Charles Plosser on Fed discretion
Charles Plosser makes a very good point:
Date-based guidance sometimes seems like a way for the Fed to achieve a consensus without actually achieving agreement.
That’s actually part of a challenge for the goal of consensus policy-making. To build a consensus you make vague statements that everybody can interpret any way they want to. Is that good communication? No, because everyone on the committee gets to interpret it their own way and then people get confused as to what it really means.
In retrospect, in reflecting upon the way that policy gets made, I think the desire to create big tents in the language actually becomes somewhat counterproductive to effective communication. I don’t have an easy answer. But it’s something that’s worth thinking about.
You go to the Bank of England, you see votes there 5-4, 6-3, all the time, and it’s not a big deal. People disagree but by disagreeing it allows the statement to more accurately reflect the views of the people that voted for it, and so the people that didn’t vote for it can be more articulate about why they disagree, so the differences and the range of views becomes more clear.
A lot of people speculated when the Bank of England started doing this that it was going to cause disruptions. It didn’t. It allowed people to better assess what the future might look like because the differences weren’t papered over.
Basically prioritize precision over consensus.
Yeah.
Some of your colleagues don’t see dissent as a useful gesture. Do you think your dissents have been effective?
I don’t know how effective it has been. I’m trying to accomplish a couple of things. I think it’s very important in the Fed and in other organizations that we openly discuss and debate different points of view. I think this has been extraordinarily important, even more so in challenging times than in normal times. We’ve entered a period where we’re kind of in uncharted territory. We don’t fully understand what happened or what made it happen. Economists are still debating the Great Depression. We’re going to be debating this for a long time, too. So this is a period of uncertainty and so you have good people sitting in that room, smart people, trying to figure it out. And it shouldn’t be surprising at all that all of these smart people have different ways of thinking about this. This is not a conventional episode.
I also think it’s an important thing to convey to the public that all of these different views are being debated within the Fed. It ought to be “” I know the markets don’t like it “” but ought to be reassuring in terms of public confidence that there’s a healthy debate going on. Always striving for unanimity creates a false sense of certainty that we know more than we actually do.
I also think if I’m going to go out in speeches and communicate ideas and differences of opinion and then not vote, that’s not very credible. That’s saying one thing and doing another. Why would you have a different view in public but not live up to that view inside the meeting when you take a vote? I think I have to match those two things.
One key problem that Plosser doesn’t really address is differences in strategic goals vs. differences in tactics. The easiest way to see that is to assume the Fed switched to something like NGDPLT. In that case with a clear strategic goal there would no longer be hawks and doves, just people with different views on the technical problem of which setting of the monetary instrument(s) is most likely to produce on-target NGDP. But we don’t have that regime, and hence the fight is over both tactics and strategy. Quite simply, Plosser would prefer a lower inflation rate, on average, than Janet Yellen. The people who implement policy should not be engaged in disputes over near term strategic goals, as it leaves the public hopelessly confused about where the Fed is going.
So yes, Plosser is right that disputes should be in the open. Perhaps each member could write down their preferred instrument setting, and the Fed could then set the policy instrument at the median vote. But that won’t solve the problem, at least if they can’t agree on a common strategic goal.
Plosser also had some comments on Switzerland:
In Switzerland’s case they tried to peg their currency as a way to keep it from rising and support the real economy. But Europe is weak. The E.C.B. can’t solve the structural problems that Europe has, and if Europe is going to remain weak, Switzerland also has a problem. And they can’t cover it up with monetary policy. They can’t afford to do it anymore. They can’t solve the fundamental problem of the trade relationship between a small open country in the middle of Europe and the rest of the continent.
Here I have the same problem as with most hawkish pundits, it’s not clear what they are trying to achieve, and how they expect to do so. When inflation is high they say we need price stability, and hence tighter monetary policy. And when prices are falling (as in Switzerland) you’d expect them to say we need price stability, and hence easier monetary policy. But they don’t. Instead they criticize monetary policy for being too expansionary, for papering over real problems, even if that monetary policy was already producing deflation. That makes no sense to me. What do the hawks want Switzerland to do, and how are they supposed to do it?
PS. At Econlog I have a new post on the jobs figures.
HT: Tyler Cowen
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6. February 2015 at 08:09
I notice you didn’t excerpt any of the really dumb comments from Plosser in that interview.
Also, how about Denmark? Pretty clear language there.
6. February 2015 at 08:20
Also, I like the way you’re inching toward common cause with Krugman et al on 2015 Fed policy:
http://krugman.blogs.nytimes.com/2015/02/03/tough-fedding/?module=BlogPost-Title&version=Blog%20Main&contentCollection=Opinion&action=Click&pgtype=Blogs®ion=Body
6. February 2015 at 08:23
“Here I have the same problem as with most hawkish pundits, it’s not clear what they are trying to achieve, and how they expect to do so. When inflation is high they say we need price stability, and hence tighter monetary policy. And when prices are falling (as in Switzerland) you’d expect them to say we need price stability, and hence easier monetary policy. But they don’t. Instead they criticize monetary policy for being too expansionary, for papering over real problems, even if that monetary policy was already producing deflation.”
It’s almost as if the hawks are bimodal about the power of monetary policy. They seem to be overly awed by the power of monetary policy to “overheat” an economy and cause runaway inflation that can’t be fixed by tightening. Why? They seem to dismiss the power of monetary policy when tightening. I think back to the Bullard interview. He said that if we didn’t tighten soon that the economy could be in jeopardy. This is dangerous? But what about tightening too soon and having to reverse course? No biggie. That’s easy to fix. No harm, no foul. They seem to view monetary policy like a ratchet that only has power in one direction.
Also it seems that they don’t want central banks to “correct” detrimental fiscal policies even if this policy of noninterference is detrimental too. Sort of like a Samaritan refusing to help someone injured on the road “for his own good.”
6. February 2015 at 08:28
Brian, I tend to agree with Krugman that there is no need to tighten policy right now.
I would also encourage people to not assume that when rate increases occur they necessarily represent a tightening of policy. That remains to be seen.
Anthony, There does seem to be an asymmetry.
6. February 2015 at 08:29
CBs still seem to see missing low as a win. And markets have figured this out, which is why the TIPS spread is always below the Fed target.
6. February 2015 at 08:34
Brian:
“And in the face of that uncertainty, the crucial question is what happens if you’re wrong. And the risks still seem hugely asymmetric. Raise rates “too late”, and inflation briefly overshoots the target. How bad is that? (And why does the Fed sound increasingly as if 2 percent is not a target but a ceiling? Hasn’t everything we’ve seen since 2007 suggested that this is a very bad place to go?) Raise rates too soon, on the other hand, and you risk falling into a deflationary trap that could take years, even decades, to exit.”
The last sentence overstates the case (as PK does so well), but overall he’s absolutely right. Plosser and Bullard are worried in the wrong direction. There is much more deflationary danger than inflationary.
6. February 2015 at 08:52
Anthony,
I am not convinced that the central bank can stop inflation once it starts.
When easy money policies create excess loans and deposits, it’s very hard to put the genie back in the bottle.
We saw that in 08-09, when a decade of easy money and speculation creates a huge debt crisis. It’s not easy to manage that. How exactly do you take excess debt/money out of the economy?
The Fed tried to slow the creation of new loans/new money with some tightening maneuvers (and some people even blame that action for the disaster.) The Fed saved the banks but did so by picking winners and losers and creating distrust in the market.
I’m in favor of money creation, but before we do so we need to understand who gets this new money and who is responsible for it.
6. February 2015 at 09:08
Charlie,
I disagree with all of that. A lot.
6. February 2015 at 09:17
@TallDave, also, true inflation expectations have to be lower than “breakeven” yields inasmuch as TIPs represent a less risky investment than nominal bonds so they should produce a lower return under ‘expected’ conditions.
I don’t know if the true embedded inflation expectations are 0.02% lower or 0.2% lower than breakevens, but I do know that the size of the difference should be related to inflation uncertainty.
6. February 2015 at 09:43
Scott,
I know you believe committees make better decisions than individuals on average, but they don’t seem to do a good job on monetary policy.
I also question the need for “independent” central banks. Might it not be better to just give the Treasury department total control over monetary policy, so that effectively the President controls policy?
Yes, I know this would scare people, but at least the executive branch has political incentives to create favorable economic conditions. And yes, I know that some presidents might abuse the authority, but as Ken Rogoff writes, Nixon was able to bully Burns into producing higher inflation, even given supposed Fed independence.
know you favor separating banking regulation from monetary policy, and I can’t agree more. At the very least, I’d like to see a single person responsible for monetary policy, and let other agencies regulate banks.
By the way, has your mind evolved at all on whether we should change the mechanisms by which the Fed operates? I know it isn’t important for the effectiveness of monetary policy, but if the Fed simply created new money and sent every American checks or direct deposits to stimulate the economy, wouldn’t such an approach find more political support, if it could be implemented?
6. February 2015 at 10:16
Scott Freelander:
“I also question the need for “independent” central banks. Might it not be better to just give the Treasury department total control over monetary policy, so that effectively the President controls policy?
Yes, I know this would scare people, but at least the executive branch has political incentives to create favorable economic conditions.”
I think this idea has more downside than upside. In the same vein as the topic of this post politicians of different ideologies have very different strategies for improving the economy. I think subjecting our monetary policy to ideologically political debates is dangerous. No I prefer an independent Fed but encourage very active oversight and engagement from the political branches.
6. February 2015 at 10:22
Brian — That makes sense. Also, I just found out owners of TIPS face no deflation risk — Treasury will actually pay the greater of face value or adjusted value.
But again, that’s all a function of the degree to which markets believe the Fed is credible. It’s sort of amazing that they seem to think the upside inflation risk is so small — in essence, they’re saying the risk of higher inflation is much, much smaller than the likelihood the Fed will choose to miss low.
6. February 2015 at 10:54
> What do the hawks want Switzerland to do, and how are
> they supposed to do it?
They want Switzerland to tighten money, and achieve prosperity for all by lowering taxes for the rich and cutting government spending except on the military. And then, when things are looking even worse, well, that’s because we didn’t do enough of that, so do it some more.
Monetary expansion? Lunacy! How can society become richer by printing more dollars? It obviously can never work. If only we used gold for money. Then monetary expansion would actually make us all richer. Obviously. It’s all so obvious. You look out across the fields; it’s flat. You can climb to the top of a 10-story building. Still flat. The world is flat. Everywhere you go. These ridiculous academics who think that lots of “flat” could add up to “round”. Outrageous!
Any other questions?
-Ken
Kenneth Duda
Menlo Park, CA
6. February 2015 at 14:09
Scott, You said:
“I know you believe committees make better decisions than individuals on average, but they don’t seem to do a good job on monetary policy.”
That’s why I favor market-oriented policies. Alternatively, what is the track record of individuals running monetary policy?
You said:
“I know it isn’t important for the effectiveness of monetary policy, but if the Fed simply created new money and sent every American checks or direct deposits to stimulate the economy, wouldn’t such an approach find more political support, if it could be implemented?”
And how would they reduce the money supply? I have lots of posts pointing out the folly of central banks giving people money. I wish I could drive a stake through that idea. If you asked the average American if the Fed should be just be handing out $100 bills for free, I am pretty sure they will say “no”, perhaps vaguely recall what the heard about the German hyperinflation in school.
Ken, I feel your frustration.
6. February 2015 at 18:20
Dear Commenters,
With wages growing significantly, is a summer Fed interest rate hike now inevitable?
http://www.bloomberg.com/news/articles/2015-02-06/payrolls-in-u-s-increase-more-than-forecast-along-with-wages
“Average hourly earnings jumped 0.5 percent, the most since November 2008, from the prior month. They were up 2.2 percent over the past year, the biggest advance since August.”
6. February 2015 at 23:53
> Ken, I feel your frustration.
The word “frustration” doesn’t really capture it.
A world where the monetary authority stabilizes the path of NGDP, and the fiscal authority produces public goods with the best efficiency it can… it feels so goddamned close I can taste it, and yet it feels so hopelessly far away at the same time.
In my industry, when I see a better way, I can raise money, bring the idea to life, and take it to market, and if I’m right, I make a pile of money and get to play again. But here, where the stakes are a thousand times higher, I can see a better way, and …. and …………. *sigh*
Anyone have other ideas for how to make this happen? Let me know. kjd@duda.org.
-Ken
Kenneth Duda
Menlo Park, CA
7. February 2015 at 01:23
A broad monetary inflation via a central bank funded tax cut would be more efficient in raising national income than the narrow channel of bond purchases.
As for the anxiety about reversing the policy, if your goal is permanently higher nominal income I don’t see why that would be a concern. A central bank can always kill an inflation.
7. February 2015 at 02:36
Kenneth,
How’s about this – it can’t happen, for reasons explained here
http://theviewfromhell.blogspot.ro/2012/10/old-money-evolutionary-economics-and.html
Look at Keynesians – their model assumes the monetary base is fixed, and yet none of them seems aware of that. Is it because all of them are stupid ?
7. February 2015 at 02:52
Also, look at how much resistance prediction markets meet, even if (actually, especially because) they are very effective.
Face it, humans love vague rules they can bend at will.
7. February 2015 at 05:44
@Duda – good analysis, sarcasm aside. And indeed the world is flat, if you factor in the curvature of the earth and the presence of a gravitational field, as any sentient being knows. As a practical matter you can get by just fine assuming the world is flat, whereas assuming the world is round will often get you into trouble (even Columbus got by fine assuming the earth was a lot smaller than it really was). Analogously, a fixed money supply is tested by history, but NGDPLT has not been so tested. Sumner does not even have a working model of it, except in his mind’s eye. You should help him code a model of it.
OT–a forgotten giant of finance: Edwin Walter Kemmerer (June 29, 1875, Scranton, Penn. – December 16, 1945 Princeton, N.J.) American economist, became famous as a “money doctor” or economic adviser to foreign governments all around the world, promoting plans based on strong currencies, balanced budgets and a gold standard.
PS–how is Denmark going to hold up to the attack on its currency ongoing now? They will cave, like Switzerland, and it will show how powerless central banks are to market forces.
7. February 2015 at 05:55
Duda: ” But here, where the stakes are a thousand times higher, I can see a better way, and …. and …………. *sigh*”
Actually it’s the same thing as in your VC / hedge fund world, Duda. Bankers, VC managers and do-gooders like Sumner don’t like to assume risk, they like to play with OPM (Other People’s Money) when possible, including shareholders money. So they often advocate crazy, untested ideas like NGDPLT, and if it works, they take the credit, if it does not, they claim their ideas were not followed correctly, or just run away. Recall only one idea of several, I think it’s between 5 and 20, works out in the VC world, and half of all LBO’s and M&A’s fail on Wall Street, not much better than chance, but it does not stop the deal-makers from dealing. For those with no skin in the game it’s a one-way bet as popular on Wall Street and Sand Hill Road as it is in academia. I just hope the Fed, also gamblers at heart, doesn’t fall for NGDPLT, but I’m not hopeful. Look at the history of the 20th century with crazy ideologies like communism adopted the world over. NGDPLT is just another such ‘ism’. Me, personally, my family’s fortune is in real estate more so than stocks and cash, so even with Sumner’s hyperinflation we’ll be OK, assuming we don’t have a US revolution that will make Russian communism seem tame by comparison. Japan will be the canary in the coal mine IMO.
7. February 2015 at 06:40
There was 27.5% U.S. employment growth in the 1970s, vs. 2.3% in the nine Plosser Years.
The 1970’s real GDP growth: 38.1%. Plosser Years: 10.9%.
But Plosser says the 1970s were the decade of monetary policy failure.
7. February 2015 at 07:29
Benjamin,
Part of the “mystery” of higher unemployment in the seventies was simply that more people who wanted to be in the workplace, were in fact there, albeit sometimes sporadically. Even though the numbers show up differently, it’s quite difficult to imagine seventies unemployment as greater than the present.
7. February 2015 at 12:13
Travis, But 2.2% is still pretty low. Consistent with sub-2% inflation.
Ken, That’s exactly why we need to turn monetary policy over to the markets.
sdfc, So a few years after the helicopter drop do they go up to people and say “please give us that currency back?” If not, how to they prevent inflation from occurring?
Daniel, I’m afraid you are right.
7. February 2015 at 17:44
Scott,
You said, “That’s why I favor market-oriented policies. Alternatively, what is the track record of individuals running monetary policy?”
Okay, so the research shows that committees generally make better decisions than individuals. But, what is often true is not always true. One problem with committees is diffusion of responsibility, and there are many others as well. I think there could be an advantage to have a single person to hold accountable.
Granted, market-driven policy adjustments would be superior, or as Friedman once wanted, perhaps a computer to carry out a rules-based policy.
You also said, “And how would they reduce the money supply? I have lots of posts pointing out the folly of central banks giving people money. I wish I could drive a stake through that idea.”
Perhaps I’ve missed something. If the Fed just created new money to send each American when monetary stimulus was needed, why would there ever be a need to withdraw the supply? Money is neutral in the long run, right? And if the Fed is targeting NGDP or has a roughly equivalent target, Why would there ever be much overshooting?
Couldn’t the money supply simply continuously grow at about 2% on average? Couldn’t the Fed simply slow the growth if inflation gets too high?
7. February 2015 at 17:47
To add to my point about having a single person responsible for monetary policy, would you rather have the current FOMC, or Charles Evans? The Riksbank board or Lars Svensson? Christina Romer? David Beckworth? Paul Krugman?
7. February 2015 at 20:58
@Scott Freelander: “Why would there ever be much overshooting? Couldn’t the money supply simply continuously grow at about 2% on average?”
Friedman once suggested a monetary policy rule of fixed growth in the monetary base. The problem is that velocity is not stable. NGDP = MV. If velocity plummets (as in 2008), and the Fed floods the economy with cash in order to maintain NGDP on target, but then velocity recovers quickly … then there will be too much cash for the new conditions. Nothing about the central bank’s ability to hit a target prevents occasional overshooting.
“would you rather have the current FOMC, or…”
Plato’s benevolent philosopher-king is always the best form of any government, in theory. The observed problem, in practice, is that there’s no way to ensure that the one top position actually goes to someone you’d approve of.
7. February 2015 at 21:24
Scott
There is no need for central bank to take money out of the system. History tells us that a higher cash rate is very effective in snapping high inflation.
8. February 2015 at 08:06
I should point out that 2% as a figure was a mistake on my part, but that’s beside the point.
More importantly, I was mistaken otherwise too. I should have written that money supply relative to demand can grow at a more or less constant rate, or perhaps remain more or less fixed with respect to demand.
Apparently posting when I’ve had some wine after a long Saturday doesn’t work as well as I’d like.
8. February 2015 at 08:09
Don,
Sure, I might not approve of every individual appointed to run monetary policy, but is that worse than not approving of the composition of the FOMC overall? I’d rather have a single human target to shoot at, so that he/she uniquely feels the pressure of failure, should it occur.
8. February 2015 at 11:18
Scott, People are proposing large increases in the monetary base, by 100% or more. If that money was left in circulation it would eventually create hyperinflation. if you don’t want that you’d have to pull it out of circulation. The only exception is if you paid IOR, but that’s also costly.
On the single person vs. the committee, obviously there are some individual people (including Bernanke) who would have been better than this committee. But that’s not the choice. The choice is between systems. As an analogy, Lee might have run Singapore better than a democracy would have, but the average dictatorship is far worse than the average democracy. When you choose dictatorship you can’t assume you’ll get a Lee.
sdfc, You said:
“History tells us that a higher cash rate is very effective in snapping high inflation.”
Sorry, but this is 1938-style Keynesianism at its worst. How do you think they get the higher interest rate? They adjust the money supply to the level required to slow inflation.
Scott, On your last point, suppose money demand falls by 50%, which might well happen.