Another sign of Fed incompetence

Face palm time:

U.S. stock index futures indicated a sharply lower open on Thursday as traders reacted to a sharp fall in European stocks and looked ahead to the second day of Fed Chair Janet Yellen’s testimony in Washington.

Dow futures were indicating a drop of around 250 points in premarket trading, after falling more than 300 points. The pan-European Stoxx 600 index (^STOXX) was down by more than 2.8 percent.

Meanwhile, U.S. Treasurys soared, as the 10-year yield fell to 1.59 percent.

On Wednesday Yellen told the House Financial Services Committee that the Fed was not sure it could legally take rates negative as Europe and Japan have. She also said it was unlikely the Fed would cut rates, having just raised them.

Not sure?!?!?!?  Now they tell us?  This is almost mindbogglingly incompetent.

OK, I admit it.  I was wrong about Yellen.  Obama should have nominated Larry Summers.  I’m sorry Larry.

PS.  Here’s William Dudley back in October:

Federal Reserve officials now seem open to deploying negative interest rates to combat the next serious recession even though they rejected that option during the darkest days of the financial crisis in 2009 and 2010.

“Some of the experiences [in Europe] suggest maybe can we use negative interest rates and the costs aren’t as great as you anticipate,” said William Dudley, the president of the New York Fed, in an interview on CNBC on Friday.

And here’s Janet Yellen in November:

The Federal Reserve would consider pushing interest rates below zero if the U.S. economy took a serious turn for the worse, Fed Chair Janet Yellen said on Wednesday.

“Potentially anything – including negative interest rates – would be on the table. But we would have to study carefully how they would work here in the U.S. context,” Yellen told a House of Representatives committee.

This would happen if the economy were to “deteriorate in a significant way,” she said, adding that she believed negative rates “would have some at least modest favorable effect on banks’ incentives to lend.”


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87 Responses to “Another sign of Fed incompetence”

  1. Gravatar of Thomas A Thomas A
    11. February 2016 at 06:44

    Scott,

    Curious on your thoughts on the following from Yellen’s statement:

    “Financial conditions in the United States have recently become less supportive of growth, with declines in broad measures of equity prices, higher borrowing rates for riskier borrowers, and a further appreciation of the dollar. These developments, if they prove persistent, could weigh on the outlook for economic activity and the labor market, although declines in longer-term interest rates and oil prices provide some offset.”

    How do low long term interest rates and oil prices help economic activity if they are caused by the market’s deteriorating outlook on economic activity?

  2. Gravatar of Scott Freelander Scott Freelander
    11. February 2016 at 07:12

    Scott,

    It looks like she was bluffing about negative rates in the past. lol Her hand has been called and she has nothing. Is there any doubt now the Fed has lost credibility?

    This is sad, and I too favored her over Summers. There are problems with Summers in that he puts too great a weight on the ZLB “problem”, and is too Keynesian, but yes, his comments indicate that he’d at least not have supported the recent rate hike. On the other hand, something seems to happen to people once they get to the Fed.

  3. Gravatar of Orn Gudmundsson Orn Gudmundsson
    11. February 2016 at 07:13

    They don’t have to go negative yet, simply creating a spread between IOR and overnight lending (by dropping IOR 25 bps or more) would be a good start start.

  4. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    11. February 2016 at 07:14

    Yellen was appointed and approved by the senate with the lowest votes in history, after Democrats found a loophole to be able to approve officials with less than 60 votes …

  5. Gravatar of Staunch Staunch
    11. February 2016 at 07:17

    Sadly, the Fed will once again be to slow to react in order to preserve its “credibility.”

    On aside, what the heck is going on with the Yen? I did not expect this sort of appreciation after the negative interest rate move (I know that it was only a small move, only on new reserves, yes?).

  6. Gravatar of Todd Ramsey Todd Ramsey
    11. February 2016 at 07:18

    Seeking understanding, not trolling: Why do you think the dollar has weakened against the Yen, Euro, and CHF since the December announcement, and especially over the last few days (joined by CAD over the last few days?

    Multiple perspectives are appreciated if anyone has the time. I’m completely lost.

  7. Gravatar of ssumner ssumner
    11. February 2016 at 07:28

    Thomas, Terrible–that’s worth a post.

    Scott, Fedborg.

    Staunch and Todd, I’m not at all sure. Since the dollar is falling against multiple currencies it suggests a weaker dollar, perhaps due to lower growth expectations in the US.

    The yen fell on the BOJ announcement, but I think Japan has since been hit by a global rush to liquidity

  8. Gravatar of ssumner ssumner
    11. February 2016 at 07:30

    Staunch and Todd, I would add that my hypothesis of slower growth in the US does have support in the bond market, where yields are plunging. But I suspect there are also other factors at work. The markets seem to be losing confidence in all the major central banks. Gee, I wonder why?

  9. Gravatar of Inigo Inigo
    11. February 2016 at 08:17

    Agreed. This is mind-boggling incompetence. Global bond markets scream panic and major banks are getting hammered (down 20% in a month) even with an implicit subsidy by the government.

    Yellen has failed which is remarkable as she probably had one of the easiest jobs of any Fed chair considering the point at which she entered office.

    If the overall trend continues, December 2015 will likely be viewed as the point where boomers should have gone to cash. There will be significant demographic pressure from the lack of yield in the years to come.

  10. Gravatar of JC12 JC12
    11. February 2016 at 08:31

    The world is rooted. Look who taught her.

    At Brown, Yellen had switched her planned major from philosophy to economics and was particularly influenced by professors George Borts and Herschel Grossman.[7] She received her Ph.D. in economics from Yale University in 1971 for a thesis titled Employment, output and capital accumulation in an open economy: a disequilibrium approach under the supervision of James Tobin and Nobel laureate Joseph Stiglitz, who later called Yellen one of his brightest and most memorable students. [1] Two dozen economists earned their Ph.D from Yale in 1971, but Yellen was the only woman in that doctoral class. [1]

  11. Gravatar of thruth thruth
    11. February 2016 at 08:47

    Another doozy from Yellen’s testimony:

    “Financial conditions in the United States have recently become less supportive of growth, with declines in broad measures of equity prices, higher borrowing rates for riskier borrowers, and a further appreciation of the dollar. These developments, if they prove persistent, could weigh on the outlook for economic activity and the labor market, ALTHOUGH DECLINES IN LONGER-TERM INTEREST RATES and oil prices provide some offset.”

    Wicksellian rate declines are always a good sign, right?

    (Must be years since I posted here, but instantly thought of Scott Sumner while reading her testimony.)

  12. Gravatar of JP Koning JP Koning
    11. February 2016 at 09:12

    “Not sure?!?!?!? Now they tell us? This is almost mindbogglingly incompetent.”

    The laws are contradictory so she is being justifiably inexact in her speech.

    Why hasn’t she tried to get legal clarity before now? There may be some reasons for this. If Yellen approaches the Fed’s general counsel on the question of legality when there is no crisis (i.e. now), the counsel is more likely to disallow negative IOR (or at least fairly weigh all the reasons for and against). Since she only has one shot at getting approval, the idea may be to husband her bullet until a crisis develops… at which she can exert much more suasion on general counsel in order to get the negative IOR tool that she wants.

  13. Gravatar of JimP JimP
    11. February 2016 at 09:45

    It is most amazing to sit here and listen to her yack and dodge.

    The markets are falling apart because of a lack of dollars in the world, so she says they will not lower rates at the next meeting, and may well raise them, thereby directly causing a massive tightening right this minute.

    Its like the Vatican. They simply cannot admit they made a mistake – but must rather keep on making the same mistake – over and over and over.

    This testimony elects Trump I believe.

    And what will he do when he comes in? Take the Fed back from the crazed deflationists and do helicopter money. Direct the Treasury to send a check to every name on the Social Security address list. Direct the Fed to finance this not with debt but rather with newly created Federal Reserves. Be sure to say that this check is not income and thus not taxable. – it is a gift from the government and will never be taxed out.

    End of the deflation problem – in one second.

    She worries about inflation that only she can see – in her dreams apparently. Clearly the 2% target is not a target – but ceiling.

    Any sign that things might be getting better for wage workers and SLAM THEM.

    It is entirely beyond belief that the believes what she is saying about inflation. She just sits there and lies – like Nixon.

    And the Senators do not fight her. They sit there and listen and nod off and sleep.

  14. Gravatar of pras pras
    11. February 2016 at 09:45

    One of my favorite Econtalk stories about modern factories: “All you see is a big machine, a man and a dog. Why a dog? To keep the man away from the machine.” We need this at the Fed.

  15. Gravatar of JimP JimP
    11. February 2016 at 09:57

    Markets are down 3% or so. Does that bother her? Not a bit of it. They need a good shaking up.

    “liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system.”

    That’s Mellon then and Yellen/Fisher now.

    Yellen the new Mellon. It rhymes! Its our new song.

  16. Gravatar of Liberal Roman Liberal Roman
    11. February 2016 at 09:58

    Yellen is doing a full Trichet here. Refusing to take any responsibility for her own actions. Doing anything possible to avoid the embarrassment of admitting the institution was wrong.

    The FedBorg is strong my friends.

  17. Gravatar of msgkings msgkings
    11. February 2016 at 10:26

    @JimP and Scott the host:

    Is there any downside to the helicopter drop of cash? Honestly asking? And if not, why hasn’t it happened? I don’t mean a tax cut I mean the Fed printing up checks for everyone….how is that any worse than printing money that just sits as bank reserves? Even if citizens save instead of spend the money, what’s the harm? And you’d think it would be the easiest thing in the world for the government to declare: “free money everyone! Obama out!”

    Honest question: what is the downside of this action?

  18. Gravatar of Brian Donohue Brian Donohue
    11. February 2016 at 10:27

    “2% target” now means “1.5% ceiling” for inflation, apparently.

    The 30-year TIPS spread is now st s new post-crisis low of 1.45%.

    Real yields and inflation expectations cratering. Hmmm, what to do?

  19. Gravatar of Tom Brown Tom Brown
    11. February 2016 at 10:35

    Scott, clearly we need to lock a bunch of people suitably versed in well established economic theory in a room until we get some agreement from all of you on what needs to be done here. Perhaps you, Prescott, Williamson, Krugman, Stiglitz, Cochrane, Murphy, Piketty, Cowen, Woodford, Levine, Romer, Lucas, Wren-Lewis, Meltzer, etc. We can pick notables at random. You guys can no doubt hash it out pretty quick: the basic principles are all clearly well established. I’d pay to see that. ;D

  20. Gravatar of Njnnja Njnnja
    11. February 2016 at 10:47

    What is most upsetting is this:

    Financial conditions in the United States have recently become less supportive of growth, with declines in broad measures of equity prices, higher borrowing rates for riskier borrowers, and a further appreciation of the dollar.

    If only we could figure out what happened in December that would cause financial conditions to be less supportive of growth! Something that leads to higher borrowing rates? And causes the dollar to appreciate? It’s too bad we have no idea what the root cause of these problems were, because if we could identify it we might be able to figure out how to mitigate its future impact, and maybe even reverse it.

    *Sigh* Obviously our policymakers can only afford to hire the most clueless economists at the bottom of the employment barrel. Or even worse, they know exactly what is hurting growth, but they feel that they need to slow it down from the blistering 2.9% rate we are currently at.

    PS That is about the same annual level of growth when there was so much dissatisfaction with the economy that an incumbent president was kicked out and a nativist businessman with no political experience made a strong showing in the election.

  21. Gravatar of Gabe Gabe
    11. February 2016 at 11:05

    “Is there any downside to the helicopter drop of cash? Honestly asking? And if not, why hasn’t it happened? I don’t mean a tax cut I mean the Fed printing up checks for everyone….how is that any worse than printing money that just sits as bank reserves? ”

    It seems to me that the big banks and the top .00001 of the population have bigger say in these policies than you or I. The top .00001 of the population likes to have QE run through their bank accounts long before it gets to the little people. This is possible to do when the decisions are made behind closed doors and the various fees and secret accounts get the new money….when the new money is sent to the masses then the top .00001 is not getting a huge advantage…THAT IS THE DISADVANTAGE!

  22. Gravatar of Gabe Gabe
    11. February 2016 at 11:09

    If you naively just believe the FED and the BIS is set up to help the little people then you are never going to make sense of how macroeconomic policy is made. Try being a little more cynical and things make a lot more sense. The same people who were lending money to all sides of WW1 and WW2 and made amazing wealth blowing up women and children all over the world are not suddenly altruistically managing the economy in the best possible way for single moms and middle class working families all over the world. get realistic

  23. Gravatar of Steve Steve
    11. February 2016 at 11:29

    “Fedborg”

    The Fed as an institution is rotten to the core. If you listen closely, on every policy issue the Fed wants more power for itself.

    – More proprietary economic modelling, ignore the market
    – More remittance to treasury (Yellen loves to brag to Congress how she is funding the budget)…this explains the unwillingness to shrink the balance sheet and the need to pay interest to hold it in place
    – More liquidity tools…lets staffers interface with and audition for Wall Street.
    – More regulatory powers, more speeches, more stress tests, etc.

    Oh and there’s the unwillingness to admit mistakes. Yellen described interest on reserves as the “most critical tool we have” and was alarmist about how much damage selling down the balance sheet would do to the economy.

    When using the term “Fedborg” it’s important to admit what we are really talking about.

  24. Gravatar of E. Harding E. Harding
    11. February 2016 at 11:39

    “Obama should have nominated Larry Summers. I’m sorry Larry.”

    -I never understood what people (including you) saw so ungood about Larry Summers. He’s a typical high-level academic Jew elitist with a penchant for support of greater QE. He was a favorite of the Rubin Clan, which has significant influence in the Obama administration even unto this day. What, exactly, made people see him as so unfit for the Fed chair role?

  25. Gravatar of Steve Steve
    11. February 2016 at 11:43

    “I never understood what people (including you) saw so ungood about Larry Summers.”

    Because Summers is to monetary policy, what Trump is to politics: a thug who can get stuff done.

    Different personalities for different folks. Scholars don’t like getting walloped over the head by aggressive and sometimes reckless personality cults.

  26. Gravatar of Tom Brown Tom Brown
    11. February 2016 at 11:50

    Scott, by the way, I don’t necessarily disagree with your “face palm” assessment. But I’m curious what your peers think. (would the face palmers be a minority in the room I describe above?)

  27. Gravatar of Randomize Randomize
    11. February 2016 at 11:51

    Msgkings,

    There are a couple reasons that the Fed prefers to interact in the financial markets.

    1. Buying bonds isn’t actually “creating” money so much as it’s swapping cash for long-term assets. They’re spending money now but taking it all back plus interest over time. Writing checks, on the other hand, would truly be printing money and create political problems for them.

    2. The financial markets are (probably) better suited for distributing money in the most efficient way. If you have to go to the bank and borrow money, it’s probably because you want to invest in some asset with wealth-creating value like a car to commute to your job or tuition. Is that going to be true if you and the rest of America get a gift check in the mail?

  28. Gravatar of tyre tyre
    11. February 2016 at 11:55

    Occam’s Razor only holds true to a point.

    Perhaps the Board of Governors is doing the bidding of ISIS agents to destroy far more wealth than decades of car bombs could. Why? Maybe blackmail, maybe promises of high office in the post-war settlement. Who knows.

    This is the only coherent explanation I can arrive on, since under no other framework are the Fed’s atrocious errors rational.

  29. Gravatar of msgkings msgkings
    11. February 2016 at 11:58

    @Randomize:

    I hear you, but if the goal is inflation might it not be more helpful to hand out checks that do indeed get spent, and not invested in assets? And the politics of handing out free money seem to me to be pretty easy pickings.

    I guess I’m saying if they are truly trying to create inflation, and the current path of giving cash to banks where it just sits in reserves isn’t working, why not try something that on its face would be pretty popular?

    Why not create money? Inflation is the goal isn’t it?

  30. Gravatar of Gabe Gabe
    11. February 2016 at 12:19

    “Why not create money? Inflation is the goal isn’t it?”

    inflation is not really their goal…any bunch of idiots can create inflation…look at Ecuador or Jimmy Carter.

    The goal is more power. They use stories to justify their power grabs. Just as the old powers used priests to tell the serfs that being a serf was the way to get to heaven and get eternal rewards…..the modern day economists tell stories about how lloyd blankfein and Ben Bernanke are doing gods work to make the economy better for all us modern day serfs.

  31. Gravatar of Gabe Gabe
    11. February 2016 at 12:24

    how can anyone here really really believe that mere inflation is “the goal”? I am not even a big Summers fan….but surely you have read enough of his solid stuff to see there are many many ways they could create inflation if they really wanted to. Have you no imagination of your own? do you not see how easily they can create inflation if they want to

  32. Gravatar of Gabe Gabe
    11. February 2016 at 12:34

    “1. Buying bonds isn’t actually “creating” money so much as it’s swapping cash for long-term assets. ”

    right those are assets. Reminds me of this great economics lesson:

    https://www.youtube.com/watch?v=7GSXbgfKFWg&NR=1

  33. Gravatar of Tommy Dorsett Tommy Dorsett
    11. February 2016 at 12:37

    Jean Claude Yellen just BLEW IT again. My summary of her testimony is as follows: 1) market indicators are not trustworthy (the Fed’s models are better); 2) lagging indicators (payrolls, etc.) should guide policy, not forward looking ones distorted by fickle traders; 3) the Phillips Curve is a reliable model (even if contradicted by market indicators). Sorry guys and gals, but we’re screwed.

  34. Gravatar of Gabe Gabe
    11. February 2016 at 12:41

    yes we are screwed. We will be screwed again and again if we don’t get straight answers….or if people keep believing the naive version of what is going on “oops Yellen wants 2% inflation but she just messed up…if only we had gotten Summers in as Fed head then everything would be groovy”.

  35. Gravatar of Dan W. Dan W.
    11. February 2016 at 12:44

    So the Fed would be deemed competent if it offered negative interest rates? And, pray tell, what would be the exit strategy from that? There would be none. Negative interest rates would be followed by even more negative interest rates. As long as the goal is to levitate financial assets the answer will be ever lower borrowing costs.

    This program is wonderful for financing ever increasing sovereign and corporate debt. But there’s no exit strategy and at some point the nations and corporations will run out of ways to pay for their debt, no matter the interest rate.

    Moral of the story: Enjoy the fun while it last and hope you are at high ground when the deluge happens.

  36. Gravatar of Jeff Jeff
    11. February 2016 at 12:57

    @EHarding,

    I was at a conference once where Larry Summers told us that people like him shouldn’t be Fed chairman. This was about 25 years ago, and he was responding to a question about how, in the absence of a monetary rule, you could keep inflation under control. He said, in effect, you put economic conservatives on the FOMC and in the chairmanship of the Fed, rather than people like himself. I guess he’s changed his mind.

  37. Gravatar of Steve Steve
    11. February 2016 at 13:01

    I worry that negative rates legitimize deflation as monetary policy.

    If a 0% inflation target can implemented without direct crisis risks, thanks to negative rates, those who prefer 0% inflation might be empowered.

    They result would be more hysteresis, tighter credit, and more deleveraging, but nothing unacceptable to insiders. Actually this may be one of the reasons the market has been responding so poorly to negative rates.

  38. Gravatar of ssumner ssumner
    11. February 2016 at 13:04

    Everyone, Lots of good comments.

    JP, You said:

    “The laws are contradictory so she is being justifiably inexact in her speech.”

    Then why didn’t the Fed ask for this power in 2008, when granted IOR? I’m very skeptical of the notion that they lack this power. Couldn’t they simply raise the fee on ERs for FDIC purposes? I’m pretty sure they could find a legal method.

    In any case it’s crazy to first tell markets that negative IOR is an option, and then later during a crisis tell the markets that it may not be legal.

    msgkings, I have many posts arguing against helicopter drops–it’s an awful idea. We need a more expansionary monetary policy, not a combined fiscal/monetary expansion.

    E. Harding, And you seem like a typical low level anti-semite.

    Tom, Krugman recently did a post claiming lower bond yields were a bad sign for the economy, so I presume you’d have Keynesians and MMs agreeing. I think Lucas would probably also agree.

    Dan, You said:

    “So the Fed would be deemed competent if it offered negative interest rates?”

    You are in so far over your head that you can’t even see which way is up and which way is down. Please stop commenting.

  39. Gravatar of Gabe Gabe
    11. February 2016 at 13:09

    “If you have to go to the bank and borrow money, it’s probably because you want to invest in some asset ”

    you mean like the wealth producing asset like dropping bombs in Syria, crates of cash in Iraq and bombing weddings in Afghanistan?

  40. Gravatar of ssumner ssumner
    11. February 2016 at 13:16

    Steve, As Friedman said, low rates mean that money has been tight. We had the tight money in 2015, and now we have the low rates.

    Gabe, That’s “fiscal policy” :)

  41. Gravatar of JimP JimP
    11. February 2016 at 13:18

    @msgkings

    The danger of helicopter money is, of course, inflation – and also of making Yellen/Fisher and all the other deflationists angry. Cant have that of course.

    I myself see no reason why this has not been tried – save for the fact that the deflationists don’t want it. The ECB doesn’t. The Fed doesn’t. And in the American Democracy as it now is there is only one vote on monetary policy, the vote of the Fed. And they love deflation. Too bad for you, and me.

    I surely do believe that Yellen today just elected Trump.

    I can easily imagine Trump doing helicopter money if he learns about it. None of the others have the backbone.

    Hitler did helicopter money. It worked very very nicely for Germany. And it would work again now. Hitler financed a war with it. We could finance better things than that surely.

    The following is a very partial list of economists writing about helicopter money. I myself like Willem Butier the best.

    https://www.google.com/?gws_rd=ssl#q=buiter+helicopter+money

    http://willembuiter.com/helifinal.pdf

    http://www.voxeu.org/article/helicopter-money-policy-option

    https://next.ft.com/content/9bcf0eea-6f98-11e2-b906-00144feab49a

  42. Gravatar of Dan W. Dan W.
    11. February 2016 at 13:28

    Scott,

    You sound a lot like Rubio, repeating the same answer as if it means something.

    So money is “tight”. Why is it “tight”? Is it because banks can get half a penny of interest every year for every dollar they put in reserves? You can’t be serious. There are in fact two reasons why money is “tight”.

    (1) The economy is over-regulated. This adds costs and uncertainty which penalize returns on investment.

    (2) Banks are over-leveraged and over-regulated and greatly impaired in their ability to fund growth opportunities.

    That is 99% of the problem. And yet your answer continues to be “Blame the Fed”. Well, the Fed is wrong but primarily because it entertains the notion that monetary policy is the answer.

  43. Gravatar of Engineer Engineer
    11. February 2016 at 13:33

    “we need to lock a bunch of people suitably versed in well established economic theory in a room until we get some agreement from all of you on what needs to be done here. Perhaps you, Prescott, Williamson, Krugman, Stiglitz, Cochrane, Murphy, Piketty, Cowen, Woodford, Levine, Romer, Lucas, Wren-Lewis, Meltzer, etc. We can pick notables at random.”

    Then they will get out Ouija board and have each of them place a hand on it. The board will move toward the letters and spell out words, which are then interpreted to mean rise or lower. Once it is apparent which direction is appropriate, chips which will create either white smoke or black smoke will be lit and the smoke will rise from the chamber for the entire world financial community to see and marvel at the wisdom of the participants….

  44. Gravatar of LK Beland LK Beland
    11. February 2016 at 13:43

    Brian Donohue

    ““2% target” now means “1.5% ceiling” for inflation, apparently.
    The 30-year TIPS spread is now st s new post-crisis low of 1.45%.
    Real yields and inflation expectations cratering. Hmmm, what to do?”

    Neo-Fisherites would suggest to raise and peg short-term rates. Then the economy will coordinate itself into the new high-rate equilibrium…

  45. Gravatar of ChargerCarl ChargerCarl
    11. February 2016 at 13:54

    Is Yellen our Trichet? God I hope not, but she sure does sound like it.

  46. Gravatar of jknarr jknarr
    11. February 2016 at 14:13

    Scott, consider that the Fed may be getting exactly what it wanted.

    Nobody is getting fired, Congress is not angrily passing Audit-the-Fed. Nobody overseeing the Fed — who has better information than you or I — seems to be agreeing with the incompetence thesis. What evidence do you have that they are screwing up?! You are assuming your conclusions, rather than being led by evidence.

    You may not like what this implies (that the Fed’s goals are different), but the Fed is a very opaque institution that occupies a very curious public-private role. Ye shall know them my their fruits.

    If Congress passes a Fed audit, then I’ll believe that they have been incompetently screwing up. Otherwise, Fed actions are tacitly approved, at the highest levels.

  47. Gravatar of Christian List Christian List
    11. February 2016 at 14:23

    Maybe Yellen is a secret GOP and/or Trump fan?

    Or she was so impressed by Cruz questioning her that she became a Cruz fan?

    Or she does not believe him and wants to test his theory by going through 2008 all over again?

  48. Gravatar of Larry Larry
    11. February 2016 at 14:50

    Isn’t it at least time to stop paying interest on reserves? Even the usually wrong Malpass agrees with that! I think you could get Mark Cuban on board as well…

  49. Gravatar of Joe Joe
    11. February 2016 at 15:59

    I have a potentially dumb question (actually 3). Could the Fed just cancel the US debt that it owns? Wouldn’t that almost certainly create inflation? If it didn’t create inflation, wouldn’t that be awesome? We’d either get a needed dose of inflation credibility from the Fed, or we’d collectively get a bunch of free stuff. Am I missing something?

  50. Gravatar of E. Harding E. Harding
    11. February 2016 at 16:07

    @ Steve

    :-)

    @Christian List

    I hope Yellen engineers a Trump victory by raising rates quickly. It’d be even funnier if it was accidental.

    BTW, according to the NY Times, Trump is “the only Republican candidate who does not favor increased military spending”. “Most militaristic” of all the GOP candidates, my butt. I think by the latter he just meant he supports the veterans. Or he might have just lied; he does that a lot.

    @Jeff

    “This was about 25 years ago”

    -When PCE inflation was 4%. Today, it’s .6%. Different times, different errors. Obviously Summers had to change his mind given the changing circumstances.

    @ssumner

    “And you seem like a typical low level anti-semite.”

    -Not in that quote. And what a fantastic and substantive contribution to the discussion, Scott. There’s even an answer to my question somewhere in your reply if you look hard enough.

    “Gabe, That’s “fiscal policy””

    -Brilliant.

    @ChargerCarl

    -She’s worse. Way worse. You could actually see the significantly above-target inflation when Trichet decided to stick to the target by raising rates. There’s no evidence the recent rate hike is helping the Fed get back to any target.

  51. Gravatar of TravisV TravisV
    11. February 2016 at 16:12

    Has Bob Hetzel said anything lately?

    I see Bob McTeer was just on CNBC……

  52. Gravatar of Benjamin Cole Benjamin Cole
    11. February 2016 at 17:00

    I said Summers not Yellen. She is a timid Fedified Bernanke retread.

    Solution: FICA tax holidays and bigtime QE. And don’t stop until we are wiping our rear apertures with Benjamin Franklins.

  53. Gravatar of TravisV TravisV
    11. February 2016 at 17:05

    Among influential economists, is there growing criticism of Yellen’s approach at all? From anyone other than Summers, Krugman and DeLong?

  54. Gravatar of Mark Mark
    11. February 2016 at 19:10

    Can one take Yellen’s comment on oil prices to mean that she doesn’t attribute the the current market downturn to oil prices (since she claims oil prices are helping to offset it)? If so, to what would she attribute it? It seems anyone who isn’t blaming oil prices is blaming the fed raising the rates, so if not that or oil prices, then what? Just some fluke, completely ex nihilo?

    Perhaps she tacitly accepts that raising the rates was to blame, but holds that changing course is worse than keeping to the wrong course? That is, the negative effect of losing credibility would ultimately outweigh the harm done by keeping their promise to raise rates? I don’t know.

  55. Gravatar of Tom Brown Tom Brown
    11. February 2016 at 19:30

    Scott, thanks. Cochrane wouldn’t be on board though:
    http://johnhcochrane.blogspot.com/2016/02/policy-rules-legislation.html?showComment=1455219085137#c2466540361000988007

  56. Gravatar of Tom Brown Tom Brown
    11. February 2016 at 19:55

    “E. Harding, And you seem like a typical low level anti-semite.”

    I’m not sure what “low level” means here: low intensity, low as in “low blow,” or just garden variety? I’d guess low intensity: the comments section here isn’t quite like Ted Nugent’s facebook page… yet.

  57. Gravatar of Steve Steve
    11. February 2016 at 20:22

    Scott-

    The rationale for 2% IT, is to keep Wicksellian rates above the ZLB most of the time. If negative interest rates work, this rationale falls apart. Go 0% IT!

    I’m NOT defending this argument; I’m just pointing out how dangerous negative rates could be in the hands of anti-inflation nuts.

  58. Gravatar of Gary Anderson Gary Anderson
    11. February 2016 at 21:37

    Gabe said: “If you naively just believe the FED and the BIS is set up to help the little people then you are never going to make sense of how macroeconomic policy is made. Try being a little more cynical and things make a lot more sense.”

    Economists are to the financial system like lawyers are to the judicial system. You don’t hear attorneys accusing the bench of fraud, deceit, and theft do you?

    But it is comforting to know that people will save more money if the banks tax them with NIRP. Or maybe they could pile into bond funds to get some price appreciation.

  59. Gravatar of Benjamin Cole Benjamin Cole
    11. February 2016 at 22:10

    Joe @ 15:59:
    Not a dumb question at all. I am a fan of aggressive quantitative easing married to FICA tax cuts. The Fed would buy US bonds and place them into the Social Security Trust Fund.

    The Swiss central bank recently tried to maintain a currency peg by buying bonds. They gave up. In fact, there were worries that the bond portfolio they accrued would be worth less in the future and Swiss taxpayers would have to make up the losses! I don’t understand this at all.

    I wonder what the results would be in Switzerland the announced they would print money, pay taxes with that and declare a one-year national tax holiday. If the Swiss franc did not depreciate, do it for another year.

    But evidently our central bankers believe the economy is being run for the benefit of financial institutions, not for anybody who works or invest for a living.

  60. Gravatar of Postkey Postkey
    12. February 2016 at 00:51

    Not aggressive enough?

    “Further there is no work, to my knowledge, that establishes a link from QE to the ultimate goals of the Fed inflation and real economic activity. Indeed, casual evidence suggests that QE has been ineffective in increasing inflation. For example, in spite of massive central bank asset purchases in the U.S., the Fed is currently falling short of its 2% inflation target. Further, Switzerland and Japan, which have balance sheets that are much larger than that of the U.S., relative to GDP, have been experiencing very low inflation or deflation.” P9
    https://research.stlouisfed.org/wp/2015/2015-015.pdf

  61. Gravatar of Engineer Engineer
    12. February 2016 at 04:04

    “How do low long term interest rates and oil prices help economic activity if they are caused by the market’s deteriorating outlook on economic activity?”

    That is like saying during the tech bubble meltdown of 2000, that cheaper personal computers partially offsets the meltdown.

    A large percentage of the investment dollars in the last 8 years in this country has poured into energy, whether it be oil/gas, solar, or the industries supporting them. The return on these seemingly “safe” investments are very negative, a victim of their own success. That has got be put a damper on the economy.

    The Fed has once again acted, not counter cyclical, but pro cyclical. Their measures of how well the economy is doing is like using binoculars out the back window. They need to use market indicators more and perhaps they need to start using Google Analytics and look at the number of goggle searches on the word “layoffs”. If they did I think there would be no talk of staying on course…the employment cycle must be way behind these leading indicators.

    It would seem to me that sometimes holding a hot potato is better than holding a hot ember…when low risk investments turn bad, like oil/gas or real estate, it is difficult to get investors or banks not to sit on any cash they have even with negative rates.

  62. Gravatar of robert genetski robert genetski
    12. February 2016 at 05:26

    I just finished reading The Midas Paradox and found it to be one of the most significant contributions to economic analysis since Friedman’s Monetary History and Wannisky’s The Way the World Works. You may be interested in my analysis of the financial crisis http://goo.gl/KptiJu

  63. Gravatar of Dan W. Dan W.
    12. February 2016 at 05:54

    Mr. Kuroda believes he is smarter than the market. The market is saying he’s wrong. Or is the market wrong? What a paradox! The market is right except when it is wrong.

    “Kuroda said negative rates will help stimulate the economy down the road by lowering borrowing costs, dismissing criticism that the policy move has aggravated the market turmoil by stocking fears it will further squeeze bank profits”

  64. Gravatar of Engineer Engineer
    12. February 2016 at 06:07

    With the Fed’s track record, perhaps it is better for the Fed to just give up on trying to tweak the economy. Just like fiscal policy, monetary policy is just not something that can be reliably used to be countercyclical and has even or better odds of being pro cyclical given the delay between indicators, the real economy, and policy. The new world economy moves too fast for the Fed. Just announce that their new policy is ZIRP forever and forget about Fed meetings and public announcements all together.

  65. Gravatar of Matt McOsker Matt McOsker
    12. February 2016 at 06:09

    Scott – still not sure why you are against a Milton Friedman “helicopter drop” increase in the nominal stock of fiat base money executed by the fed just crediting accounts. Can’t it be structured so the fed can undo it? Have the fed credit accounts, and at the same time create offsetting “bonds” on the fed’s balance sheet, which can be sold back to drain the reserves in the future if needed. Seems to be a better way to do QE as the money goes to lower income folks instead of just bond holders. Negative IOR may work (may not) but negative IOR could have just as many political implications IMO.

  66. Gravatar of ssumner ssumner
    12. February 2016 at 06:17

    jknarr, Those conspiracy theories are just silly, for reasons I’ve pointed out many times.

    Postkey, That Williamson quote is exactly backwards, but worth a post.

    Thanks Robert.

  67. Gravatar of Benjamin Cole Benjamin Cole
    12. February 2016 at 06:20

    Postkey:

    If it is true that there is no connection between QE and inflation, then let us pay off the entire national debt and keep it on the Fed balance sheet. Not only that, let’s finance the federal budget in future years through QE, and do away with income taxes.

    If you say that these steps would be too aggressive, and would cause inflation…

  68. Gravatar of ssumner ssumner
    12. February 2016 at 06:21

    Matt, You said:

    “Seems to be a better way to do QE as the money goes to lower income folks instead of just bond holders.”

    That’s not a helpful way to think about things. The so-called “Cantillon effects” are overrated, what matters is how much money is created, not who gets it. The bond holders who sell bonds to the Fed don’t hold on the currency, they spend the money on financial assets almost as soon as they get it.

    I guess I’ll have to do another post someday on why helicopter drops are a really bad idea.

  69. Gravatar of ssumner ssumner
    12. February 2016 at 06:23

    Engineer, You said:

    “With the Fed’s track record, perhaps it is better for the Fed to just give up on trying to tweak the economy.”

    That only makes sense if you are saying they should legalize counterfeiting. Otherwise you have not described a monetary policy option. Holding rates at zero can be done in many different ways.

  70. Gravatar of Matt McOsker Matt McOsker
    12. February 2016 at 06:39

    The Cantillon Effect may or may not be effective (or as effective as QE or anything else – we just don’t fully know yet), but there is a certain political palpability associated with it at this point versus prior QE methods. That is why marketing terms like “People’s QE” are proliferating the political landscape. Heck, you could tie helicopter drops to NGDP targeting – could you not? If negative rates are implemented and banks stick it to depositors, politicians are probably going to step in.

  71. Gravatar of Joe Leider Joe Leider
    12. February 2016 at 07:59

    Benjamin, I’m interested to see Scott talk about why helicopter drops would be bad (I’m assuming monetizing the debt is a helicopter drop of sorts). In his last post he says it would lead to hyperinflation or perma-deflation, which I can buy. I imagine if Yellen just mentioned monetizing the debt in conjunction with an NGDP target, we’d reach that target quite quickly without pulling the trigger (Chuck Norris walking into a room).

  72. Gravatar of Postkey Postkey
    12. February 2016 at 08:21

    “Postkey, That Williamson quote is exactly backwards, but worth a post.”

    Cannot ‘someone’ send him ‘the evidence’?

    Is this ‘credible evidence’?

    “The depth of the crisis was reached in the spring and summer of 2009, and we now have the initial estimates for the economy for the same period in 2015. GDP as a whole increased by £100bn over the period, after allowing for inflation, a rise of nearly 13 per cent. Companies spent an additional £32bn on new investment in 2015 compared to the same period six years ago. In percentage terms, this was by far the fastest growing sector of the economy, up by 26 per cent. By contrast, consumer spending grew by only 10 per cent, less than the economy as a whole. It has been an investment-led recovery, with the role of public spending negligible. “
    http://www.cityam.com/231763/ignore-the-gloom-merchants-the-uks-investment-led-recovery-is-sustainable

  73. Gravatar of mpowell mpowell
    12. February 2016 at 10:32

    What a pathetically craven message. Summers appeared to be more of an inflation hawk which is why I preferred Yellen. But possibly he would have had more backbone and if he had stuck closer to his pre-appointment views he would have been substantially better than this disaster.

    A Trump presidency might be worth it if were to smash the fedborg. But a) I don’t attach too much confidence to that actually happening once he gets into office. Keep in mind that the likelihood Trump actually gives a shit about this country as opposed to himself is really quite low, despite how effectively he sells himself. That’s how you make money in real estate, sell people that you have a grand vision and everyone will make money and then fuck them all over with a deal that in the fine print is tails I win heads you lose. And b) the only thing worse than the fed we have today is a monetary system that is vulnerable to the election of a populist who can just print money at will. You need institutional protections against that kind of thing. The problem comes when the Bernie Sander’s of the world figure out what is possible and the institutional barriers are down. Regular bouts of hyperinflation would, in fact, be worse than anemic but >0 real GDP growth.

  74. Gravatar of TravisV TravisV
    12. February 2016 at 10:41

    Joe Leider,

    Prof. Sumner just answered your question re: helicopter drops in his latest post. I also recommend you check out this post (I love the title):

    http://www.themoneyillusion.com/?p=27741

    “Men with two feet on the ground”

  75. Gravatar of Tom Brown Tom Brown
    12. February 2016 at 14:58

    mpowell,

    John Cochrane today posts a link to the libertarian case for Bernie Sanders. I didn’t have any clue there was one!

  76. Gravatar of Tom Brown Tom Brown
    12. February 2016 at 15:01

    Actually I take that back. I have heard of a case:

    Sanders =/= Trump

  77. Gravatar of Benjamin Cole Benjamin Cole
    12. February 2016 at 17:04

    Joe L–
    Scott Sumner does say that helicopter drops are either hyperinflationary or perma-deflationary. I confess this puzzles me in more than one way.

    David Beckwith contends that he should be permanent. That is, the increase to the feds balance sheet is permanent.

    I do not believe that QE, even if permanent, is hyperinflation area. They’re Fed presently is maintaining its balance sheet, without any signs of hyperinflation.

  78. Gravatar of Negation of Ideology Negation of Ideology
    13. February 2016 at 04:07

    Joe –

    “I have a potentially dumb question (actually 3). ”

    I agree with Ben, not dumb questions at all.

    The Fed doesn’t have the legal authority to forgive debt on US Treasuries. Congress would have to pass a bill to cancel the debt to the Fed. Cancelling debt would have the practical consequence of causing the Fed to operate at negative equity and probably at an annual loss instead of a profit.

    If it were possible it might cause inflation by increasing expectations that the monetary base increase is permanent. The key question is – would markets consider cancelling $1 Trillion of debt to the Fed more permanent than buying $1 Trillion in long term US Treasuries? I don’t know the answer to that question. An equivalent option is for Congress to have the Treasury issue US Notes directly like it did from 1861-1976.

    Your third question is the best of all. The critics of QE tend to argue that QE simultaneously will cause inflation and that QE won’t “work”. If it doesn’t work, then we get a bunch of free stuff. If it does work, we get a recovery.

  79. Gravatar of Dan W. Dan W.
    13. February 2016 at 06:28

    Benjamin Cole,

    I also find Sumner’s dismissal of “helicopter drops” and debt forgiveness puzzling. My interpretation is politically Sumner is a libertarian-conservative. He rejects Keynesianism, and welfare and raw counterfeiting of money. His answer is Monetarism which he sees as a lawful way to manage the money supply. But as some have pointed out, and I wrote in response to his latest post, bureaucratic management of the money supply is just another form of Socialism. Yet it is one step removed from Socialism and apparently that is good enough for Sumner.

    But as a more libertarian-conservative than Sumner is I would rather there be helicopter drops than the insanity we have with the central banks manipulating the financial system. I believe more direct methods of injecting money into the economy would be preferable than what we have now with the corrupt partnership between government and the banks.

    Individual welfare threatens the individual work ethic and can be economically inefficient. But it does not destroy Capitalism. Central banking may be economically efficient but it destroys Capitalism. I would rather Capitalism survive.

  80. Gravatar of ssumner ssumner
    13. February 2016 at 12:43

    Matt, Again, Helicopter drops are a solution to a problem that doesn’t exist. They solve the problem of the Fed being out of ammo, but it isn’t out of ammo.

    Thanks Travis, I direct people to that old post, which makes my case against helicopter drops.

    Tom,

    Anyone is better than Trump
    Sanders is anyone.
    Ergo, Sanders is better than Trump.

    Heck he might be better than any other candidate, now that Rand Paul is out of the race.

  81. Gravatar of Tom Brown Tom Brown
    13. February 2016 at 14:10

    Scott, right. That’s why I wrote above the case I’ve heard (from you actually) is Sanders =/= Trump.
    And thanks for your view.

  82. Gravatar of Joe Joe
    15. February 2016 at 11:58

    That was a good post on helicopter drops, but I feel like it’s assuming the helicopter drops are fiscal, not monetary. Legal issues aside, what if the Fed started cancelling the treasuries it bought. Because we have yearly deficits, this could happen indefinitely, no?

    The BOJ never explicitly monetized its debt – because we still talk about Japan’s debt-to-GDP ratio jumping to 240% of GDP. I’m saying, why can’t the Fed just cancel existing deficit spending, keeping our debt-to-GDP ratio at 100%, or even lowering it in steps until NGDP started growing at X% per year.

    Don’t we need that sort of commitment to be irresponsible? It seems like BOJ was just flirting with jumping in the water, but no one actually believed they would do it.

    On the other side, I was thinking about level-targeting the other day and had a (maybe crazy) hard-money thought. If we’re level-targeting, how far back to do we go? Do we just go back to 2008 and get back to 4% NGDP growth from then on? Or do we go back to 1960 and think, well, we’re doing great because we had lots of NGDP growth in the 1960s and 1970s, so less income growth now would be fine to level target the trend from then?

    I suppose the starting point would be when median debt contracts where taken out?

  83. Gravatar of Gabe Gabe
    16. February 2016 at 07:52

    Sumner keeps saying Cantillion effects are over-rated and it doesn’t matter how the money is injected just how much….

    If that were true then why does he so loyally stand up to defend the current black box crony system of money injection via the politically powerful and richest banks in the world?

    keep it up and he may get on the 200k rubber chicken circuit like other loyal high priests of big government monetary alchemy.

  84. Gravatar of ssumner ssumner
    16. February 2016 at 17:15

    Joe, Sure, there is some degree of insanity in Japan that would have “worked” like literally dropping money out of helicopters. By why do that when much more efficient methods are available?

    Gabe, I’d be happy to switch to a system where 0% of new money is injected through banks. 99% of it would end up there in a few hours in any case.

  85. Gravatar of Joe Joe
    17. February 2016 at 09:04

    ssumner, yeah, I guess that’s a good “why” point. I must have been reading too many articles before this one on how the Fed can’t create inflation.

    BTW, very good post over on econlog on how the market knows the Fed will tighten before the Fed even tightens. I feel like my brain is still hurting from that one.

    If you ever have time, I’d be interested in hearing your thoughts on monetary policy in a free banking system. I’ve been reading some of George Selgin’s very interesting work. A lot of it makes sense in that banks under such a system would have a lot of freedom to adjust reserve requirements downwards in the face of declining velocity, maintaining a stable price level. The privatization of note issue would help in the face of demands for cash.

    I’m not sure I could see an overarching NGDP growth target under such a system though. Perhaps the free banks would be required to keep a central banks notes as reserves, but issue their own notes for public use?

  86. Gravatar of ssumner ssumner
    18. February 2016 at 07:32

    Joe, I want to deregulate banking, but I don’t want them to have any role in monetary policy.

  87. Gravatar of Fed Can Print Money, Fed Can't Print Gold – Gold Investing FAQ Fed Can Print Money, Fed Can't Print Gold - Gold Investing FAQ
    19. February 2016 at 09:35

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