All I ask for is symmetry

I was in a bad mood when I wrote my last post on Mr. Fisher.  I turned 54 that day and would have rather been spending the time with my family.  This is another foul-tempered post.  But don’t worry it’s (relatively) short, and I’ll do one soon on the thinking man’s sex symbol (Scarlett Johansson.)

Mr. Fisher is in the news again.  I know you guys don’t like me to refer to last year’s monetary policy as “tight,” so let’s just call it much less expansionary than needed to prevent a severe downturn.  And Mr. Fisher was the most aggressive opponent of greater monetary ease.  Now with unemployment expected to rise to over 10% next year, he sounds like he can hardly wait to raise interest rates:

WASHINGTON (AP) — To prevent inflation from taking off, the Federal Reserve will need to start boosting interest rates quickly and aggressively once the U.S. economy is back on firmer footing, a Fed official warned Tuesday.

“I expect that when it comes time to tighten monetary policy, my colleagues and I will move with an alacrity that, if needed, will be equal in speed and intensity” to when the Fed was slashing rates to battle the recession and the financial crisis, said Richard Fisher, president of the Federal Reserve Bank of Dallas.

At first the second sentence sounded scary, but then I recalled that the Fed did not raise rates once between May 1st and early October, 2008, the period when the world economy was falling off a cliff.  So perhaps if they move with equal “speed and intensity” it won’t be so bad.  But the next sentence indicates that it isn’t just Mr. Fisher:

Although Fisher has a reputation for being one of the Fed’s toughest inflation fighters, it marked the second such warning by a central bank official in recent days. Fed member Kevin Warsh on Friday said the central bank will need to move swiftly when the time comes to raise rates.

You might ask what’s so unreasonable about their views; after all don’t we need to tighten at some point to prevent a breakout of inflation?  Yes, but there are still two very serious problems with what Fed officials are saying:

“The wind-down process needs to begin as soon as there are convincing signs that economic growth is gaining traction and that the lending capacity of the banking system is capable of expansion,” according to excerpts of a speech Fisher delivered in Dallas. That also was similar to Warsh’s comments last week.

No wonder one press report indicated that these comments made Christy Romer “cringe.”  In 1933 the US recovery gained traction, and yet in 1937, four years later, a decision to tighten policy proved disastrously premature.  I have no idea how long it will be before the Fed should raise its target rate, but I know it should not come at the first sign the recovery is gaining traction.  It should come when the forecast rate of NGDP is equal to the Fed’s implicit target.

And this leads to my second objection.  Why are Fed officials talking about raising interest rates without any discussion of removing fiscal stimulus?  You might argue that fiscal policy is none of their business, and they can’t control it anyway.  Here’s how I look at things.  Last year the Fed called for fiscal stimulus, basically on the grounds that they (wrongly) felt that monetary stimulus alone wasn’t sufficient.  If they are going to call for fiscal stimulus when they think it is needed, then they absolutely must call for removal of the fiscal stimulus when monetary policy is, by itself, capable of providing sufficient stimulus.  And logically that would occur well before the Fed was contemplating tightening policy.  All I ask for is symmetry.  If the Fed is going to interfere in fiscal policy, do it in both directions.  After all, fiscal stimulus is far more costly (in terms of debt) than monetary stimulus.

Here’s how the markets responded to these Fed statements:

Some investors found Warsh’s comments confusing, especially coming just two days after the Fed decided to hold its key bank lending rate at a record low near zero and pledged to keep it there for an “extended period.” Most economists read that to mean the Fed would keep rates at super-low levels through this year and into part of 2010.

Warsh’s comments led some investors to believe that rate increases could come sooner.

I’m not surprised they’re confused.  I am too.  The standard monetary text for PhD students was written by Michael Woodford of Columbia.  He shows that the most important determinant of current AD is changes in the expected path of future monetary policy.  If this article is correct, and the comments “led investors to believe that rate increases could come sooner,” then these statements represent a de facto tightening of monetary policy.  Let’s hope this AP story is wrong.

Update:  It looks like my hopes are dashed.  From last Friday’s

Warsh’s comments and rise in a consumer confidence index caused prices on U.S. two-year notes to fall. Yields on the two- year government note rose five basis points to 0.98 percent at 4:32 p.m. in New York. Stock prices fell, with the Standard & Poor’s 500 index down 0.6 percent to 1,044.38.

PS.  I forgot to give a hat tip to Marcus for the previous Fisher article.



17 Responses to “All I ask for is symmetry”

  1. Gravatar of The Arthurian The Arthurian
    29. September 2009 at 15:19

    Hello sir, and happy birthday. (54 ain’t so bad. Some of us here are 60.) I’m with ya. But I’m thinkin’ maybe Mr. Fisher and Mr. Warsh are trying to nip expectations in the bud. After all, the whole Mises organization is doing everything it can to fan the fires of inflation. Somebody has to defuse the psychological component.

    I enjoy reading your posts. Not many people share your views, and you present things so that even a hobbyist like me can understand. Peace.

  2. Gravatar of Mike Sandifer Mike Sandifer
    29. September 2009 at 17:50

    I’ve read similar posts on several economics blogs, including those of Krugman, DeLong, and others. There seems to be a large consensus among economists that appear sane to me that this sort of talk should be avoided until the Fed is actually close to raising rates.

    Speaking of ignorance, I saw John Cochrane on Bloomberg a couple of weeks ago, and most of his interview seemed fine. However, at the 3:23 mark, he said that fiscal stimulus was ineffective because a dollar of spending is a dollar that had to come from someone else. Correct me if I’m wrong, but isn’t this an obvious fallacy?

    The simulus is being financed with deficit spending, with government debt being bought by at least some of that money that may otherwise be on the sidelines. The link to the video:

  3. Gravatar of Mike Sandifer Mike Sandifer
    29. September 2009 at 21:24

    The Arthurian,

    I think inflationary expectations would be nice right now, given that there needs to be a rather considerable increase in the money supply.

  4. Gravatar of q q
    30. September 2009 at 01:15

    speaking of symmetry, it’s my 45th birthday, today.

  5. Gravatar of leo leo
    30. September 2009 at 03:03


    I have an example of bad symmetry; both Bernanke and Romer are obsessed with the 1937 analog. That’s one 72-year old data point. Doesn’t anything else matter!

  6. Gravatar of Current Current
    30. September 2009 at 06:28

    q: “speaking of symmetry, it’s my 45th birthday, today.”

    I’ve been to four birthday parties in the last two weeks including my own. The anniversary Mises birthday was yesterday, which makes Scott 73 years and 1 day younger than him.

    The reason for this is, of course, The Structure of Production :). It’s very cold in winter and New Years Eve seems to have some romantic charm to some people.

  7. Gravatar of Joe Calhoun Joe Calhoun
    30. September 2009 at 07:00

    From the end of Warsh’s speech at Annual International Banking Conference (

    “Monetary policy is not conducted in a vacuum. The Federal Reserve, and other monetary policymakers, will be keen observers to the judgments made by the fiscal authorities around the world. Central bankers will necessarily take account of these judgments.”

    I’m not sure exactly what that means but it seems that at least Warsh is watching fiscal policy.

  8. Gravatar of jean jean
    30. September 2009 at 08:16

    I find this proposition a bit fallacious:
    “After all, fiscal stimulus is far more costly (in terms of debt) than monetary stimulus.”

    While it is difficult to assert the actual effectiveness of fiscal policy, the cost of monetary stimulus in terms of debt is non-zero: if inflation is to resume a bit too strongly, then the Fed may have to sell assets at loss, and asset sales may not be sufficient to pace inflation. Then, a Fed bailout by the treasury would be needed to permit the Fed to withdraw monetary base from circulation.

    The real questions to be raised seems to be:
    _Is better to have a Fed doing risk management than a government investing massively (or cutting taxes)?
    _Which policy is the most credibly inflationary?

    Since, the Fed would have to beg support from Treasury in case of great inflation, monetary policy seems to be more credible.

  9. Gravatar of rob rob
    30. September 2009 at 14:58

    Scott, my local bar just raised beer prices. Could you please explain monetary policy to the owner? Thanks.

  10. Gravatar of rob rob
    30. September 2009 at 15:51

    Maybe it’s just the expensive beer talking, but I’m getting tired of all the theory and want to do something practical. Let’s start an NGDP futures market now! Current, dont you live in Ireland? Isnt that where most of the prediction markets are based? I’m ready to invest in this thing. If others are on board, make yourselves lknown. The central banks can follow later. Targeting proponents and greedy capitalists unite!

  11. Gravatar of Picasso Kadinsky Picasso Kadinsky
    30. September 2009 at 16:23

    “All I ask for is symmetry”


  12. Gravatar of Current Current
    1. October 2009 at 02:18

    rob: “Maybe it’s just the expensive beer talking, but I’m getting tired of all the theory and want to do something practical. Let’s start an NGDP futures market now! Current, dont you live in Ireland? Isnt that where most of the prediction markets are based? I’m ready to invest in this thing. If others are on board, make yourselves lknown. The central banks can follow later. Targeting proponents and greedy capitalists unite!”

    Though it is headquartered in Dublin you can use Intrade anywhere. There are legal advantages to living in Ireland, though, it’s cheaper to sue them if you need to.

    The main question though is, what do you plan on betting on?

  13. Gravatar of ssumner ssumner
    1. October 2009 at 05:36

    Thanks Arthurian, I am worried that in trying to nip inflation in the bud, they will also nip the recovery in the bud.

    Mike, Cochrane is saying that as a first approximation they are just shifting money around And that is true. But fiscal policy may also increase velocity, which Cochrane is aware of. I tend to agree with Cochrane that fiscal stimulus is rather weak and ineffective, but I take a more nuanced stance that is less likely to be ridiculed by Krugman and Delong. My view is that the effect on velocity is modest, and that fiscal stimulus also takes the pressure off the Fed to do (much more effective) monetary stimulus.

    Happy birthday q.

    leo, I agree that we shouldn’t become obsessed with 1937, but there are lots of reasons not to talk about tightening right now. Reason number one is that it slows the recovery in NGDP, which we’d like to be much more rapid than it appears to be.

    Current, I’d rather not think of my parents in that way.

    Joe, That’s the argument I have been making against Krugman. He argues that without fiscal stimulus monetary policy would have been no more stimulative. I disagree, and it seems like the Fed also disagrees with Krugman.

    jean, Good question but I strongly disagree. First of all, the EMH says the expected profit or loss to the Fed is roughly zero. It is true that there is some risk, and if the stimulus is more expansionary that expected the Fed’s holdings of bonds may fall in value. But the Fed can buy T-bills and short term T-notes that have relatively little price risk. So the expected return is zero and the variance is small. In contrast, fiscal stimulus produces massive deadweight losses. The national debt will rise sharply as a share of GDP. Servicing that debt will require higher taxes, which will be a huge drag on the economy.

    But I agree with your policy views.

    rob, Beer is more expensive, but houses and gasoline are less expensive than a year ago. It all balances out.

    Current, I spent hours trying to set up a Intrade account, but they wouldn’t let me. The reason? They claimed I already had one. I asked for the password and they gave me several, none of them worked. I’d love to use Intrade but they need to get their act together. So I bet on Obama to win in the Iowa Electronics markets. It was like taking candy from a baby. Who in their right mind thought McCain would win? Oops, that violates EMH. Nevermind. . .

  14. Gravatar of jean jean
    1. October 2009 at 07:57

    Well, you are assuming that there are enough treasury bills to buy (roughly 2 trillions $ now). And the balance sheet of the fed is currently 2 trillions $. Of course, the task would be much easier if the Fed committed publicly to raise CPI or NGDP.

    But anyway, the fed buying treasury bonds would have probably less negative impact than:
    _ rapidly decided government investments
    _ incremental deadweights induced by tax deferral (tax cuts followed by tax raises)
    _ distorting assets market by massive purchases in private sector.

  15. Gravatar of rob rob
    1. October 2009 at 14:10

    Current, my point was that I want to launch a prediction exchange to compete with Intrade, with more markets. My point about Ireland is only that there must be a legal & economic reason Intrade is located there. You couldn’t locate one in the US, for instance. And according to Scott above, Intrade doesn’t have their act together, so they clearly need some competition…

  16. Gravatar of Current Current
    2. October 2009 at 09:00

    It’s complicated. The gambling industry is affected by two main taxes, gambling taxes and corporate taxes.

    In Ireland in the recent past corporate taxes were low (12.5% on profits) and gambling taxes only applied to bets taken within Ireland. I understand that recently though the law has changed….

    In Britain things are different, but still quite attractive for starting bookmakers. The situation is complicated because of many decades of attempts by bookies to avoid being taxed. They are currently charged no betting taxes, but they are charged an extra 15% corporate tax on gross profits. As a result they are fleeing to Gibraltar (again, they did in in the late 90s too).

    From a cursory look at the subject Gibraltar seems to be the place to be.

  17. Gravatar of ssumner ssumner
    3. October 2009 at 10:07

    Jean, I said T-bills and T-notes, of which there are plenty to buy. Especially if the Fed gets rid of the bloated reserves with an interest penalty.

    I agree with the rest of your point.

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