Memo to the Fed: Please learn from the RBA
Cthorm sent me the following:
The Reserve Bank of Australia cut its benchmark interest rate by a quarter percentage point to the lowest since 2009 as Europe‘s debt crisis and slower Chinese growth overshadowed a stronger domestic labor market.
Governor Glenn Stevens and his board lowered the overnight cash rate target to 3.5 percent, the RBA said in a statement in Sydney today. . . .
The jobless rate in Australia [4.9%] is less than half the 11 percent in the euro area and lower than the U.S.’s 8.2 percent. In his statement, Stevens noted the local job market’s improvement. . . .
The RBA, in its quarterly monetary policy statement released May 4, cut growth and inflation forecasts. It predicted average growth of 3 percent in 2012, down from a February estimate of 3.5 percent. Consumer prices will rise 2.5 percent in the year to December, from a previous prediction of 3 percent; underlying inflation is forecast at 2.25 percent from a previous estimate of 2.75 percent, the RBA said.
Today, Stevens said: “The board judged that, with modest domestic growth and a weaker and more uncertain international environment, the outlook for inflation afforded scope for a more accommodative stance of monetary policy.”
Forget about the implied 5.5% NGDP growth forecast. Australia has a 2-3% inflation target and faster trend RGDP growth than the US. That sort of nominal growth would be beyond my wildest dreams for the US. Rather think about how proactive they are. Unemployment is low and inflation is in the sweet spot. But they are easing monetary policy because they see the global slowdown, which for some reason the much more sophisticated Fed and ECB don’t quite comprehend. They aren’t cutting rates because 5.5% NGDP growth is too low, they are cutting rates to make sure that 5.5% NGDP growth happens.
The Fed seems content to wait until our recovery is off the rails, and then pull out still another QE, each one less stimulative than the last, because they mostly work via signalling. Every time the Fed fails to carry through it losses a little more credibility. And the biggest irony is that the credibility loss they are worried about is too much inflation! That’d be like Mitt Romney worrying that people will regard him as too spontaneous and reckless.
Tags:
5. June 2012 at 09:03
Guess that lady from the RBA was serious when she said that we were forward-looking.
5. June 2012 at 09:39
From Wikipedia–Glenn Stevens
http://en.wikipedia.org/wiki/Glenn_Stevens
5. June 2012 at 09:46
Tyler’s latest is interesting: http://marginalrevolution.com/marginalrevolution/2012/06/how-close-is-the-uk-to-potential-output.html
5. June 2012 at 09:50
I’m a little confused. The RBA was predicting a 6.5% NGDP rise. Now it’s predicting a 5.5% NGDP rise. Doesn’t that mean it’s not targeting the forecast? Because if it were targeting the forecast, then its prediction of nominal growth would remain unchanged, and it would say, “We are forecasting a real growth of 3%, down from our previous forecast of 3.5%, and we are forecasting consumer prices rising 2.5%, up from our previous forecast of 2%.”
5. June 2012 at 10:17
Richard, Thanks for the info.
Saturos, That’s a good post.
Neal, My bad, they are failing to target the forecast. My point was slightly different. The new inflation forecast is within the Australia target. And even 3% RGDP growth is quite good. And yet they cut rates, to make sure it doesn’t fall below the target range. The Fed would stand pat. But you are quite right that I implied they are precisely targeting the forecast, and that’s overstating things.
5. June 2012 at 10:37
“The Fed seems content to wait until our recovery is off the rails, and then pull out still another QE, each one less stimulative than the last, because they mostly work via signalling.”
That’s why I sadly keep agreeing more and more with this Brad Delong post:
What Can Ben Bernanke Do Now to Summon the Confidence Fairy?
At this stage, I don’t think there is ANYTHING he can do. Since the fall of 2009 he has misread the situation: been dovish, then hawkish, seen “green shoots”, contemplative, then decisive, then a victory lap, then hawkish, then dovish, dovish again, oh””then hawkish.
Declarations that the Federal Reserve is about to undertake QE III or Twist II simply won’t alter market expectations about the future path of the price level or nominal income anymore (if they ever would have) and so won’t induce any increase in the flow of spending.
5. June 2012 at 10:38
As admirable as the RBA has been, I wonder if it too would be in paralysis mode with rates at 0%.
5. June 2012 at 10:58
Their view of the transmission mechanism is pretty conventional, so I think they would be.
5. June 2012 at 12:03
Have you been keeping up with the Williamson/Kimball debate. Have you got anything more to say about Williamson further explanation about why he thinks QE doesn’t do anything?
5. June 2012 at 12:28
I think Liberal Roman and Saturos are right.
It’s more of a zero lower bound issue (although the RBA deserves credit for avoiding the ZLB). I’m sure you’ve made this point before, but the hawks need to realize that by raising the cost of hitting the ZLB they are increasing the chance of excessive NGDP growth (and “uncertainly”) in the future.
5. June 2012 at 12:30
Scott: Okay, that makes more sense. The RBA is prophylactically cutting rates instead of waiting for the economy to tank first.
5. June 2012 at 12:44
[…] Scott Sumner » Memo to the Fed: Please learn from the RBA: […]
5. June 2012 at 13:01
And this was after the RBA cut by 50 bp in May. The question is, does it matter that the latest RBA cut was slightly below market expectations and does it matter that the market is expecting a further 120 bp of cuts over the next few months, which the RBA is unlikely to deliver?
5. June 2012 at 15:00
Scott,
In your (informal) model of the economy, does a country which has an inflation target of 3% differ from one with 2%? If they both implement their target successfully? Are their any real differences?
5. June 2012 at 17:53
Very interesting, Australian q/q GDP was 1.3% (not annualised) and 4.3% y/y. But the GDP deflator was -0.3%, leaving NGDP at 4.1%. And everyone except for miners is miserable. More evidence, Scott, that what matters to people is NGDP, not ‘real’ growth.
5. June 2012 at 21:57
We are a smaller, more lonely economy. It makes you pay attention more to the world around us.
6. June 2012 at 05:40
Liberal Roman, There may be nothing Bernanke can do (I can’t say) but there are certainly things the Fed could do.
You may be right about the RBA
Adam, I looked at it. He seems to take a very mechanical approach, ignoring expectations. And he ignores the fact that QE2 did affect the markets. The task we have as economists is to explain why it affected the markets, not develop models that say it never should have affected markets, but did.
Let me know if Kimball ever replies to my comments.
Rajat, Whatever the market expects is what the RBA is likely to do. (And yes, it’s market expectations that matter in the short run.)
Antipode. The 3% target has two advantages; Less likely to hit zero bound, and less downward real wage inflexibility.
The advantage of a 2% rate is a lower tax on capital. But it’s easier to do the 3% and combine it with tax reform.)
Rajat, Good point.
Lorenzo, Good point, and good to see you back.
6. June 2012 at 05:46
Antipode,
FORGET Scott, 2% is better because it rewards those with capital, and makes people less likely to take on debt.
Scott’s weakest arguments fall around using inflation for positive things.
Stability and smaller government are the two sole advantages of NGDPLT.
6. June 2012 at 05:47
Under NGDPLT we don’t have to worry about the zero bound.
Scott will admit that.
Ask Woolsey.
6. June 2012 at 06:00
[…] Source […]
6. June 2012 at 10:32
[…] that it’s failed, as does the persistence of the new abnormal. Even worse, Scott Sumner worries that Bernanke and company are in no rush to change their strategy: The Fed seems content to wait […]
11. June 2012 at 05:07
[…] In particular, major increases in the (domestic) demand for money unmatched by changes in money supply have not occurred so as to lead to crashes in transactions. Having a central bank responsive to both inflationary pressures and shifts in output has successfully anchored expectations, as the RBA has balanced credibility. Since the RBA is accountable for both the value of money and the level of transactions, we have also had beneficial reputation effects operating on our central bank officials. (Which shows up in its statements and actions.) […]
2. November 2012 at 07:39
[…] of expected economic conditions, particularly if economic conditions are weakening. Scott Sumner nicely highlights an example of […]