In April 1933 FDR stunned the markets, the pundits, and his own administration by devaluing the dollar.  In June 1933 he stunned everyone again by blowing up the World Monetary Conference, which was trying to restore a fixed exchange rate regime.  In October 1933 he stunned everyone again with his “gold-buying” (i.e. dollar depreciation) program, which caused some of his top officials to resign in protest.

In 2003 Ben Bernanke said Japan needed “Rooseveltian resolve.”

A few years later almost all of the major developed economies needed Rooseveltian resolve.

And today the central banker that best illustrates Rooseveltian resolve is the head of the BOJ, Haruhiko Kuroda.

The Bank of Japan Governor not only surprised the markets with his latest splurge of monetary easing. He sprang it on his own board members just two days earlier, jolted into action to stop them making a low-ball forecast that might have sunk his flagship inflation target.

To achieve maximum effect for the shock decision, Haruhiko Kuroda and right-hand man Masayoshi Amamiya kept only a handful of elite central bank bureaucrats in the loop as they laid the ground for the expansion of their quantitative and qualitative easing (QQE) programme.

They didn’t even give the usual forewarning to senior bureaucrats at the Ministry of Finance, according to interviews with nearly a dozen insiders and government sources with knowledge of the bank’s deliberations.

.  .  .

Timing was critical – and not of his choosing. At the policy meeting the board would also issue a new consumer inflation forecast for the next fiscal year, based on the median estimate from the nine members. But two days before publication, the preliminary estimate was only around 1.5 percent, three of the sources said.

That was well below the 1.9 percent forecast made in July, and if published could have been fatal to his key goal of hitting 2 percent from April next year. Since price expectations play a key role in the consumer behaviours that ultimately determine prices, doubts about the target could be self-fulfilling.

.  .  .

It worked. They revised their forecasts to take account of the QQE injection, bringing the figure up to 1.7 percent, enough to keep Kuroda’s target within sight and perhaps drain the growing pool of doubters.

That’s about as close to a Svenssonian “target the forecast” approach as I’ve ever seen.

Though Kuroda won the vote, which will boost the BOJ’s government debt purchases by $260 billion a year and triple its buying of risky assets, he also paid a price for the manner and haste of the decision: a board split almost down the middle.

Because policy board members are barred from discussing policy without a quorum in a formal meeting, Kuroda sent BOJ bureaucrats as his emissaries to corral a majority for his easing plan, sources said.

He knew he had the votes of his two deputies, and that there was no hope of winning over the board’s two market economists who have long expressed public doubts about QQE, especially Takahide Kiuchi, who wants the programme terminated in two years.

So fierce lobbying focused on the board’s two former businessmen, Koji Ishida and Yoshihisa Morimoto.

Despite frantic efforts, he failed to win them over. Worse, though they had rarely voiced open doubts about QQE before, their opposition would now become public.

The sources said the swing voter was the hard-to-predict former academic Ryuzo Miyao, who took a long time to convince.

One suggested Kuroda had let a genie of dissent out of the bottle, which could make future easing decisions more difficult to achieve.

Yes, but elected officials have the last word:

Takeshi Minami, chief economist at Norinchukin Research Institute and one of just four of the 19 economists who had correctly forecast the Halloween surprise in a Reuters poll, expects the bank will want to ease again in mid-2015.

If so, Kuroda, whose determination to stay the course is unflagging, could well need Prime Minister Shinzo Abe to stack the BOJ board with reliable reflationists when Miyao’s term ends in March and Morimoto’s in June.

“In order to completely overcome the chronic disease of deflation, you need to take all your medicine,” Kuroda said on Wednesday. “Half-baked medical treatment will only worsen the symptoms.”

A lesson the ECB has yet to learn.

The northeastern part of the US contains some decent colleges that you might have heard of: Harvard, Dartmouth, Boston College, etc.  But none of them was able to stop the Bentley team, which won the Northeast regional Fed Challenge on Friday, and now advances to the National competition in DC.  Congratulations to the team:

Aizhan Uzakova

Sal Visali

Michael Liotti

Brian Levine

Dan Reeves

Santiago Rada

Alexis de Bruin

Mirtha Dominguez

Matt Paniati

. . . as well as the two coaches David Gulley and Aaron Jackson.  As you may recall, the Bentley team has been a real juggernaut in recent years, with one national championship, a second place in the nationals, and a number of other northeast regional wins over very stiff competition.

Well done!

Lots of people have pointed me to an article on the zero bound by Eric Swanson:

According to traditional macroeconomic thinking, once monetary policy hits the zero lower bound, there is nothing more the Committee can do to stimulate the economy – monetary policy is essentially ‘stuck at zero’. A corollary of this observation is that fiscal policy becomes more powerful than in normal times because any stimulus from fiscal policy on output or inflation will not be partially offset by monetary policymakers raising interest rates to keep inflation in check. In other words, monetary policy will not act to ‘crowd out’ fiscal policy because interest rates will remain stuck at zero as long as the economy is weak (see, e.g., Mankiw 2013, Chap. 12).

The role of monetary expectations

More recent research, however, has emphasised how monetary policy expectations can alter this reasoning. Reifschneider and Williams (2000) and Eggertsson and Woodford (2003) show that, if the Federal Committee can credibly commit to future values of the federal funds rate, then it has the power to largely work around the zero lower bound constraint. As these authors point out, the economy depends not just on the current level of the federal funds rate (a one-day interest rate), but rather on the entire path of the expected future federal funds rate over the next several years. Put differently, businesses and households typically look at interest rates with maturities out to several years when making investment and financing decisions. Even if the current federal funds rate is stuck at zero, the Committee could continue to push longer-term interest rates lower by promising to keep the federal funds rate low for an extended period of time. In this way, the Committee could continue to stimulate the economy even when the current federal funds rate is constrained by the zero lower bound.

This line of reasoning suggests that monetary policy has probably not been as constrained by the zero lower bound as the traditional way of thinking would imply.  Figure 1 plots the federal funds rate along with the one-, two-, five-, and ten-year Treasury yields. Although the funds rate (solid black line) is essentially zero from December 2008 onward, even the one-year Treasury yield averages close to 0.5% throughout 2009 and 2010, and fluctuates noticeably as the outlook for the economy and monetary policy rose and fell over this period. The two-year Treasury yield is even higher and more volatile. Thus, Figure 1 suggests that monetary policy might not have been very constrained by the zero lower bound until at least mid-2011.

I certainly agree with the primary claim of this article–monetary policy was not very constrained by the zero bound in 2009-10.  But it’s disappointing to see someone call the wacky liquidity trap view “traditional macroeconomic thinking.” Perhaps it could be called traditional old Keynesian thinking, but it was certainly a discredited model by the 1980s, if not earlier.

I’m also a bit uncomfortable with focusing on mid-2011, when 1 and 2-year T-bond yields fell close to zero.  There is nothing special about that date, because there is nothing special about 1 and 2 year T-bonds.  Three-month yields were close to zero throughout 2009 and 2010, and 5-year yields have been well above zero since 2011.  Nothing of importance changed in 2011.  The Fed always has the ability to adopt monetary stimulus if it chooses to do so, as interest rates are not an important part of the monetary policy transmission mechanism.  Of course the Fed ended QE1 and QE2 and QE3 because each time they (wrongly) thought the economy didn’t need any more stimulus.

The paper uses a rather indirect method of trying to ascertain whether monetary policy is constrained.  Swanson looks at whether longer-term bond yields are impacted by economic news. But why not look at whether longer-term bond yields are impacted by monetary news?  And why pick a highly ambiguous indicator like interest rates? Why not look at whether forex prices and stock prices and TIPS spreads are impacted by monetary news?

Nonetheless, I’m pleased that a distinguished economist like Eric Swanson has concluded that monetary policy was much less constrained than many pundits assumed.  At the end of the article, Swanson notes that this implies that crowding out continued to apply after 2008, thus weakening the impact of the ARRA stimulus program.  But crowding out assumes a constant money supply, which is obviously unrealistic.  In fact, “crowding out” depends almost entirely on the degree of monetary offset. I’d like to see the profession stop talking about the crowding out of aggregate demand and move on to the real issue; how do central banks respond to fiscal initiatives?

In a recent post I discussed the astounding 31 point gender gap between men and women on the marijuana legalization question.  Chris Ingraham left this comment:

I’d note that in the exit polls of the most recent ballot measures on marijuana in FL, OR, and AK, the gender gap on support for those measures was much, much smaller – in the neighborhood of 5 points or so. I’d be hesitant to draw too many conclusions from a survey conducted two years ago.

Florida looked at a slightly different question (medical marijuana) and both DC and Alaska are unusual “states.”  So I dug up the Oregon exit polls, which show that Chris is right.  Men favored legalization 58 to 42 while women favored legalization by 52 to 48, a gap of 6 or 12 points, depending on how it’s measured.

So unfortunately my previous post on this topic seems to have been based on false information. There probably is a gap, but it’s not that large.  It’s certainly wrong to generalize by saying “women oppose legalization.”  They split pretty evenly, especially if you assume the national figures would be a couple points lower for legalization, as compared to liberal Oregon.

Update:  Commenter Steve breaks it down by married and unmarried.  The gender gap in Alaska is all in the unmarried, and is slightly larger for the unmarried in Oregon.

The new jobs numbers provide one more bit of evidence in support of the claims I’ve been making in this blog:

1.  Job growth in the first 10 months of 2014 was almost 2.3 million, roughly the amount for the entire 12 months of 2012 or 2013. Thus the total for 2014 will end up being about 400,000 more than the average of the previous two years.  That may reflect the expiration of extended unemployment benefits.  Ditto for the still sluggish nominal hourly wage growth (stuck at 2.0%.) The household survey (less reliable) shows nearly 2.6 million jobs so far this year.

2.  I’ve often referred to the fact that since the beginning of 2013 the unemployment rate has been falling at 0.1% per month, and will continue to do so. It did so again in October, down from 5.9% to 5.8%. That means we are only 4 months from the Fed’s definition of “full employment.”

3.  Some have pointed to the low employment/population ratio as evidence that we are not recovering.  After being stuck in the trading range of 58.2% to 58.8% from October 2009 (when unemployment was 10.0% (exactly 5 years ago)) to February 2014, we finally have a decisive breakout on the upside:

We also have a breakout for average weekly hours, which were stuck in the 34.3 to 34.5 range for years:

New claims for unemployment as a share of the workforce keep hitting all-time lows.  Never in all of history did workers have less need to fear layoffs.

No Fed chairman ever had an easier job that Janet Yellen has right now.  Normally you want to tighten before nominal wage growth accelerates.  But in this case the Fed can wait for nominal hourly wage growth to accelerate from 2.0% to 2.5% before tightening, as the 2.0% figure is too low to hit their inflation target.  So the Fed merely needs to wait until wage growth accelerates.  No need to read the tea leaves.

(BTW, when I say “tighten,” I mean raise the fed funds target–policy is already tight.)

The last two years disproves several theories:

1.  In January 2013 unemployment was still 7.9%, and many conservatives were pessimistic about the prospect for monetary stimulus to lower unemployment. They claimed we had “structural problems.”  Now unemployment is 5.8% and still falling fast.  We had a demand shortfall—in early 2013 wages hadn’t fully adjusted to the huge plunge in NGDP growth in 2008-09, and slow recovery.

2.  Liberals claimed “austerity” in 2013 would slow the recovery.  Exactly the opposite happened.

3.  Liberals also claimed that ending extended unemployment benefits would not reduce unemployment (which was itself odd, because prior to 2008 liberals did believe that ending extended unemployment benefits would create jobs.)  In fact the 2008 liberals were right, job growth accelerated in 2014 without any acceleration in wages.  The acceleration was a “supply of labor-side” story.  So while the overall recovery since late 2012 is a demand-side story, the acceleration in job growth after the first of the year was a modest supply-side addition to the recovery.

Despite all this good news, we could have done much better with a more expansionary Fed over the past 6 years.  There are some “structural problems” in America, but they never had much to do with the near 10% unemployment rate of 2009-10.

PS.  Tim Duy has an excellent post demolishing the conservative argument that the Fed is creating growth with “inflation.”

PPS.  Here’s the steady fall in unemployment since January 2013.  In contrast, from January 2012 to January 2013 unemployment had only fallen from 8.2% to 7.9%, which is why so many people were pessimistic “structuralists” at the time.

PPPS.  The employment-population ratio for the all important 25-54 age group also rose, and has regained 2 points of the slightly over 5 points lost during the Great Recession. There’s still some slack out there.

HT: Garrett McDonald