Great minds think alike
Back in April I posted the following idea:
Here’s my suggestion: If the Fed is committed to communicating in terms of the fed funds rate, why not continue to have the Fed set a “shadow fed funds target.” The proposal would work as follows. The FOMC would continue to meet every six weeks and vote on the fed funds target that would be most effective in communicating their macro policy goals. For instance, this might be the number that results from the Taylor Rule formula. No consideration would be given to whether this was a positive or negative number. Then the Fed would announce the target, and instruct the New York trading desk to get as close as possible (which would be zero, or perhaps the IOR rate.)
Just two days ago Miles Kimball posted the following idea:
What I propose is that the FOMC say something like this when it feels that monetary policy should be more expansionary than a fed funds rate of zero alone will provide:
“In addition to keeping the federal funds rate at 0 to 1/4 percent, the Committee will undertake purchases of other securities in amounts estimated to provide an effect on aggregate demand equivalent to what a reduction in the federal funds rate target of 2 percent would normally provide.”
. . .
The “virtual fed funds rate target” of my title is my suggestion for how the press could report this action by the FOMC:
“The Federal Reserve today set a virtual fed funds rate target of -2%. Since the fed funds rate is already close to zero, the Fed is slated to buy various assets (including long-term government bonds and mortgage-backed securities from Fannie Mae) in order to achieve the same stimulus that reducing the fed funds rate by 2% normally would accomplish.”
HT: Saturos
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20. June 2012 at 08:09
i am very bipolar about this idea:
1. how do i know -4% is the right number. why not -6% or -3%?
2. These “virtual” fed funds estimates are highly model
dependent and subject to wide variation across the industry. I’ve parsed the one the Atlanta Fed uses and I do not trust it. Plus, “effectiveness” is a function of clear communication.
3. what about interest on reserves??
4. why have an intermediate target like fed funds at all?
on the other hand, its might be a good step forward.
20. June 2012 at 08:18
Sorry for another off-topic comment. I’ll stop. I promise. But readers might be interested in this interactive graphic by the W$J noting Fed actions against treasury yields and the DJIA.
http://blogs.wsj.com/economics/2012/06/20/how-effective-have-fed-moves-been/tab/interactive/
20. June 2012 at 08:42
And the Fed did zero.
It is as if all this blogging has done nothing at all.
20. June 2012 at 08:46
dwb: “how do i know -4% is the right number. why not -6% or -3%?”
What’s so special about the negative rates? How do you know any Fed Funds target is the right number? Isn’t the answer simply: follow something like a Taylor Rule?
You use some process to decide on a rate target. In recent years, that process has resulted in a negative number, but the reported target is always “zero”, which is too high.
20. June 2012 at 08:48
I like Scott’s phrasing better. But then I’m biased.
20. June 2012 at 08:52
It’s a good step towards NGPLT.
20. June 2012 at 09:01
I, for one, welcome our new NGDP targeting overlords.
20. June 2012 at 09:18
Cedric:
Sorry for another off-topic comment. I’ll stop. I promise. But readers might be interested in this interactive graphic by the W$J noting Fed actions against treasury yields and the DJIA.
It’s amazing how temporary the effect of QE programs seem to be for increasing bond PRICES (PRICES NOT RATES argh!).
20. June 2012 at 09:19
It’s like as soon as QE programs end, rates go down.
20. June 2012 at 10:00
If economists were doctors…
Doctor Fisher: The patient is probably fine. He doesn’t need any medicine. Besides, medicine is risky.
Doctor Bernanke: I’m a little worried. Let’s give the patient one sugar pill and see what happens.
Doctor Sumner: The patient is very ill. Let’s give him a sugar pill every hour until he recovers, and inform the patient he is receiving virtual medicine in a dosage calculated to have the same effect as real medicine.
20. June 2012 at 10:33
Max, economist are not doctors but dentists. After the world ignores all dentist advice to brush teeth, the teeth rot and the world realizes that they should have been brushing them. Merkel goes out and says that all the toothaches are a result of not brushing our teeth and that brushing our rotten teeth hard enough is all we need to get rid of the toothache.
Additionally, if economists were doctors, faced with the bleeding patient Scott would be recommending transfusion of enough blood until our medical equipment shows that blood pressure is back to normal, Bernanke would recommend we give the patient barely enough blood to keep him alive and Fisher would be recommending stopping all transfusions because transfusions are a work of the devil.
20. June 2012 at 10:37
Max, Satire is only effective if you have at least a primitive understanding of the ideas you are satirizing.
20. June 2012 at 10:42
Instead of letting NGDP fall according to market determined processes, the Fed has inflated like gangbusters, and since 2010 have been bringing about an artificial 4-5% annual rise in NGDP.
This is, of course, distorting economic calculation and thus preventing the market from fully correcting. The result can be summed up by the Fed’s latest forecast:
http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120620.pdf
They forecast 2012 unemployment to be 8.0%-8.2%, up from 7.8%-8/0% their April forecast.
Nobody at the Fed knows what they are doing. They are inflating and inflating and making it incredibly difficult for investors and entrepreneurs to guess what the undistorted market prices and interest rates really are.
20. June 2012 at 10:44
Max:
LOL, that about sums it up.
20. June 2012 at 10:51
If the 2% reduction in fed funds rate is what would “normally” have been sufficient to increase aggregate spending a particular amount, and this “shadow fed funds rate” method is adopted, then the “normally” will lose its meaning, because the new normal will be 0% fed funds rate and large scale asset purchases. It would become impossible to calculate the shadow fed funds rate when history becomes more and more filled with “non-normal” data.
The “shadow fed funds rate” would soon become a figment of someone’s imagination, if it wasn’t always one, much like the benefits of NGDP targeting.
20. June 2012 at 10:52
In other words, Goodhart’s Law strikes again.
20. June 2012 at 10:55
Miles Kimball is a “great mind” because he, like Sumner, is a central planner, politics thinker, not an economist. Look at what he wrote:
“And here is the headline:”
“FED SETS VIRTUAL FUNDS TARGET AT -2%”
“To me, this sounds much less inflammatory than”
“FED SET TO BUY $600 BILLION OF BONDS”
He thinks it is better for the state to use words that he thinks would have less backlash, than words that describe reality. The Fed would be buying $600 billion in bonds, but because that is not politically popular for the state, they should instead say “We are targeting an imaginary rate that doesn’t exist.”
I knew right away from Sumner’s praise of Kimball that I would end up reading a political hack, not an economist.
20. June 2012 at 11:32
looking at the FOMC’s OWN projections, it isn’t till 2014 that we see 5% NGDP growth. they seem satisfied with 4% this year. greg ip came close by asking why they weren’t doing more even with their own inflation forecasts below the 2% target, but bernanke slipped through the question, the eel!
20. June 2012 at 18:03
Ravi, I saw that too.
20. June 2012 at 18:38
If (most) economists were doctors they would advocate asphyxiating the obese to fight the weight problem.
21. June 2012 at 04:21
Once again Ben I am forced to quote you on Twitter: https://twitter.com/_Srijit/status/215781247870451712
21. June 2012 at 13:27
Benjamin Cole:
If (most) economists were doctors they would advocate asphyxiating the obese to fight the weight problem.
If most economists were Austrians they would advocate for less of what caused the obesity in the first place, namely too much eating.
Unfortunately, most economists are not Austrians, so most actually believe that less eating is the equivalent of asphyxiation.