Twelve basis points on the 5 year TIPS spread
Two hundred points on the Dow.
Fed lowers its 2014 unemployment estimates by 0.3% or 0.4%
People are getting very excited by the Fed’s new initiatives, and rightly so. But it’s important to keep things in perspective. There’s a big difference between moving slightly toward level targeting/targeting the forecast, and actually doing those things. The markets are telling us that expected NGDP growth accelerated. So the policy “worked.” But it’s not enough to promote rapid recovery. On the other hand we have to be realistic, the policy will be judged on the basis of subsequent events, not yesterday’s changes in market expectations (as it would be judged if macroeconomics were a science, not a branch of astrology.)
In my view the most important gain might be in future business cycles. The Fed has implicitly acknowledged that they should have paid more attention to market monetarists and Woodfordians back in 2008-09. Like most big institutions, the Fed evolves gradually over time. Perhaps the best analogy I could provide would be the Keynesian revolution. It had a small impact on 1930s policy-making, but not enough to promote a fast recovery. On the other hand it became conventional wisdom among policymakers after WWII (for better or worse–and I’d say “both.”) I expect the Fed to do some hard thinking about signaling/level targeting/etc between now and the next recession, and to be better prepared next time. And the smartest teenage economists in the blogosphere (Soltas, Wang, etc) have also been pushing the Fed to move in this direction. That bodes well for the future.
On a lighter note, yesterday was “Scott Sumner day” and yet I had to go to work. That doesn’t seem fair! I’d also note that Cardiff Garcia at FT Alphaville mentioned David Beckworth and I (along with Woodford), in their discussion of economists who had played a role in the debate. Don’t get me wrong, I realize that Woodford’s 100 times more influential than I am. But I also think we’ve had some impact, mostly by putting out ideas that other more famous people have discussed and/or advocated (Christy Romer, Krugman, DeLong, Jeffrey Frankel, Jan Hatzius, etc.) So it’s a good day for market monetarism.
In a recent post I mentioned Evan Soltas’s tweet on how the decision seemed to affect the Obama contract over at Intrade. A few months back a blogger named “redonkulus” sent me a link showing that the Obama contract is positively correlated with the TIPS spread, which jumped last night.
PS. A patron of the arts is a wealthy individual who is skilled at finding and nurturing talented artists. Tyler Cowen is sort of a patron of the economics blogosphere. He was the first to promote my blog, and he saw the quality of Evan Soltas’s blogging even before I did.
PPS. I just noticed some very kind comments from my favorite progressive blogger, Matt Yglesias. He credits me with influencing his thought on monetary economics. I can honestly say that he’s influenced my thought on public policy issues more than any other blogger. I’d also like to thank Ryan Avent, who’s helped promote our ideas, and who can express then much more eloquently than I can.
PPPS. Also thanks to all the other market monetarists. The list is getting so long that I won’t try to name them (and offend someone by leaving out the name) but you all know who they are.