No credibility problem for President Obama

Some have argued that there is a credibility problem in Bernanke’s forward guidance.  He’ll be gone next year and the new Fed chief may have different views.  Here the Binyamin Appelbaum at the NYT:

WASHINGTON “” The spreading expectation that President Obama will name Lawrence H. Summers to lead the Federal Reserve Board appears to be working against the central bank’s efforts to stimulate the economy.

The jitters even have some analysts betting that a Summers nomination could lead to slower economic growth, less job creation and higher interest rates than if the president named Janet L. Yellen, the Fed’s vice chairwoman.

Businesses raising money and people buying homes and cars all have faced higher interest rates in recent months as the Fed’s campaign to suppress borrowing costs has faltered. The rise in rates reflects optimism that the economy is gaining strength, and an expectation that the Fed will begin to pull back later this year. But a wide range of financial analysts also see evidence of a Summers effect.

.  .  .

But Mr. Summers has criticized the Fed’s purchases of Treasury securities and mortgage-backed securities, warning that bond-buying on such a scale could distort financial markets. He said it was “less efficacious for the real economy than most people suppose.” As a result, many investors suspect he would seek to end those purchases more quickly than Ms. Yellen.

Julia Coronado, chief North America economist at BNP Paribas, said last week that the yield on the benchmark 10-year Treasury note already had started to rise as investors price in a Summers nomination. She added that the yield could eventually rise half a percentage point more than if the president nominated Ms. Yellen instead. Ms. Coronado estimated that this Summers effect would reduce domestic economic growth by 0.5 to 0.75 percentage point over the next two years, which could reduce job creation by 350,000 to 500,000 jobs.

A Summers nomination, she wrote, “would come at a cost of higher market volatility and interest rates, and a less buoyant economic recovery.”

.  .  .

But Mr. Posen said that the market turbulence of recent months showed that investors still thought the choice of chairman would determine the course of policy. “This is one of the reasons I don’t believe that forward guidance works,” he wrote in an e-mail, referring to the Fed’s declaration of intentions regarding short-term rates. “There is no way it can be binding on a new chairperson.”

I don’t see this as the credibility problem at all.  The ultimate head honcho is President Obama.  He is “the decider.”  He seems to want tighter money, and it looks like he’s already getting it.

PS. Maybe he wants tighter money so that the Keynesian “fiscal austerity” theory doesn’t get completely blown out of the water by monetary offset.


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28 Responses to “No credibility problem for President Obama”

  1. Gravatar of kebko kebko
    3. September 2013 at 13:03

    Is there something amiss here, or am I confused?

    So the market projects a possible decrease in Fed buying that wouldn’t start for 6 months and a reduction in growth of .5-.75% as a result, and the net effect of this is to raise today’s spot bond rates? How could the liquidity effect be that strong?

    And, I don’t understand…For the liquidity effect to push rates down even though long term real effects and inflationary effects would lead us to expect higher rates, there has to be a lack of liquidity in the bond market that prevents it from reflecting those long term factors. Right? So, if the liquidity effect can push down rates prospectively, how can there be any liquidity effect at all? If markets can price in the liquidity effect 6 months ahead of time, why can’t they price in the inflation effect, too?

  2. Gravatar of Brian Donohue Brian Donohue
    3. September 2013 at 13:58

    I think that Obama thinks that monetary stimulus mostly ends up in rich people’s pockets.

  3. Gravatar of ssumner ssumner
    3. September 2013 at 14:26

    kebko, I wonder the same thing, I keep saying we’ll know more in 12-18 months. Either growth will pick up or rates will come down.

    Brian. Sad to say, that might be his motive. I wish he read Krugman.

  4. Gravatar of J J
    3. September 2013 at 14:37

    Professor Sumner,

    Actually, tighter money might prove you right better than looser money. If money gets tighter, but austerity slows down — which is likely — and NGDP growth slows, then what will the Keynesians say? Krugman’s best argument now is that NGDP growth should be speeding up, but austerity is holding it back. If that is the case, then less austerity should hold NGDP back less and, even with austerity, a recovery should be coming soon.

  5. Gravatar of Tony N Tony N
    3. September 2013 at 15:20

    “PS. Maybe he wants tighter money so that the Keynesian “fiscal austerity” theory doesn’t get completely blown out of the water by monetary offset.”

    I think you’re giving the man way too much credit.

  6. Gravatar of Doug M Doug M
    3. September 2013 at 15:29

    Suppose there are 2 candidates, Hawk and Dove.
    If Hawk is nominated, inflation RDGP and NGDP will average 1%, 1% and 2% over the next 10 years.
    If Dove is nominated we will get inflation of 3% RGDP 2.5% and NGDP of 5.5%.
    Where should the 30 year treasury yield go if we the odds of Hawk getting the job rise?
    If the market were rational the 30 year yield should fall!

    All of that said, I am really amazed at the Yellen / Summers controversy. When Greenspan’s retirement was imminent we didn’t get this much discussion. There was never a discussion of who might get the job, just a little bit of how “Helicopter Ben” would slightly more dovish than Greenspan.

  7. Gravatar of Bill Ellis Bill Ellis
    3. September 2013 at 16:16

    “David Andolfatto wants you to explain why he’s wrong about NGDP targeting (this is part of a much longer post):” via Thoma… http://economistsview.typepad.com/economistsview/2013/09/us-price-level-dynamics.html

    Link to Andolfatto’s post. http://andolfatto.blogspot.com/2013/09/us-price-level-dynamics.html

  8. Gravatar of Edward Edward
    3. September 2013 at 17:24

    Its sad and terrible.

    Obama is a Hooverite Leftist. The one idea he picks from conservatives has to be the worst idea of them all- austerity.

  9. Gravatar of benjamin cole benjamin cole
    3. September 2013 at 17:32

    Re bond rates: We have global markets…expectations about inflation…if the PBoC tightens…

    Also, these interest rates are low…people somewhat oversensitive to small movements…

    The big story is still one of the Fed suffocating the economy…

  10. Gravatar of Greg Hill Greg Hill
    3. September 2013 at 19:37

    Scott,

    You write, “I don’t see this as the credibility problem at all. The ultimate head honcho is President Obama. He is ‘the decider.’ He seems to want tighter money, and it looks like he’s already getting it.”

    President Obama knows a lot about a lot of subjects, but I’m afraid monetary policy isn’t one of them. Other than considering Summers for Fed chief (which can be explained in many other ways), what evidence supports the claim that Obama wants “tighter money”?

  11. Gravatar of Don Geddis Don Geddis
    3. September 2013 at 21:20

    @Greg Hill: Obama, November 2008: “It’s clear monetary policy has shot its wad”. Obama, August 2013: Obama this month spoke four times in five days of the need to avoid what he called “artificial bubbles” [Bloomberg Businessweek]. Obama, August 2013 [to NY Times reporters]: “I want a Fed chairman that can step back and look at that objectively and say, let’s make sure that we’re growing the economy, but let’s also keep an eye on inflation. And if it starts heating up, if the markets start frothing up, let’s make sure that we’re not creating new bubbles.”

    This is not a President who believes that the economy has been suffering from a lack of sufficient aggregate demand over the last few years. It’s instead a President who clearly does not wish for additional NGDP growth.

  12. Gravatar of Benjamin Cole Benjamin Cole
    3. September 2013 at 22:19

    Okay, I will whip my horse again.

    What if the Fed was part of the Treasury, and the public would more directly hold the president accountable for monetary policy and perhaps would even become a little more educated about it?

    This idea sounds gong-show, but in fact Don Regan, President Reagan’s Treasury Secy, proposed such an arrangement. If yoyu read Civil War histories, you will learn that back then the Congress considered control of the money supply to be its prerogative. So we have had different arrangement through history.

    Would Fed officials dare to pompously pettifog about the perils of inflation when unemployment was high and inflation running at 1 percent? When we have not seen even doubly-digit inflation in 30 years, and that when there were huge structural impediments in the US economy that are gone (try de-reg of transportation, telecommunications, banking, and also a deunionized workforce, and also huge global trade)

    Could a President get booted out of office by voters? Or would he put some oomph into a pro-growth monetary policy?

    Some say popular (though still indirect) control of central banks would lead to inflation (although I now believe there is a large segment of “professional economists” who believe that everything leads to escalating inflation and thus permanent recession is the best course).

    But what if central bank independence also has dangerous ramifications? What if central bank independence leads to ZLB and perma-recessions?

  13. Gravatar of Greg Hill Greg Hill
    3. September 2013 at 22:43

    Don Geddis,

    You write, “It’s instead a President who clearly does not wish for additional NGDP growth.” No, this a President who would be quite pleased with additional NGDP growth, but who has many other things on his mind besides the debates that take place on blogs like this one. President Obama may choose Larry Summers for Fed chair, but not because he wishes to crucify America on a cross of “tight money.”

  14. Gravatar of Vivian Darkbloom Vivian Darkbloom
    4. September 2013 at 00:18

    “PS. Maybe he wants tighter money so that the Keynesian “fiscal austerity” theory doesn’t get completely blown out of the water by monetary offset.”

    ‘I think that Obama thinks that monetary stimulus mostly ends up in rich people’s pockets.”

    Yes, and both points were previously addressed here:

    https://www.themoneyillusion.com/?p=23107#comment-268914

  15. Gravatar of Morgan Warstler Morgan Warstler
    4. September 2013 at 04:31

    Vivian, other than Obama’s personal gain, or personal ignorance… pro-fiscal / anti-monetary is only thing that makes sense.

  16. Gravatar of ssumner ssumner
    4. September 2013 at 04:42

    J, Maybe, But I don’t see Keynesians saying NGDP growth should be speeding up.

    Doug, See my reply to kebko.

    Edward, Sad but true.

    Thanks Bill.

    Ben, Yes, people do forget that rates are still low. They’ve had similar bounces throughout this 4 year recovery.

    Greg, He says he’s worried that Fed policy could create bubbles.

    If you are right about Obama, that he is utterly incompetent in the most important issue facing America, that’s a pretty sad commentary on our President.

  17. Gravatar of Michael Michael
    4. September 2013 at 05:19

    Interesting article on household debt by Lars Svensson:

    http://www.voxeu.org/article/riksbank-wrong-about-household-debt

  18. Gravatar of Saturos Saturos
    4. September 2013 at 06:43

    But then doesn’t that just push back the credibility problem one level, to the reelection of the decider? Seems as though as long as there is some level of democratic accountability for the people in charge of policy, there will always be the possibility that policy could turn against itself. The only way to really gain the confidence of the markets would be to nail down the fundamental intentions of the central bank, perhaps by announcing a legal mandate that clearly specifies what the Fed is interested in achieving as an outcome – say with a measurable goal variable or variables which clearly indicate, at the very least, whether the FOMC should want to aim at looser or tighter policy at any given moment. That should definitely work. If markets knew that the central bank had a legal obligation to say, loosen policy when the economy was well behind two stated objectives which could both be furthered by loosening policy – that would definitely gain their confidence.

  19. Gravatar of Tom Brown Tom Brown
    4. September 2013 at 06:51

    “PS. Maybe he wants tighter money so that the Keynesian “fiscal austerity” theory doesn’t get completely blown out of the water by monetary offset.”

    I think Obama is worried about his legacy… I don’t think he cares one bit about Keynesian “fiscal austerity” theory or any other economic theories or any economists’ egos for that matter.

  20. Gravatar of Steve Steve
    4. September 2013 at 08:47

    This makes me very angry, because I would have voted for Romney had I known Obama’s “view” on monetary policy. I thought Obama’s unknown was better than Romney’s deliberate stupidity, my bad.

  21. Gravatar of Don Geddis Don Geddis
    4. September 2013 at 10:21

    Greg Hill: “this a President who would be quite pleased with additional NGDP growth

    Do you have any evidence for that? I offered you specific Obama quotes that shows his (silly) concern about the economy overheating (bubbles, inflation). These are the words of someone who wants to reign in NGDP growth.

    What evidence do you have that Obama would welcome acceleration in NGDP growth?

  22. Gravatar of ssumner ssumner
    4. September 2013 at 16:23

    Saturos, Yes, but that’s not really much of a problem because the President can appoint the Fed chair, who has a 4 year tenure. That’s plenty of time to get NGDP where they want it. Summers would be around until 2018.

    Steve, I told people that Romney’s pick would be mainstream (say Mankiw) and no worse than Obama’s, but no one believed me. And I wasn’t even a Romney supporter.

  23. Gravatar of Lorenzo from Oz Lorenzo from Oz
    4. September 2013 at 23:44

    The only saving grace to a Larry Summers pick I can think of is that he is such an egomaniac that the Fed would suddenly become The Most Important Institution In The World once he was Chair, and he would try and prove what it could do now it was being run by God’s Gift To Public Policy.

    But it is still quite a way from that to the Fed being as competent as the RBA. After all, consider all the things he might try to do.

  24. Gravatar of Lorenzo from Oz Lorenzo from Oz
    5. September 2013 at 03:12

    Saturos: you mean like a signed letter between Treasurer and Governor?
    http://www.rba.gov.au/monetary-policy/framework/stmt-conduct-mp-5-30092010.html

  25. Gravatar of Russ Anderson Russ Anderson
    5. September 2013 at 04:50

    The head of the Minneapolis Fed thinks monetary policy has been too tight.

    FED PRESIDENT KOCHERLAKOTA: We’re ‘Failing To Provide Sufficient Stimulus To The Economy’

    http://www.businessinsider.com/kocherlakota-fed-failing-sufficient-stimulus2013-9

  26. Gravatar of Steve Steve
    5. September 2013 at 09:58

    “I told people that Romney’s pick would be mainstream (say Mankiw)”

    Scott, I’m sure you were right about Romney.

    But, but, I thought ‘mainstream’ economists were part of the problem. I recall Mankiw supporting the zero percent inflation targeter crowd back in 2006-07. It’s on his blog somewhere if I have time to look for it. But I don’t have time to follow economists who aren’t influential in the current policy debate.

  27. Gravatar of Saturos Saturos
    5. September 2013 at 19:16

    Scott and Lorenzo, it was just sarcasm. This might be an interesting paper, though (Tyler): http://www.iie.com/publications/wp/wp07-3.pdf

  28. Gravatar of Sumner's Wild Theory on the President's Reason For Nominating Summers | Last Men and OverMen Sumner's Wild Theory on the President's Reason For Nominating Summers | Last Men and OverMen
    17. March 2017 at 06:42

    […] doesn’t get completely blown out of the water by monetary offset.”      https://www.themoneyillusion.com/?p=23369#comments      You can question why the President seems to prefer Summers-it’s a very […]

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