John Carney on monetary offset
Here’s John Carney of CNBC:
Which is to say, the Fed would like to ease up on monetary accommodation but fears that Congress seems unlikely to implement fiscal policy that won’t restrain growth. To put it differently, if Congress were to “get its act together” and provide fiscal relief to the economy, the Fed likely would respond by tightening.
That means that the dominant narrative may have things backward. Instead of Fed policy enabling congressional bungling, it’s Congress that is enabling Fed policy. A Congress that was less divided along partisan lines and dedicated to stimulating the economy might trigger a tightening reaction by the Fed.
HT: David Gulley
PS. Here’s Evan Soltas:
My view is that extending the payroll tax cut, replacing sequestration and investing in infrastructure would’ve led to a significantly stronger 2013 than we’ve had. But I’m less confident that those policies would’ve made a big difference, as opposed to a small difference, than I was six months ago.
And here Neil Irwin responds to me and several others making similar arguments:
There is good reason to think that monetary easing is doing quite a bit of the work offsetting tighter fiscal policy. The Fed’s policies, including buying $85 billion in bonds each month with newly created money, are directly aimed at housing; $40 billion of those purchases are of mortgage-backed securities, meaning the money is being funneled directly toward the sector. And sure enough, a solidifying housing market is an important part of the economy’s holding up. And a second important consequence of Fed easing is to boost the prices of other financial assets, including the stock market.
This isn’t rocket science: The Fed in September introduced a policy meant to boost housing and stock prices, and now, nine months later, housing prices and stock prices have risen quite a bit. Enough, indeed, to (so far) offset the impact of higher taxes that went into effect Jan. 1 and federal spending cuts that took effect March 1.
So far so good. The bad news, though, is that these channels through which monetary policy affects the economy tend to offer the most direct benefits to those who already have high incomes and high levels of wealth.
I have several problems with this. First of all, income inequality tends to be pro-cyclical. Stocks fall much more sharply than wages during recessions, and rise much faster during recoveries. That’s nothing new. Of course there is also a long term trend toward greater income inequality in America, but that has little or nothing to do with monetary policy. If there are parts of the sequester that hurt the poor, those cuts should be re-evaluated on a cost/benefit basis, not based on whether they are perceived to promote recovery.
The Fed should focus on promoting a healthy macro environment. To some extent they do, although in unusual circumstances such as 2008-09 they screw up. It’s up to fiscal policymakers to adopt sound fiscal policies using cost/benefit calculations, not “stimulus estimates.” In other words, let the Fed steer the car, and have Congress focus on setting the A/C controls, choosing the radio station, and adjusting the seating position.
Tags:
29. May 2013 at 17:14
Meanwhile the “bubble” obsession grows as these interesting statistics from twitter show:
http://www.marketwatch.com/story/bubble-references-on-twitter-soar-2013-05-29
Volume of “bubble”-related tweets
Month 1 (Nov/Dec) = 168
Month 2 (Dec/Jan) = 181
Month 3 (Jan/Feb) = 208
Month 4 (Feb/Mar) = 762
Month 5 (Mar/Apr) = 2,984
Month 6 (Apr/May) = 29,632
29. May 2013 at 18:13
You have the uncanny ability to make people talk about what you want to talk about.
My only question is why is the FED looking for any excuse to pull back stimulus?
29. May 2013 at 18:21
And you [Sumner] didn’t even comment on Irwin’s claim that “$40 billion of those [Fed] purchases are of mortgage-backed securities, meaning the money is being funneled directly toward the sector.” Can you say “Cantillon effects”? (I know Geoff can!) Yet another claim that it matters where the money enters first.
If Irwin is confused about the transmission mechanism, well then no wonder he’s completely confused about the whole macro picture.
29. May 2013 at 18:43
Argh, “investing in infrastructure.” That’s the new and improved version of “investing in alternative energy” and we all remember how that worked out.
Of course there is also a long term trend toward greater income inequality in America,
And concomitantly, a great levelling in living standards. Marginal dollars have never bought less utility, partly because we’re all so rich now but also partly because efficiencies of scale apply in ways they didn’t used to — it would be practically impossible to produce something like World of Warcraft or the iPhone5 for a small audience, because development costs are large and cumulative.
29. May 2013 at 19:15
The Fed should focus on promoting a healthy macro environment. –Scott Sumner.
Exactly!
There ever seems to be sniveling in one quarter or another that some Fed action will initially favor one group or another.
The Austrians (also known as the Afro-Brazilians) say the first people to get the cash from monetary growth benefit, before inflation sets in (in an era of one percent inflation? wow-wee-wee).
Others say, “Oh no, you are hurting savers.” As if stimulus hurts savers anyway, but even if the Fed is “hurting savers,” then what is the answer? Perma-recession? Which leads to ZLB? And how does that help savers?
For that matter, defense outlays help certain groups. Let’s wipe out defense spending, so no one will privately benefit from those outlays first, before the money enters general circulation.
The Fed should right now provide maximum clarity and resolve: Bernanke should say, “We will double down on QE until we see five percent unemployment and 5 percent inflation, or 8 percent NGDP growth.”
And the FOMC should shut up.
29. May 2013 at 22:15
“That’s nothing new. Of course there is also a long term trend toward greater income inequality in America, but that has little or nothing to do with monetary policy.”
Mostly wrong.
Speaking of John Carney, try this link about banking.
http://www.cnbc.com/id/100497710
29. May 2013 at 22:37
Congress is enabling the Fed to be easy, and if congress could just get it together and stimulate the economy! ack… run…
Congress should not even try to tweak the economy in the short term! Congress should be evaluating legislation on the basis of whether they are the right policies now and forever!
30. May 2013 at 01:34
I think this is begging for a response from you: http://economistsview.typepad.com/economistsview/2013/05/dsge-financial-frictions-macro-that-works.html
30. May 2013 at 04:24
“Of course there is also a long term trend toward greater income inequality in America, but that has little or nothing to do with monetary policy”
You may want to check this out. I found it to be an interesting read.
http://www.imf.org/external/pubs/ft/wp/2012/wp12199.pdf
30. May 2013 at 04:27
Meegs, Good question.
Don, Yes, I should have commented on that too.
TallDave, I agree.
30. May 2013 at 04:33
Joe, They argue that monetary policy was contractionary during 2005-06 and expansionary during 2008. In other words, they have things exactly backwards.
30. May 2013 at 04:36
Saturos, I’m puzzled. They say they can predict the recession as of 2008 Q3, but the recession began in 2007. How is a prediction occurring in 2008 Q3 a big achievement?
30. May 2013 at 05:24
Prof. Sumner,
You might be tired of Krugman by now but you really ought to read this post:
“Rate Stories”
http://krugman.blogs.nytimes.com/2013/05/29/rate-stories
“All three of these stories would imply falling bond prices, that is, rising interest rates. But they have different implications for other markets, in particular for stocks and the dollar. Debt fears “” basically, a run on America “” should send stocks and the dollar down along with bonds. A perceived tougher Fed should send stocks down but the dollar up. And a better recovery should send both stocks up (because of higher expected profits) and drive the dollar higher.
OK, there are possible complications; you can manage, just, to tell stories that don’t quite work as I’ve described. But these are surely what you should have in mind in your first pass at the issue. Here it is in a table:”
30. May 2013 at 05:32
I know the car analogy isn’t new, but it does make me think it should be modified: the Fed is currently acting like a Driver’s Ed teacher instead of a driver. Congress gets to control the vehicle, bumping along, but if the car starts heading towards a ditch, or is about to stall, the Fed will act.
30. May 2013 at 05:38
Re Krugman’s post above,
He talks about a story that if the Fed “may be ready to snatch away the punch bowl sooner than previously believed,” then that implies that bond prices should go down.
That is wrong. If the Fed may be ready to snatch away the punch bowl sooner than previously believed, then that implies that bond prices should go UP. Not down.
When he writes his posts, Krugman needs to be more clear that when people tell stories like these, they are exactly wrong. They have it backwards.
After reading Krugman’s post, many people will come away with the mistaken conclusion that tighter Fed money could drive long-term bond prices down. No. The relationship is exactly the opposite. Very unfortunate.
30. May 2013 at 05:41
Scott, have you already seen this Woodford (coauthored) article on “helicopter drops” (not helicopter drops)? http://www.voxeu.org/article/helicopter-money-policy-option
30. May 2013 at 05:43
Nicholas Crafts on exiting liquidity traps, is the Treasury needed to overcome the commitment problem? http://www.voxeu.org/article/escaping-liquidity-traps-lessons-uk-s-1930s-escape
30. May 2013 at 06:03
Saturos, What I can’t figure out is why so many smart people spend so much time trying to solve a problem (credibility) that does not exist. Why not simply press the central banks to do monetary stimulus?
Travis, Thanks, I’ll take a look.
30. May 2013 at 06:14
Travis,
Here is a Krugman post from a week ago in which he mostly agrees with you — he says the effect of tightening monetary policy on rates is ambiguous.
http://krugman.blogs.nytimes.com/2013/05/23/elementary-my-dear-watanabe-san-somewhat-wonkish/
Perhaps he was just trying to cover every possible story for increasing rates in the most recent post. It is POSSIBLE that tightening monetary policy would send rates up temporarily.
30. May 2013 at 08:40
Scott, All of the intros are written by Ezra Klein, not me, though I think I agree with him because the Fed is not offsetting fully the fiscal contraction. One can see this in private-sector consumption and investment data in areas that should have no beta to changes in government expenditure.
30. May 2013 at 09:03
Evan, Two points:
Thanks for clarifying that, but they put your name on the article by mistake.
I don’t follow the beta argument. I can’t imagine how correlations between private spending and G would provide evidence on the strength of monetary offset. Can you elaborate?
30. May 2013 at 10:11
“Wage and salary disbursements are now estimated to have
increased $171.7 billion in the fourth quarter of 2012, an upward revision of $100.9 billion.
These estimates reflect newly available wage and salary tabulations for the fourth quarter
from the BLS quarterly census of employment and wages”
Perhaps this helps explain why ‘austerity’ in the beginning of the new year had little effect on spending in the beginning of Q1. Workers made $100b more than originally estimated at the end of Q4. This probably offset a portion of it in the beginning of the year.
30. May 2013 at 10:16
Carney’s point seems to be different than yours. He’s not saying “Congress don’t end the sequester because the Fed will slowdown the bond buying’ but rather that the Fed does want Congress to end it.
For you the sequester seems to be a feature but for Carney and the Fed it’s a bug.
30. May 2013 at 13:23
“Stocks fall much more sharply than wages during recessions, and rise much faster during recoveries. That’s nothing new.”
In other news, neither inflation nor deflation affects all prices and spending equally.
But that’s still not Cantillon!
Bwahahaha.
30. May 2013 at 15:59
Joe, Wow, Remind me to pay no attention to preliminary GDP data in the future.
Mike, I don’t follow your argument. I’m talking about the size of the multiplier–that doesn’t depend on one’s views as to whether the sequester is wise. I think the 1/2 of the sequester that is cuts in military spending is great. The rest I’m agnostic about–I haven’t studied the cuts in detail.
Geoff, Yup, monetary policy affects some prices more than others–I’ve never suggested otherwise.
31. May 2013 at 08:21
So why is the Fed’s reluctant to stimulate? Is it due to fears that they will be unable to regather the cash fast enough should inflation go above target?
2. June 2013 at 05:51
Floccina, Probably not, more likely fear on the unknown.