Tag: Ryan Avent

Must-Read: Ryan Avent: Everything Is Not OK

Posted on by Brad DeLong

Must-Read: Ryan Avent: Everything Is Not OK: “Things might or might not be ok in the long run….

…[But] in the short run, there is plenty to worry about…. Yields around the world were already extraordinarily low before the Brexit vote. In the days immediately after they plummeted. While equities have risen, bond yields have not. The yield on the 10-year US Treasury is 30 basis points below where it was on June 23rd. The real yield is close to zero. The 10-year gilt yield is below 1%. The yield on 10-year bonds in Germany, France and the Netherlands are basically zero. Falling yields on safe assets indicate some combination of falling expectations for growth, falling expectations for inflation and a rising risk premium….

The range of possibilities has widened, and the odds of quite a bad outcome have increased. Worryingly, central banks have very little room to respond…. Neither short- nor long-term rates can be pushed much lower. The best hope for effective monetary stimulus is asset purchases designed to weaken a country’s currency. But not everyone can depreciate simultaneously…. Quantitative easing everywhere could help if it boosted expectations for growth and inflation. But at the zero lower bound and with little hope of massive fiscal stimulus, central banks might well struggle to raise animal spirits. In a world of very low inflation and very low interest rates, people only have to cling a little more tightly to their money to tip economies into recession…

Must-Read: Ryan Avent: Expect the Worst

Posted on by Brad DeLong

Must-Read: the sharp Ryan Avent, I think, nails it:

Ryan Avent: Expect the Worst: “It wouldn’t make sense for the Fed to target real GDP growth, but then, the Fed is not really in that business…

…The Fed is also unable to control the long-run real interest rate, which is a function of global saving and investment. What’s more, it does seem clear that the global real interest rate has settled down to a level of approximately zero. But does it follow that the Fed should then either 1) set a high nominal interest rate in order to achieve higher inflation, or 2) keep its interest rate low and accept low inflation? I don’t believe so…. It is not the case that the Fed is choosing low rates and inflation expectations are therefore converging toward a low level…. The Fed has been targeting very low inflation, and falling inflation expectations imply much lower interest rates in future. This dynamic is there back in 2013. In its projections the Fed indicates that rates will rise steadily, even as it projects that inflation will be extraordinarily low, just over 1% in 2013, converging, finally, toward 2% by the end of 2015. Essentially every set of Fed projections since then has shown the same thing. It allowed its QE programmes to end despite too-low inflation, and it raise its interest rate in December despite too-low inflation. The Fed has signalled very strongly that markets should expect inflation to remain at very low levels, indeed, below target. It would be shocking if inflation expectations hadn’t trended inevitably downward….

Is there a route out?… Where in the past the Fed has promised to raise rates even as inflation stays low, it could instead promise to keep them low no matter what, even if, and indeed until, inflation rises above the target. If the Fed wants higher nominal rates in a world of low real rates, it must cultivate higher inflation…. The Fed can choose whether nominal rates get stuck near zero or rise to a higher, safer level. Right now, unfortunately, it is steering the American economy firmly into a low-rate rut.

Must-read: Ryan Avent: “The Fed Ruins Summer: America’s Central Bank Picks a Poor Time to Get Hawkish”

Posted on by Brad DeLong

Must-Read: And agreement on my read of the Federal Reserve from the very sharp Ryan Avent. Nice to know that I am not crazy, or not that crazy…

Ryan Avent: The Fed Ruins Summer: America’s Central Bank Picks a Poor Time to Get Hawkish: “THE… Federal Reserve… ha[s] been desperate to hike rates, often…

…keen to begin hiking in September, but were put off when market volatility threatened to undermine the American recovery. In December they managed to get the first increase on the books, and committee members were feeling cocky as 2016 began; Stanley Fischer, the vice-chairman, proclaimed that it would be a four-hike year… and here we are in mid-May with just the one, December rise behind us. But the Fed… is ready to give higher rates another chance…. Every Fed official to wander within range of a microphone warned that more rate hikes might be coming sooner than many people anticipate. And yesterday the Fed published minutes from its April meeting which were revealing:

Most participants judged that if incoming data were consistent with economic growth picking up…then it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June….

[But] worries about runaway inflation are based on a view of the relationship between inflation and unemployment that looks shakier by the day…. Global labour and product markets are glutted… a global glut of investable savings too…. The Fed does not have cause to try to push inflation down. Its preferred measure of inflation continues to run below the Fed’s 2% target, as it has for the last four years. Somehow the Fed seems not to worry about what effect that might have on its credibility. All that undershooting has depressed market-based measures of inflation expectations…. If the Fed’s goal is to hit the 2% target in expectation, or on average, or most of the time, or every once in a while, or ever again, it might consider holding off on another rate rise until the magical 2% figure is reached. You know, just to make sure it can be done.

But the single biggest, overwhelming, really important reason not to rush this is the asymmetry of risks facing the central bank. Actually, the Fed’s economic staff explains this well; from the minutes:

The risks to the forecast for real GDP were seen as tilted to the downside, reflecting the staff’s assessment that neither monetary nor fiscal policy was well positioned to help the economy withstand substantial adverse shocks. In addition, while there had been recent improvements in global financial and economic conditions, downside risks to the forecast from developments abroad, though smaller, remained. Consistent with the downside risk to aggregate demand, the staff viewed the risks to its outlook for the unemployment rate as skewed to the upside.

The Fed has unlimited room to raise interest rates…. It has almost no room to reduce rates…. Hiking now is a leap off a cliff in a fog; one could always wait and jump later once conditions are clearer, but having jumped blindly one cannot reverse course if the expected ledge isn’t where one thought it would be…

Must-read: Ryan Avent: “No Take-Backs: The Fed Makes the Best of the Bad Situation It Created”

Posted on by Brad DeLong

Must-Read: Back at the end of last October, when the Federal Reserve decided it was going to hike interest rates in December, there were three reasonably-likely outcomes for the US economy over what was then the next six months: the economy could roar ahead, and a 2015:IV rate hike followed by a 2016:I one would look prescient while a 2015:IV pause and a 2016:I double-hike would look a little behind the curve; the economy could plod along, in which one hike in either 2015:IV or 2016:I would look arguable; or the economy could dive, in which case a 2015:IV hike would look like a significant unforced error.

Now roaring ahead is off the table. The prospects now for October-April are for either a plod or a dive…

Ryan Avent: No Take-Backs: The Fed Makes the Best of the Bad Situation It Created: “SUPPOSE for a moment that you are sitting on the Federal Open Market Committee…

…You think that it was sensible to raise the fed funds target in December… [think] the second half of 2015… [shows] employers adding workers at a sustained, rapid clip… oil can’t fall that much farther… payroll growth at this pace and unemployment rate has to eventually lead to much faster wage growth and higher inflation. There’s a risk that high inflation would be hard to bring down, and we don’t want to create a new recession by hiking rates a lot in a short period of time. So best to get started with the hikes now…. So you raise rates. And… all hell breaks loose…. Market-based measures of future inflation trip on a stone and faceplant….

So then you all meet again in January…. What do you do, then? Well, you release a statement… which makes the best of December’s unforced error. And… think very hard about how to change gears in March if things continue on…. The Fed… could not simply point to the real-economy data, which don’t look that different now than they did in December, and say that its outlook hadn’t really changed…. A statement… that it remained… hawkish… would force… to a nasty market panic. And enough panic can become self-fulfilling.

The statement therefore needed to… demonstrate that: the Fed’s view is basically unchanged, but the Fed is also aware of potential trouble brewing and stands ready to act accordingly, but the brewing trouble isn’t the sort of thing that should cause anyone to worry…. The problem is that now the Fed doesn’t meet again until March…. If it chooses to wait while markets do their thing, a March policy reversal could come too late to prevent a sharp deceleration in American economic activity….

It is possible that America’s recovery will roar ahead, and the Fed will be able to hike four times in 2016. But the Fed is now in a very uncomfortable position, which could easily become much more uncomfortable still. That was always the risk in hiking before economic conditions really demanded it. When both interest rates and inflation are very low, there is unlimited room to increase rates in response to an unexpected (and improbable) surge in inflation to a rate well above the target. On the other hand, under those circumstances it is very hard to react in time and with adequate force to an unexpectedly weak economic performance…

Must-Read: Ryan Avent: Ben Bernanke’s Big Blunder

Posted on by Brad DeLong

Must-Read: I find myself thinking about six things:

  1. The failure of the Bernanke Fed to focus on the unwinding housing bubble and learn about the outstanding sources of systemic risk in 2006 and 2007.
  2. The decision by the Bernanke Fed in September 2008 that it was time to demonstrate that it did not guarantee the debt of money-center shadow banks, step aside, and allow the uncontrolled bankruptcy of Lehman Brothers.
  3. In fact, the earlier decision by the Bernanke Fed to stand by rather than to handle the situation when, in the summer of 2008, Lehman Brothers crossed the line from solvent to insolvent and thus the Federal Reserve arguably lost the legal power to handle a Lehman-centered crisis.
  4. The failure of the Bernanke Fed to commit to a policy of catching-up to 2%/year inflation should prices fall below its inflation target.
  5. The failure of the Bernanke Fed to choose a more appropriate, higher inflation target than 2%/year.
  6. The failure of the Bernanke Fed to admit that the 2%/year inflation target had proved to be a mistake, and shift to a more sensible nominal GDP target.

These are six major failures of technocratic rationality in monetary policy. Is there anything to offset them, other than “we stopped another Great Depression from happening”?

Ryan Avent: Ben Bernanke’s Big Blunder: “Two weeks ago, The Economist repeated its endorsement of a change in the Fed’s monetary policy target…

…from an inflation rate to a growth rate for nominal GDP (NGDP): or total spending and income in an economy in dollar terms. In November of 2011, during Mr Bernanke’s chairmanship of the Fed, the monetary-policy committee considered a change to an NGDP target, but opted to stay with the old, inflation-focused framework. Mr Bernanke writes:

For nominal GDP targeting to work, it had to be credible. That is, people would have to be convinced that the Fed, after spending most of the 1980s and 1990s trying to quash inflation, had suddenly decided it was willing to tolerate higher inflation, possibly for many years.
And so in January of 2012 the Fed reiterated its inflation-targeting stance and officially designated a 2% rate of inflation, as measured by the price index for personal consumption expenditures, as the target.

We all know what happened next. Since then, the Fed has spectacularly undershot its inflation target…. Markets suspect rates might not rise to 0.5% until well into 2016, and most Fed members think rates will never get any higher than 3.5%. Treasury prices suggest that inflation will be closer to 1% than 2% over the next five years. There is good reason to believe that Mr Bernanke’s Fed made a big mistake, in other words. An NGDP target would have worked out better… helped the Fed choose policy more appropriately at a tricky time in the recovery. In 2011 high oil prices drove headline inflation above 2%… the central bank sensibly shrugged aside calls to raise rates in response to rising prices. Yet it also took no additional action to boost the economy. The recovery subsequently lost pace, inflation fell, and by the end of 2012 the Fed was forced to restart QE. Had the Fed instead focused its attention on NGDP, it would have been forced to react to an economy that was well below an appropriate level of output and which was growing too slowly…. Instead it took the costly choice to dither.

Just as importantly, a switch to an NGDP target would have sent a strong signal about Fed priorities…. Mr Bernanke notes that the Fed spent the 1980s and 1990s trying to quash inflation. It did not arrive at that policy strategy passively…. Paul Volcker… [did not say] that the Fed couldn’t possibly rein in double-digit inflation because it lacked credibility as an inflation-fighter after a decade of neglecting the problem. Instead, he used the tools available to him to demonstrate the Fed’s credibility. Mr Bernanke’s Fed could have, and should have, taken similarly bold action….

Instead, it made itself a prisoner of its own complacency. As a result, inflation and interest rates will spend most of the 2010s at dangerously low levels, leaving the American economy disconcertingly vulnerable to new economic shocks. The book, by the way, is titled The Courage to Act