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Reading the Federal Reserve's Tea Leaves Dot Plots - Washington Center for Equitable Growth
Yet I find myself frustrated by one lack: the meeting participants fail to give their estimates of what the 10-year Treasury bond yield associated with their preferred funds path would be. I don’t know how they think the shifts since 2007 both in the economy and in how we view the economy have affected the “neutral” or “natural” long-term safe interest rate in relation to the short-term rate. So the thinking of FOMC participants remains more opaque to me than I would wish. What is their expectation of the gearing from the short to the long-term interest rate? And at what short-term interest rate do they expect the yield curve to invert? (Of course, even if I knew their implicit appropriate 10-year bond yield forecasts, much of their thinking would still remain opaque–only less opaque).
Morning Must-Read: Barry Eichengreen: The Fed Under Fire - Washington Center for Equitable Growth
Barry Eichengreen: The Fed Under Fire: “Fed officials… while they would prefer not to re-litigate… 2008…
…their decisions are still not well understood and that officials must do more to explain them…. Fed officials should avoid weighing in on issues that are only obliquely related to monetary policy…. Fed officials should acknowledge that at least some of the critics’ suggestions have merit. For example, eliminating commercial banks’ right to select a majority of each Reserve Bank’s board would be a useful step in the direction of greater openness and diversity. The Federal Reserve System has always been a work in progress. What the US needs now is progress in the right direction.
A Note on Communications with the Federal Reserve: Focus - Washington Center for Equitable Growth
Yet the Federal Reserve in its internal decision-making processes appears to be focusing 100% on (2), and 0% on (1), (3), (4), and (5). And that raises the question of why: Just what are the internal decision-making committee processes within the Federal Reserve that are leading to such an outcome? Ex ante, I would have expected many individual members of the FOMC to be very unhappy with such a possibly-premature tightening–what is the reason that they are not? That the Federal Reserve has failed to make its thinking clear enough to me for me to get where they are coming from seems to me to be a major failure–but whether of their communications policy or of my comprehension I am not sure…
Evening Must-Read: Tim Duy: Game On - Washington Center for Equitable Growth
Bottom Line: The Fed’s confidence in the US economy is driving them closer to policy normalization…
…The labor market improvements are key – as long as unemployment is falling, confidence in the inflation outlook is rising
Nighttime Must-Read: Paul Krugman: The Strange Urge to Raise Rates - Washington Center for Equitable Growth
“Monetary policy attracts crazy people like moths to a flame: goldbugs, 100-percent-reserve-banking types, amateur historians who think they know exactly what happened when Diocletian ruled Rome…
…The obsession with raising interest rates among economists who used to seem sensible…. Up to a point, Feldstein has followed the now-usual arc…. We’re talking about conservatives with vast faith in the wisdom of markets, who somehow are completely sure that markets will make terrible decisions due to low interest rates, and require paternalistic monetary policy to keep them on the strait and narrow. What really strikes me about Marty’s latest… is the muttering that there must be some sinister hidden agenda…. that central banks are operating under… a desire to help finance budget deficits. It’s very, very strange, and distressing.
Morning Must-Read: Larry Mishel: Even Better Than a Tax Cut - Washington Center for Equitable Growth
Lawrence Mishel: Even Better Than a Tax Cut: “The challenge is to ensure that a typical worker’s wages…
…grow along with profits and productivity. There is no silver bullet, but the key is… to reverse decades of decisions that have undercut wage growth. We need to start with monetary policy…. The most important decisions… are those of the Federal Reserve Board…. Before raising rates, it is essential we achieve a robust recovery, with roughly 3.5 to 4 percent annual [nominal] wage growth…
Evening Must-Read: Jared Bernstein: A Few Quick Fed Points - Washington Center for Equitable Growth
Jared Bernstein: A Few Quick Fed Points: “1) The sharply stronger dollar…
…pushes against Fed tightening….
Morning Must-Read: Robert Litan: What 'Audit the Fed' Really Means-and Threatens - Washington Center for Equitable Growth
Robert Litan: What ‘Audit the Fed’ Really Means–and Threatens: “Words matter…. Think of the success tax reformers…
…had when they called the inheritance tax the ‘death tax.’ Or how opponents of the president’s health-care law gathered political strength… calling a medical reimbursements panel the ‘death panel.’ And so it is with Washington’s latest craze, the movement spearheaded by Sen. Rand Paul to ‘audit the Fed,’ an effort launched by the senator’s father, Ron Paul…. The Fed’s financial statements have long been audited by professionals, but Sen. Paul’s bill is not about that… [it’s about the] Government Accountability Office… giv[ing] Congress annual reports on monetary policy functions….
The economists employed by the GAO are no match for the economists at the Fed. It is not within their domain of expertise…. It’s fine for Congress to regularly ask the Fed… to report…. But why create… a ‘shadow Fed’ elsewhere within the government?… If backers of the ‘audit the Fed’ movement want to get rid of the agency, they should say so, and let that debate begin. If it does, central banks will win…. If ending the Fed is not the objective… economic evidence makes clear that truly independent central banks keep inflation lower…
Evening Must-Read: Claudia Sahm: Is Resistance Futile? - Washington Center for Equitable Growth
Claudia Sahm: Is Resistance Futile?: “Krugman…. ‘So if Larry [Summers] were at the Fed…
would he be saying what he is, or would he have been assimilated by the FedBorg?…
This got me wondering: In the past 7+ years have I, as a staff economist, been ‘assimilated by the FedBorg?’… What are some Fed-specific signs that I have changed as an economist?: Fedspeak: My economic writing tends to be more factual and less forceful now…. The staff view: As an economist, I uttered the words: ‘we think xyz’ much, much less before joining the Fed…. The Fed: More than once I have thought how wonderful it would be if monetary policy in the real world were like in Woodford’s textbook…. I am constantly amazed at the array of inputs to and outputs from the policy work at the Fed. And I am pretty sure that most academic economists could learn something from reflecting more on this…. So it seems to me the good part of assimilating is learning new things, the bad part of assimilating is forgetting what you knew…
Nighttime Must-Read: Lawrence Summers: Only Raise Rates when Whites of Inflation’s Eyes are Visible - Washington Center for Equitable Growth
Mark Thoma sends us to: Lawrence Summers: Only Raise Rates when Whites of Inflation’s Eyes are Visible
I cannot recall a moment when the gap between what markets expect the US Federal Reserve to do and what the Fed itself has forecast it will do has been as large. Markets predict that the Fed will raise rates only to 1.6 per cent by the end of 2017; the Federal Open Market Committee’s average forecast is 3.5 per cent. Such a divergence raises the risk of volatility and poses a communications challenge for the Fed. More important, it raises the question of what should guide future policy…. Available inflation data suggests little cause for concern. The core consumer price index has averaged 1.1 per cent over the past six months; if housing costs were stripped out it would be zero. Wages actually fell in December and over the past year employment costs have risen 2.25 per cent…. In such circumstances efforts to reduce demand and growth require a compelling justification. Yet the idea that below normal unemployment will necessarily lead to accelerating inflation as suggested by the so called Phillips curve is very uncertain…. [Moreover,] if inflation were to accelerate a bit this would be a good thing…. A plane that accelerates too rapidly as it takes off may cause passengers discomfort while a plane that accelerates too slowly may crash…. The US has never been more intertwined with the global economy…
