Paging Lars Svensson: The Fed’s not targeting the forecast
Here is a good post from Paul Krugman:
In past releases, the Fed has been clear that the long-run unemployment projection represents Fed views on the NAIRU, the unemployment rate consistent with stable inflation, and that the long-run inflation projection should be viewed as a target. Also, the Fed generally looks at core inflation rather than the headline number.
With that in mind, here’s what the Fed expects: unemployment far above normal, core inflation well below target, for years to come.
I’d quarrel with those projections, a bit: I have no idea why Fed presidents expect core inflation to rise over the next two years. Historically, high unemployment has been associated with falling, not rising inflation. In fact, my bet is that we will be near or into deflation by 2012.
But even given the Fed’s own projections, it’s not doing its job, it’s missing its targets. Yet it apparently sees no need to act.
Bonus question: Estimate (to the nearest 100) the number of times I have complained (since October 2008) that the Fed is not targeting the forecast.
HT: Niklas Blanchard
Update: Get your NGDP targeting T-shirts here.
HT: William Luther.
Tags:
16. July 2010 at 07:42
200?
16. July 2010 at 07:44
500. basically the number of posts…
16. July 2010 at 09:07
The stock market sniffs deflation, and falls. “Consumer confidence” i.e. NGDP expectations, is falling – as are bank revenues. I wonder why. I wonder what might be done.
John Makin knows:
http://www.ft.com/cms/s/0/5c8c6aec-9049-11df-ad26-00144feab49a.html
I wonder if Bernanke ever reads the FT. He had better.
16. July 2010 at 10:47
Talking about Svensson, he has not managed to convince the rest of the panel on the Swedish central bank that we need easier money either. He usually loses 2-4 with the chairman Ingves voting against him.
I think the booming housing market worries them. A new rule has also been insituted that buyers can only lend 85% of the house value as a mortgage to cool it down.
16. July 2010 at 12:40
Why should I bother reading your blog anymore when Krugman is now saying the same thing, with better writing 🙂
16. July 2010 at 12:41
I can’t make out the symbol in the middle of the target. I really want one of the MV = PQ shirts.
16. July 2010 at 12:46
Nevermind – it’s PQ.
16. July 2010 at 12:59
You are absolutely wrong Sumner they are targeting the forecast. You just are confused about what forecast they are targeting You see the Cleveland Fed’s measures of inflation expectations are out. I like the Cleveland Fed’s measures since it goes beyond just looking at TIPS and includes inflation swap rates and forecast estimates into a measure of inflation expectations that overcomes the problems of just using TIPS (e.g. inflation risk premium etc.).
Here are their estimates as of July 1st: One-year inflation expectations are 0.95%, two-year expectations are 1.24%, five-year expectations are 1.50%, and ten-year expectations are estimated at 1.70%.
As you can clearly see, we are witnessing a regime change. Clearly they have revising their inflation target downward, possibly to zero! Perhaps we are seeing a desire to move U.S. monetary policy. Almost all modern macro models with sticky prices seem to suggest that the optimal long-run inflation targets should be far lower than 2%. Perhaps the Fed decided this was an obviously good time to do this regime change.
It all makes sense now.
16. July 2010 at 13:50
@Ted
‘As you can clearly see, we are witnessing a regime change. Clearly they have revising their inflation target downward, possibly to zero! Perhaps we are seeing a desire to move U.S. monetary policy. Almost all modern macro models with sticky prices seem to suggest that the optimal long-run inflation targets should be far lower than 2%. Perhaps the Fed decided this was an obviously good time to do this regime change.
It all makes sense now.’
Again, they don’t realize that inflation/deflation are phonies. Supply side deflation is good! Supply side inflation is bad!
Demand side inflation signals to producers to up production, demand side deflation signals to money producers to increase money production (its the same thing as increased demand for money).
Oddly enough, talking about targeting inflation only makes sense in a regime where you aren’t targeting inflation. Once you start targeting inflation, it quickly becomes noise and increasingly difficult to predict.
16. July 2010 at 15:52
Maybe we can hope for a really smart and successful ring of counterfeiters to move to the USA.
Years back, Iraq was supposedly counterfeiting US money, and successfully. We couldn’t detect real from fake. Little did we know Iraq was actually doing us a favor…..
17. July 2010 at 04:21
jj and Jaap, Somewhere between those numbers, I think.
JimP. I liked that article–didn’t like the part about conservatives not agreeing with him.
Mattias, That’s a good rule, but 80% would be an even better rule. (I’m assuming these are loans of Federally-insured deposits. I.e. government money that is being loaned out. Non-banks loans shouldn’t be regulated at all.)
Thorfinn, Stay tuned for a few more days, I plan to quote your remark in a post. 🙂
Ted, I plan a post on this soon. The Fed even has a term for what you are discussing—“opportunistic disinflation.”
Doc Merlin, That is why we need NGDP targeting, the inflation discussion is horribly confused.
Benjamin, Like a stealth “black helicopter” drop.
Everyone, Today I will be visiting America’s largest free market (Brimfield Mass) and thus won’t have time to answer comments on the other posts. I will get to them tomorrow.
You guys shouldn’t be reading my blog on a nice summer day anyway. Get outside and do something!
17. July 2010 at 07:04
Since we’ve today have our first rain in weeks I can stop by your blog and tell you that the 85% rule refers to all loans.
http://www.fi.se/Templates/Page____12781.aspx
17. July 2010 at 09:54
At 98 degrees, I think I’ll stay inside for now.
One question on NGDP targeting: What if the volume component of GDP unexpectadly accelerates (say due to a very populous poor country or two introducing neoliberal reforms) and/or a leap in productivity occurs (say due to some newfangled computational device)? If the NGDP target does not change in this context, wouldn’t that put downward pressure on interest rates, inflation rates, spark bubbles in sectors with fixed short run supply, and perhaps cause an explosion in borrowing?
17. July 2010 at 14:56
If we print money and increase NGDP, does this also cause an increase in RGDP? Could all the increase in NGDP be a result of money inflation with almost no RGDP increase?
As I see it, our present problems resulted when home owners and real estate investors decided suddenly and in large numbers that prices were going down in the future, so they started selling which drove down prices and bankrupted builders and mortgage firms. Printing money makes NGDP increase but Im not sure it would improve people’s expectations for the future value of houses. Yes, house price would go up but so would everything else. Thus, no increase in house production to help increase RGDP.
Jeff got me straight on RGDP and NGDT, so I now have just enought knowledge to come up with wild thoughts like this!
17. July 2010 at 18:07
OT, but very important:
Someone named Chris Neely, with the St. Louis Fed, has authored a serious looking study that quantitative easing worked in 2008.
See: http://research.stlouisfed.org/wp/2010/2010-018.pdf
This supports my view that the Fed will move to quantitative easing, and it laying the groundwork now. There is explicit talk that being a zero-bound makes this the option to turn to.
18. July 2010 at 04:55
Mattias, Thanks for that info.
Dan, Inflation might fall, but that’s not a problem as long as NGDP is rising briskly (see China as an example.) Interest rates are more closely related to NGDP growth than inflation. In any case, monetary policy doesn’t affect the long run real interest rate.
Bob, No, our present problems are not caused by real estate, which declined sharply between mid-2006 and mid-2008, but rather the other sectors of the economy, which declined sharply after mid-2008.
Yes it is possible that we are faced with a supply-shock, and that more money would not help. But in that case monetary policy is still better than fiscal stimulus, as it doesn’t boost the deficit. In addition, if the problem was a fall in aggregate supply, then why is inflation now falling to such low levels?
Benjamin, If 2008 is viewed as a monetary policy success, I’d hate to see a monetary policy failure! How could he view it as successful, given that the economy fell off a cliff in late 2008?
18. July 2010 at 13:51
Well, why I think this paper is important is that it shows the Fed is putting out more and more studies, statements, speeches etc about QE. I think they are preparing the policy community for QE.
I confess to not having thought too much about monetary policy in the last 20 years, so much of my commentary is probably a bit uninformed.
I’ll say it again: I would rather live through a long inflationary boom than a long deflationary recession. And I fear we are headed for Door No. 2.
18. July 2010 at 14:49
@Benjamin Cole:
What about an inflationary recession?
18. July 2010 at 16:19
http://www.capitalspectator.com/archives/2010/07/monetary_policy.html
18. July 2010 at 16:37
Contrary to the Time article linked by JimP, this one mentions MP but has grave doubts about its effectiveness…
http://economistsview.typepad.com/economistsview/2010/07/dont-expect-miracles-from-monetary-policy-1.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+typepad%2FKupd+%28Economist%27s+View+%28typepad%2FKupd%29%29
18. July 2010 at 18:06
Talking to an internist friend of mine about our economic woes, and he had heard of “Scott Sumner”…Fight on!
18. July 2010 at 18:19
my posts don’t post
18. July 2010 at 18:21
what is this – my posts dont post
18. July 2010 at 18:26
well I dont get this – but Jim Hamilton has a good post at econobrowser – “Fighting Deflation” – but I cant get the link to post.
18. July 2010 at 19:30
Doc Merlin-
I lived through that, in the 1970s. However, we started the 1970s with accelerating inflation, and ran into oil price shocks and Burns accommodation (if memory serves).
Now, we are facing deflation. I fear we will fall into a deflationary cycle, which will shred banks. Our banks have lent on property that expected to hold value, and probably appreciate. Property equity is how many businesses get capital for expansion, especially small businesses.
This is ugly, deflation is very ugly.
On top of that, ain’t no way this country can pay back its debt without inflation, whether it is morally right or not.
Survival is morally right, and we are in this fix now.
18. July 2010 at 22:34
@Benjamin:
Some thoughts:
If we inflate as heavily as I fear we will need to to due to the debt burden, we will end up trashing the dollar heavily, and we won’t get out of it, because monetary inflation encourages debt building. Look at what happened public+private debt as a result of the 70’s.
If we don’t inflate, we will have to do a slow real climb out of this by slowly digging our way out of the debt.
However, stop saying we are having deflation; we aren’t. The deflation is long passed, we are now in a very slightly inflationary period.
19. July 2010 at 00:56
Prof. Sumner said:
“Yes it is possible that we are faced with a supply-shock, and that more money would not help. But in that case monetary policy is still better than fiscal stimulus, as it doesn’t boost the deficit. In addition, if the problem was a fall in aggregate supply, then why is inflation now falling to such low levels?”
This is interesting.
As I recollect, we had spiking fuel prices in the lead up to the financial crisis that had a ripple effect through to other commodities (especially corn and soy because they are used for alternative fuels as well as food) and started showing up in the price level. They say one thing leads to another and if you get the all of the complexities arranged in the just the right way – it goes kaboom!
It can happen that way, but it didn’t and I can see how some people might see it that way.
I’ve been around quite a while and I’ve never seen what I refer to as a bunch of economic weirdness for about a year prior to the crash, the likes of which I’ve never witnessed, not even prior to the S&L crisis. It was clear to me by what I was seeing with commodity prices and wages compared to core inflation being way out of whack that something quite out of the ordinary was going on, extraordinary even for the onset of a recession. When I felt like I had seen enough persistent off-the- charts weirdness I cashed out the majority of my stocks in July 2008, two weeks before the first stock market crash. Not knowing exactly what I was seeing meant, but knowing that it didn’t make any sense saved my bacon.
This likely wasn’t a garden variety recession gone wild because the Fed didn’t do its job. I think it started with the Fed changing stance hardcore and without warning so that inflation expectations exceeded what actually took place by a long shot. I can’t recall an instance where that has happened in my lifetime except maybe 1981; and I was only 14 at the time and not paying attention to commodity and wage reports. Paul Volker has far more savvy than to squeeze the spigot with an oversized monkey wrench without telling anyone the Fed would be doing it or by how much, so it probably didn’t happen to such a degree even then.
What I’m saying is that I think inflation isn’t necessarily falling now. TIPS or any other market we might look to in order to gage future expectations would not be able to reflect things the Fed does without warning and it can take them a few quarters to adjust. The markets have been in the process of adjusting to what the Fed did and are now reflecting the new outlook.
19. July 2010 at 05:28
Benjamin, We will see, the devil is in the details.
Thanks JimP, I don’t know why those links didn’t work, but I did enjoy the Hamilton piece.
Marcus, Yes, Thoma has always been a bit skeptical, but he seems to use an interest rate transmission mechanism.
Thanks Larry.
Bonnie, I’d like to see some evidence that inflation is a problem. I just don’t see it.
19. July 2010 at 08:51
Doc Merlin:
The deflation has long passed? Are you joking?
When the PPI and CPI numbers are going down? When MZM is sinking? When unit labor costs are declining? When even gold buffoons are worried that gold will deflate too? When commercial, industrial and retail rents are sinking?
Can you name a single market characterized by inflation? Possibly health-care, but even there the picture is deeply
muddled by the question of quality and consumer demand–I might choose more-expensive care if I thought it would work.
19. July 2010 at 23:53
@Benjamin Cole
Seasonally adjusted CPI went down 0.1% in june and 0.2% in may, thats basically noise around 0. Its still positive for the last 12 months.
“When unit labor costs are declining”
Unit labor costs only tell half the story, when productivity is increasing faster than wages are rising, unit wages will naturally fall. Sure this is deflationary, but it is not bad in and of itself.
“Can you name a single market characterized by inflation.”
Short term, monthly prices tend to have a lot of noise, so lets see by the BLS data over the last 12 months:
Energy commodities……. 4.9
Gasoline (all types)… 3.9
Fuel oil (1)………… 16.6
Used cars and trucks…. 16.1
Transportation services 4.5
Food…………………. .7
All items……………… 1.1
20. July 2010 at 04:06
Benjamin and Doc Merlin, Can we agree there is disinflation?
21. July 2010 at 23:28
Sure Scott, I’ll grant you that.