Tag: Optionality

Must-read: Tim Duy: “FOMC Recap”

Posted on by Brad DeLong

Must-Read: Once again: if the economy comes in weak, then the FOMC will wish that it had not raised interest rates in December and will find it impossible to induce an offsetting deviation from the ex post interest rate path it will wish it had followed in order to balance things out. If the economy comes in strong, then the FOMC will wish that it had raised interest rates even earlier than December, but it will then find it easy to induce an offsetting deviation from the ex post interest rate path it will wish it had followed in order to balance things out. This ain’t rocket science. This is the simple logic of optionality near the zero lower bound and the liquidity trap.

So why does this logic evade the FOMC? What are they thinking?

Tim Duy: FOMC Recap: “Now they have slow GDP growth and fast employment growth…

…That will make brains explode on Constitution Ave. They don’t know what to do with that when unemployment is at 5%…. If the recessionistas are correct, then they already made a mistake in December. If the optimitistas are correct, they will fall behind the curve if they hold in March. And that is without the uncertainty of the financial markets. Did the Fed release a little steam by shifting into a tightening cycle, the avalanche control of Mark Dow?  Or did they set in motion the next financial crisis? And recognize that this is within the context of a no-win political situation….

So, considering all this, you can’t really blame the Fed for taking a pass on quantifying the balance of risks…. Bottom Line: The Fed got lucky this month. They weren’t expected to do anything, which takes the pressure off. But in March they might have a real decision to make. We have only six weeks of data to digest. Even assuming that labor markets hold solid, will that be enough? Doubtful. They will need more.

Must-Read: Niccolo Machiavelli: On Princes and Optionality

Posted on by Brad DeLong

Must-Read: Niccolo Machiavelli: On Princes and Optionality: “The Romans did in these instances what all prudent princes ought to do…

…who have to regard not only present troubles, but also future ones, for which they must prepare with every energy, because, when foreseen, it is easy to remedy them; but if you wait until they approach, the medicine is no longer in time because the malady has become incurable. For it happens in this, as the physicians say it happens in hectic fever, that in the beginning of the malady it is easy to cure but difficult to detect, but in the course of time, not having been either detected or treated in the beginning, it becomes easy to detect but difficult to cure.

This it happens in affairs of state, for when the evils that arise have been foreseen (which it is only given to a wise man to see), they can be quickly redressed, but when, through not having been foreseen, they have been permitted to grow in a way that every one can see them, there is no longer a remedy.