China”

Posted on by Brad DeLong

Must-Read: Just how large is the Chinese elite’s potential demand for political risk insurance in the form of dollar assets underneath the U.S.’s legal umbrella anyway? The extremely-sharp Ken Rogoff

Ken Rogoff: The Great Escape from China: “The prospect of a major devaluation of China’s renminbi…

…has been hanging over global markets like the Sword of Damocles. No other source of policy uncertainty has been as destabilizing…. It might seem odd that a country running a $600 billion trade surplus in 2015 should be worried about currency weakness. But… slowing economic growth and a gradual relaxation of restrictions on investing abroad, has unleashed a torrent of capital outflows…. Private citizens are now allowed to take up to $50,000 per year out of the country. If just one of every 20 Chinese citizens exercised this option, China’s foreign-exchange reserves would be wiped out. At the same time, China’s cash-rich companies have been employing all sorts of devices to get money out…. Now that Chinese firms have bought up so many US and European companies, money laundering can even be done in-house…

Must-read: Amir Sufi: “Household Debt, Redistribution, and Monetary policy during the Economic Slump”

Posted on by Brad DeLong

Must-Read: Amir Sufi: Household Debt, Redistribution, and Monetary policy during the Economic Slump: “High-income and low-income individuals respond very differently to monetary policy shocks…

…as do savers and borrowers. Monetary policy has been especially weak in advanced economies over the past seven years because the redistribution channels of monetary policy have been severely hampered. Recognising the importance of such channels can guide central bankers on what monetary policies are most likely to be effective: the same policy may have different effects on the real economy depending on the distribution of debt capacity across individuals.

Weekend reading: Narayana Kocherlakota: “Dovish Actions Require Dovish Talk (To Be Effective)”

Posted on by Brad DeLong

The wise Mark Thoma sends us to the newly-unmuzzled and very sharp Narayana Kocherlakota: Dovish Actions Require Dovish Talk (To Be Effective): “The Federal Open Market Committee (FOMC)…

…has bought a lot of assets and kept interest rates extraordinarily low for the past eight years.  Yet, all of this stimulus has accomplished surprisingly little (for example, inflation and inflation expectations remain below target and are expected to do so for years to come).   Does that experience mean that we should give up on monetary policy as a useful way to stimulate aggregate demand?
My answer is no.  I argue that, over the past seven years, the FOMC’s has consistently talked hawkish while acting dovish.  This communications approach has weakened the effectiveness of policy choices, probably in a significant way.  Future monetary policy stimulus can be considerably more effective if the FOMC is much more transparent about its willingness to support the economy – that is, about its true dovishness.

My starting point is that households and businesses don’t make their decisions about spending based on the current fed funds rate – which, is after all, a one-day interest rate.  Rather, spending decisions are based on longer-term yields.  Those longer-term yields depend on market participants’ beliefs about how monetary policy will evolve over the next few years.  Those beliefs are a product of both FOMC actions and FOMC communications. 

In December 2008, the FOMC lowered the fed funds rate target range to 0 to a quarter percent. It did not raise the target range until December 2015, when the unemployment rate had fallen back down to 5%.   But – with the benefit of hindsight – a shocking amount of this eight years’ worth of unprecedented stimulus was wasted, because it was largely unanticipated by financial markets. (Full disclosure: I took part in FOMC meetings from November 2009 through October 2015, and it could certainly be argued that I was part of the problem that I describe until September 2012.)  

I’ll illustrate my basic point in the most extreme way that I can.  In November 2009, the Committee’s statement said that the fed funds rate might be raised after ‘an extended period’ – a term that was generally interpreted to mean ‘about six months’.  Accordingly, as footnote 25 of this speech notes, private forecasters in the Blue Chip survey projected that the unemployment rate would be near 10 percent at the time of the first interest rate increase.  

Now, suppose that the FOMC had communicated its true reaction function in November 2009 (or even as late as December 2012): as long as inflation was anticipated to be below 2% over the medium-term, the Committee would not raise the fed funds rate until the unemployment rate had fallen to 5% or below.  We can’t know the impact of such communication with certainty.   But most macroeconomic models would predict that this kind of statement would have put significant upward pressure on employment and prices.  In other words: the models predict that if the FOMC had been willing to communicate its true willingness to support the economy, the Committee would have been able to (safely) raise rates much sooner.  

I want to be clear: my point in this post is not to express regrets or recrimination over past ‘mistakes’.    (It would have been good in 2009 to know what we know now, but we didn’t.)  And my point is not that monetary policy is some kind of panacea.  In the presence of a lower bound on nominal interest rates, expansionist fiscal policy would have been helpful in the past (and could be now too). 

My point is this: we shouldn’t make judgements about the efficacy of future monetary policy stimulus based on the experience from the past seven years.   Unfortunately, much of the potential impact of that lengthy stimulus campaign was vitiated by the FOMC’s generally hawkish communications.   

In my view, the FOMC can deliver useful impetus to aggregate demand with its remaining tools.  But it needs to communicate ahead of time about its true willingness and ability to support the economy.   Without that prior communication, later attempts at stimulus are likely to prove in vain – and the Fed’s credibility may suffer further damage.

Must-read: Antonio Fatas: “A 2016 Recession Would Be Different”

Posted on by Brad DeLong

Must-Read: “The years that the locust hath eaten, the cankerworm, and the caterpiller, and the palmerworm…” –Joel 2:25 (KJV). The task of fiscal and monetary policymakers as of the start of 2009 was (1) to arrest the slide, (2) to trigger a strong recovery, and (3) to set the world economy in a situation in which future policymakers would have the room to maneuver so that future substantial adverse macroeconomic shocks–and there would be future substantial adverse macroeconomic shocks–could be neutralized. They (probably) accomplished (1), they (certainly) failed at (2), and they continue to fail at even starting at (3)–and the fact that it is now seven years and they have not even started this task somehow fails to exercise them:

Antonio Fatas: A 2016 Recession Would Be Different: “1. The Yield curve would be very steep…

…2. The real federal funds rate (or the ECB real repo rate) would be extremely low…. 3. And nominal central bank interest rates would be stuck at zero…. So maybe this tells us that a recession is not about to happen. But if it is, the lack of space to implement traditional monetary policy tools should be a big concern for policy makers. If a recession ends up happening, helicopter money will likely become a policy option.

Must-read: Ben Zipperer: “U.S. Job Growth Slows in January, as the Nation Remains Years Away from Full Employment”

Posted on by Brad DeLong

Must-Read: Almost all of those believing that we are now near full employment here in the U.S. dismiss the low employment-to-population ratio by noting that the population is aging. They very rarely confront the collapse since the late 1990s of the prime-age employment-to-population ratio.

But when they do confront the collapse since the late 1990s of the prime-age employment-to-population ratio, what do they say? I have heard only:

  1. “Peak male”–that the rise of the robots will systematically disadvantaging male workers, and we are starting to see this already. The problem with this is that the decline in employment-to-population since 2000 is about equal for 25-54 year-old males and females.

  2. “It’s too late”–that our failure to induce a rapid recovery in 2009-11 broke the connection of many prime-age workers to the social networks that allowed them to navigate the labor market, and that taking steps to get them back into the labor market could only succeed if accompanied by unwelcome and unthinkable inflation.

  3. “Stop and smell the roses”–that people found out in the late 1990s that they really did not want to work that hard and that long anyway.

May I say I find all three of these profoundly unconvincing?

Ben Zipperer: U.S. Job Growth Slows in January, as the Nation Remains Years Away from Full Employmenth: “Estimates of full employment vary, but one natural point of comparison is the tight labor market of the late 1990s…

…For the entire 1998-2000 period, the employed share of the prime-age population (ages 25 through 54) was at least 81 percent, reaching 81.9 percent in April of 2000. In the most recent business cycle, the prime-age employment rate was above 80 percent during the final quarter of 2006 and first quarter of 2007. A full employment standard of 81 percent therefore lies somewhere in between the peaks of the last two business cycles. Some of the brightest news in today’s employment report is that the employed share of the prime-age population moved to 77.7 percent, up from 77.4 percent in December…. Last month’s increase in the prime-age employment rate is excellent progress. But as part of its mandate to promote full employment, the Fed should consider the projected progress of the labor market as it considers slowing the rate of employment growth.