Tag: Stan Fischer

Must-read: Tim Duy: “Stanley Fischer and Lael Brainard Are Battling for Yellen’s Soul”

Posted on by Brad DeLong

Must-Read: Tim Duy: Stanley Fischer and Lael Brainard Are Battling for Yellen’s Soul: “Stanley Fischer sits on Chair Janet Yellen’s left shoulder, muttering:

…we may well at present be seeing the first stirrings of an increase in the inflation rate…

Fed Governor Lael Brainard perches on the right, whispering:

…there are risks around this baseline forecast, the most prominent of which lie to the downside.

Yellen is caught in a tug of war between Fischer and Brainard. At stake is the Fed chair’s willingness to embrace a policy stance that accepts the risk that inflation will overshoot the U.S. central bank’s target. At the moment, Brainard has the upper hand in this battle. And she has a new weapon on her side: increasing concerns about the stability of inflation expectations….

Fischer’s not alone. In his group sit Federal Reserve Bank of San Francisco President John Williams, Kansas City Fed President Esther George, and Cleveland Fed President Loretta Mester. And Yellen is believed to be reasonably sympathetic to this camp. She’s repeatedly voiced her support of a Phillips curve view of the world—or the idea that, after accounting for the temporary impacts of a strong U.S. dollar and weak oil, inflation will rise as unemployment rates fall…. Indeed, a Phillips curve view is fairly common among monetary policymakers….

So, given the Phillips curve framework’s consistency among policymakers, why delay further rate hikes?… The challenge for further rate hikes is that recent financial instability has exposed the downside risks to the forecast… New York Fed President William Dudley, Philadelphia Fed President Patrick Harker, and Boston Fed President Eric Rosengren…. Financial instability certainly gives the Fed reason to stand still this week. And it gives reason for the Fed to continue to be cautious…

Must-read: Stan Fischer: “Reflections on Macroeconomics Then and Now”

Posted on by Brad DeLong

Must-Read: Stan Fischer: Reflections on Macroeconomics Then and Now: “In 1961, at the end of my school years, on the advice of a friend…

…I read Keynes’s General Theory for the first time. Did I understand it? Certainly not. Was I captivated by it? Certainly, though ‘captured’ is a more appropriate word than ‘captivated.’ Does it remain relevant? Certainly. Just a week ago I took it off the bookshelf to read parts of chapter 23, ‘Notes on Mercantilism, the Usury Laws, Stamped Money and Theories of Under-Consumption.’ Today that chapter would be headed ‘Protectionism, the Zero Lower Bound, and Secular Stagnation,’ with the importance of usury laws having diminished since 1936.

There is an old joke about our field…. ‘But this is exactly the same as the exam I wrote over 50 years ago.’ ‘Ah yes,’ says the professor. ‘It is the same, but all the answers are different.’ Is that really the case? Not really…. The basic framework we learned a half-century ago remains extremely useful. But also yes: Some of the answers are different because… the problems they deal with were not evident fifty years ago…. Learn as much as you can, for most of it will come in useful at some stage of your career; but never forget that identifying what is happening in the economy is essential to your ability to do your job, and for that you need to keep your eyes, your ears, and your mind open, and with regard to your mouth–to use it with caution.

Must-read: Stan Fischer: “Reflections on Macroeconomics Then and Now”

Posted on by Brad DeLong

Must-Read: When I look at these five graphs below, this paragraph from Stan Fischer seems to me to be simply the wrong one-paragraph summary of the issues. Just wrong:

Stan Fischer: Reflections on Macroeconomics Then and Now: “Estimated Phillips curves appear to be flatter than they were estimated to be many years ago…

…in terms of the textbooks, Phillips curves appear to be closer to what used to be called the Keynesian case (flat Phillips curve) than to the classical case (vertical Phillips curve). Since the U.S. economy is now below our 2 percent inflation target, and since unemployment is in the vicinity of full employment, it is sometimes argued that the link between unemployment and inflation must have been broken. I don’t believe that. Rather the link has never been very strong, but it exists, and we may well at present be seeing the first stirrings of an increase in the inflation rate–something that we would like to happen.

Graph Consumer Price Index for All Urban Consumers All Items FRED St Louis Fed Https www whitehouse gov sites default files docs ERP 2016 Book Complete 20JA pdf Https www whitehouse gov sites default files docs ERP 2016 Book Complete 20JA pdf Https www whitehouse gov sites default files docs ERP 2016 Book Complete 20JA pdf Is weak U S wage growth all because of who s getting jobs Equitable Growth

https://www.whitehouse.gov/sites/default/files/docs/ERP_2016_Book_Complete%20JA.pdf | https://www.evernote.com/l/AAE6xHSsx8VH54YkkTp_visEwoz4UEAKtxwB/image.png

Must-read: Tim Duy: [Stan Fischer] “Resisting Change?”

Posted on by Brad DeLong

Must-Read: Two takeaways this morning from Stan Fischer, and from Tim Duy reading Stan Fischer:

  1. 1.4%-2% inflation “positive and broadly consistent with price stability” “not in another universe [from 2%]… not a negative number” is the new 2% inflation target.

  2. Because the Federal Reserve has no confidence in its ability to nudge the unemployment rate up to its long-run NAIRU level without overshooting and causing a recession, it must always attempt to glide down to the NAIRU from above–and must not follow policies that risk pushing unemployment below the NAIRU, whatever it really is:

Tim Duy and Friends: [Stan Fischer] Resisting Change?](https://twitter.com/TimDuy/status/694715619929780224): https://t.co/2g24mCkTzv

Lance Bachmeier: @kocherlakota009 @TimDuy: “Good post…

…SF/EG (inadvertently?) communicate that 1.5-2% inflation is ‘good enough’ for them.

NRKocherlakota: “@TimDuy Problem: if 2% is the true symmetric…

…target of policy, the FOMC needs a U-Turn, not just a pause: https://sites.google.com/site/kocherlakota009/home/policy/thoughts-on-policy/1-21-16

Tim Duy: “@kocherlakota009 So…

…I don’t really believe the target is symmetric. Need to prove it to me.

NRKocherlakota: “@TimDuy Yes, and I worry that public/markets…

…have your same (reasonable!) doubts. SF’s and EG’s remarks don’t help assuage those doubts.

Lance Bachmeier: “@kocherlakota009 @TimDuy The strange thing…

…is that they’re lowering the [inflation] target after we’ve learned 2% is too low already.

Lance Bachmeier: “@kocherlakota009 @TimDuy I’m not even sure 2% is a ceiling…

…they want to prevent inflation from [even] reaching 2%.

Tim Duy: Resisting Change?: “Stanley Fischer[‘s]… speech… was both illuminating and frustrating…. Although his confidence is fading… he is resisting change…. The first source of my frustration… [is that] his definition of ‘accommodative’ depends upon a specific idea of the neutral Fed Funds rates. From the subsequent discussion:

Well, I think we have to wait to see…. We expect…. somewhere around 3 ¼, 3, 3 ½ percent, which is on average a bit lower than in the past. But we’ll be data-dependent….

If you don’t know the longer-run rate, how can you know how accommodative policy is? If the longer-run rate is close to 2 percent, then policy is less accommodative than you think it is. The endgame of policy is the dual employment/price stability mandate, not a specific level of interest rates…. [That the] Fed’s forecasts… have been foiled by oil and the dollar… would suggest a slower or delayed pace of rate hikes, but more on that later. As for market volatility and external events:

In addition, increased concern about the global outlook, particularly the ongoing structural adjustments in China and the effects of the declines in the prices of oil and other commodities on commodity exporting nations, appeared early this year to have triggered volatility in global asset markets. At this point, it is difficult to judge the likely implications of this volatility. If these developments lead to a persistent tightening of financial conditions, they could signal a slowing in the global economy that could affect growth and inflation in the United States. But we have seen similar periods of volatility in recent years that have left little permanent imprint on the economy.

This is unimpressive…. The likely implications of the volatility are straightforward. The decline in longer term yields signals the Fed is likely to be lower for longer…. It seems that Fischer does not acknowledge the Fed’s role in minimizing the impact of similar bouts of volatility. They have responded by either easing via additional quantitative easing, or easing by delaying tightening…. When you fail to recognize your role, you set the stage for a policy error. They can’t use the logic that they should hike in March because past volatility had no impact on growth when that same volatility actually changed their behavior and thus the economic outcomes. I guess they can use that logic, but they shouldn’t. So is March on the table still?… I can tell a story where they push ahead on the labor data alone. Back to Fischer….

A persistent large overshoot of our employment mandate would risk an undesirable rise in inflation that might require a relatively abrupt policy tightening, which could inadvertently push the economy into recession. Monetary policy should aim to avoid such risks and keep the expansion on a sustainable track….

Policymakers fear that they cannot allow unemployment to drift far below the natural rate because they do not believe they could just nudge it back higher without causing a recession. They can only glide into a sustainable path from above… [thus] the Fed will resist holding rates steady…. Indeed, one voting member is already working hard to downplay recent events. Today’s speech by Kansas City Federal Reserve President Esther George:

While taking a signal from such volatility is warranted, monetary policy cannot respond to every blip in financial markets. Instead, a focus on economic fundamentals, such as labor markets and inflation, can help guard against monetary policy over- or under- reacting to swings in financial conditions. To a great extent, the recent bout of volatility is not all that unexpected, nor necessarily worrisome, given that the Fed’s low interest rate and bond- buying policies focused on boosting asset prices as a means of stimulating the real economy. As asset prices adjust to the shift in monetary policy, it is to be expected that the pricing of risk will realign to this different rate environment…. If we wait for the data to provide complete confirmation before making a policy decision, we may well have waited too long….

Watch for policymakers to downplay the inflation numbers as well. Back to George:

Finally, inflation has remained muted as a result of lower oil prices and the strong U.S. dollar…. Yet… core measures of inflation have recently risen on a year-over-year basis. And although inflation rates… have hovered below the Fed’s goal of 2 percent, they have been positive and broadly consistent with price stability.

Note the ‘positive and broadly consistent’ line. And Fischer:

And our view of progress is what the law calls maximum employment and what we call maximum sustainable employment, and a 2 percent inflation rate. And when we get there—we’re there—we’re very close to there on employment, and on inflation the core number that came out this morning was 1.4 percent. You know, that’s not 2 percent. It’s not in another universe. It’s not a negative number. But inflation’s been pretty stable, and we’d like it to go up.

Not in ‘another universe’ from 2 percent. Not negative. Sure we’d like it to go up, but are we really worried about it? Doesn’t sound like it to me.

Bottom Line…. I suspect market volatility and lack of inflation data keep them on hold in March and maybe April…. However (although not my baseline), I can tell a story where they feel like the employment data forces their hand. Especially so if they continue to downplay the inflation numbers. A substantial part of their policy still appears directed by a pre-conceived notion of ‘normal’ policy. This I think is the Fed’s largest error; the fact that the yield curve stubbornly resists being pushed higher suggests that the Fed’s estimates of the terminal fed funds rates is wildly optimistic. There appear to be limits to which the Fed can resist the global pull of zero (or lower) rates.

Must-read: Stan Fischer: “Monetary Policy, Financial Stability, and the Zero Lower Bound I”

Posted on by Brad DeLong

Must-Read: Very disappointing to me that both nominal GDP targeting and price path level targeting appear to be completely off of Stan Fischer’s radar:

Stan Fischer: Monetary Policy, Financial Stability, and the Zero Lower Bound I: “Are We Moving Toward a World With a Permanently Lower Long-Run Equilibrium Real Interest Rate?…

…Research that was motivated in part by attempts that began some time ago to specify the constant term in standard versions of the Taylor rule has shown a declining trend in estimates of r*. That finding has become more firmly established since the start of the Great Recession and the global financial crisis…. A lower level of the long-run equilibrium real rate suggests that the frequency and duration of future episodes in which monetary policy is constrained by the ZLB will be higher than in the past. Prior to the crisis, some research suggested that such episodes were likely to be relatively infrequent and generally short lived. The past several years certainly require us to reconsider that basic assumption….Conducting monetary policy effectively at the ZLB is challenging, to say the least….

The answer to the question ‘Will r* remain at today’s low levels permanently?’ is that we do not know….

Raising the Inflation Target…. The welfare costs of high and variable inflation could be substantial. For example, more variable inflation would make long-run planning more difficult for households and businesses….

Negative Interest Rates: Another possible step would be to reduce short-term interest rates below zero if needed to provide additional accommodation. Our colleagues in Europe are busy rewriting economics textbooks on this topic as we speak…. It is unclear how low policy rates can go before cash holdings rise or other problems intensify, but the European experience has certainly shown that zero is not the effective lower bound in those countries….

Raising the Equilibrium Real Rate: An even more ambitious approach to ease the constraints posed by the zero lower bound would be to take steps aimed at raising the equilibrium real rate. For example, expansionary fiscal policy would boost the equilibrium real rate…. The Federal Reserve’s asset purchases… have reduced the level of the term premium….

Eliminating the ZLB Associated with Physical Currency….

None of these options for dealing with the difficulties of the ZLB suggest that it will be easy either to raise the equilibrium real rate or to mitigate the constraints associated with the ZLB…