“Not accommodative enough”

In 2003 Bernanke said that interest rates and the money supply were unreliable indicators of the stance of monetary policy, and that ultimately only NGDP growth and inflation were reliable. I’ve frequently criticized Bernanke for seeming to walk away from this definition of easy money, as during recent years he has occasionally called monetary policy “extraordinarily accommodative.”

Johnleemk sent me a very interesting BusinessInsider post from Joe Weisenthal, which discussed a recent Bernanke interview:

At one point he was asked what Milton Friedman would have said about the Fed’s actions these days. His answer was excellent. He pointed out that Friedman advocated QE for Japan during its struggle against deflation and weak growth. He also recalled one of  Friedman’s most important lessons, that low interest rates are not the same as loose policy.

Bernanke said specifically, when citing the lesson of Milton Friedman: “We didn’t allow the fact that interest rates were very low to fool us into thinking that monetary policy was accommodative enough.”

The Fed seems to be getting a bit more market monetarist each day.  That’s very good news.

Perhaps they’ll eventually realize that there are no absolute standards of ‘easy’ and ‘tight’ money, and that the terms can only be defined relative to the central bank’s policy objective.  That means money is still tight.



31 Responses to ““Not accommodative enough””

  1. Gravatar of Major_Freedom Major_Freedom
    1. October 2012 at 12:26

    Perhaps they’ll eventually realize that there are no absolute standards of ‘easy’ and ‘tight’ money, and that the terms can only be defined relative to the central bank’s policy objective. That means money is still tight.

    Am I the only one who finds this comment rather amusing?

    If the proper standard of monetary policy is…monetary policy intentions, then seeing as how the Fed isn’t targeting NGDP, and never has been targeting NGDP, does that mean that every post ever made on this blog that argues money has been loose or tight on the basis of NGDP, is hereby rescinded?

  2. Gravatar of Steve Steve
    1. October 2012 at 12:33



    “NOTE: This Working Paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily reflect those of the ECB.”

    “Both OLS and Bayesian model averaging estimates suggest that unofficial dollarisation/euroisation was an important contributor to the severity of the crisis, once other of its well-established determinants are taken into account, including fast pre-crisis credit growth, current account deficits, trade and financial openness, market regulation, international openness of the banking sector and GDP per capita. Moreover, the adverse impact of unofficial dollarisation/euroisation is found to have been transmitted through the main channels traditionally highlighted in the literature, i.e. currency mismatches, reduced monetary policy autonomy and limited lender of last resort ability, all of which became more binding constraints in the midst of the crisis.”

  3. Gravatar of marcus nunes marcus nunes
    1. October 2012 at 13:15

    That´s one reason for more “sessions” with Carl Robinson

  4. Gravatar of Bernanke says Friedman would have approved of Fed’s recent actions – I think is he more or less right « The Market Monetarist Bernanke says Friedman would have approved of Fed’s recent actions – I think is he more or less right « The Market Monetarist
    1. October 2012 at 13:17

    […] further tried to explain the Fed’s recent policy actions. As Scott Sumner says in a comment: “The Fed seems to be getting a bit more market monetarist each day”. That might be slightly too optimistic of what is going on at the Fed and I remain frustrated about […]

  5. Gravatar of Philippe Belanger Philippe Belanger
    1. October 2012 at 13:22

    “We didn’t allow the fact that interest rates were very low to fool us into thinking that monetary policy was accommodative enough.”

    Isn’t that an attempt at history re-writing? If they weren’t fooled, then why have they been telling us for 4 years now that as far as monetary policy is concerned everything is just fine?

  6. Gravatar of johnleemk johnleemk
    1. October 2012 at 14:58

    Philippe, my thoughts exactly. I hope someone calls Bernanke out on that. My guess is that he had in mind the Fed’s most recent policy statement, and blotted out the memory of all his previous attempts to defend the Fed’s policies (which, Scott would probably argue, merely reflect the median economist’s position, not necessarily Bernanke’s).

  7. Gravatar of Declan Declan
    1. October 2012 at 18:24

    Hi Scott,

    Off topic, but interesting IMF report referenced by Krugman:

    Key quotes:

    “The first key lesson is that a supportive monetary
    environment is a necessary condition for successful
    fiscal consolidation.”

    “Given that both fiscal and monetary policies were
    tight in the United Kingdom [interwar], it is conceivable that either or both were to blame for the poor outcomes.
    However, the cases of Japan [90s], which had tight monetary
    conditions and loose fiscal conditions, and the United
    States [after WW2], which had loose monetary and tight fiscal conditions, allow us to attribute the outcomes more clearly to the monetary stance…”

  8. Gravatar of Declan Declan
    1. October 2012 at 18:25

    Sorry, the link didn’t display


  9. Gravatar of John Papola John Papola
    1. October 2012 at 18:25

    What happens when the policy objective is a real variable that’s not under the Fed’s relative control such as, oh I don’t know, say, the unemployment rate? Is it possible to determine whether money is “tight” or “loose” given such a policy objective? And what happens if/when we hit the outer limit of “in the context of price stability”? And since we’re trying to banish “inflation” in favor of “NGDP”, can we send “price stability” to the woodshed where “stability” means a modestly INCREASING price level as opposed to, you know, an actual stable price level (such as that under during the classical gold standard era).

  10. Gravatar of Dan Kervick Dan Kervick
    1. October 2012 at 20:11

    In explaining how monetary policy can be stimulative in today’s speech, Bernanke suggests its all about interest rates. His line is that to the extent existing policy was not sufficiently accommodative, that is because there was still room to push long term rates down further. He eschews all the shamanistic expectations mumbo jumbo of the MMers.

  11. Gravatar of Saturos Saturos
    1. October 2012 at 21:20

    So Dan, what didi you make of this statement by Bernanke?

    In the category of communications policy, we also extended our estimate of how long we expect to keep the short-term interest rate at exceptionally low levels to at least mid-2015. That doesn’t mean that we expect the economy to be weak through 2015. Rather, our message was that, so long as price stability is preserved, we will take care not to raise rates prematurely. Specifically, we expect that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economy strengthens. We hope that, by clarifying our expectations about future policy, we can provide individuals, families, businesses, and financial markets greater confidence about the Federal Reserve’s commitment to promoting a sustainable recovery and that, as a result, they will become more willing to invest, hire and spend.”

  12. Gravatar of Saturos Saturos
    1. October 2012 at 21:23

    Is hard-money bias due to gerontocracy? Noah Smith links to this paper on Twitter, calling it “frigging brilliant”: http://www.imes.boj.or.jp/research/papers/english/12-E-13.pdf

    Evan Soltas responds saying he plans on doing a scatterplot of average age and inflation, after controlling for central bank independence.

  13. Gravatar of Saturos Saturos
    1. October 2012 at 21:24

    Noah Smith has a question (about Kocherlakota’s old comments) http://noahpinionblog.blogspot.com.au/2012/10/a-monetary-policy-pop-quiz.html

    (Wouldn’t inflation accelerate to infinity?)

  14. Gravatar of Saturos Saturos
    1. October 2012 at 21:25

    Scott, and if you’ve got time a response to this Mungowitz post would be appreciated: http://mungowitzend.blogspot.com.au/2012/09/moving-goalposts-in-ndgp-debate-or.html

  15. Gravatar of Saturos Saturos
    1. October 2012 at 22:42

    Off topic stuff:

    Things are coming to a head in Iran: http://www.theatlanticwire.com/global/2012/10/irans-currency-lost-40-percent-its-value-last-week/57488/

    And how Maoist can this village actually be? (They don’t seem poor enough.) http://www.theatlantic.com/infocus/2012/10/the-last-maoist-village-in-china/100378/

    Also, Scott, have you ever been to Hangzhou? Bloody beautiful, isn’t it? (Now I’m really embarassed about the state of India.)

  16. Gravatar of Saturos Saturos
    1. October 2012 at 22:50

    On second thoughts, it’s probably a Cuban thing: Pictures indicate the entire population is actually living off welfare, probably from elsewhere in China. Or they’ve kept the formal symbols whilst ditching the substance.

  17. Gravatar of Saturos Saturos
    1. October 2012 at 23:02

    Attention everybody: Ryan Avent is on Tumblr now http://ryanavent.tumblr.com/

    (And his first post is so good, it approaches Nick-Rovian proportions)

  18. Gravatar of Saturos Saturos
    1. October 2012 at 23:04

    Oh my god, I’ve just realized he’s had his own blog for years: http://www.ryanavent.com/blog/

    How have I not been reading this?

  19. Gravatar of Saturos Saturos
    1. October 2012 at 23:14

    Sounds like something out of a Stephen Colbert sketch:

    “I’ve learned a lot by talking to [Bernanke],” Mr. Kocherlakota said in an interview after the September meeting. Mr. Bernanke’s “thinking is framed by data and models,” he said. “It beats coming in there with just your gut.”

    I know what you’re thinking — there are people at the Fed who just go by their guts? Yes. Dallas Fed President and perpetual inflation hawk Richard Fisher said he opposed QE2 because “his gut” told him that it would “result in some unpleasant general price inflation.” It didn’t.


  20. Gravatar of Saturos Saturos
    1. October 2012 at 23:15

    And I think that’s the end of my posting frenzy today.

  21. Gravatar of Saturos Saturos
    2. October 2012 at 00:17

    Nope, sorry, one more link: Scott, you have to comment on this: http://blogs.wsj.com/chinarealtime/2012/10/01/eight-questions-james-mcgregor-no-ancient-wisdom-no-followers/?mod=WSJBlog

  22. Gravatar of Y.Alekseyev Y.Alekseyev
    2. October 2012 at 05:35

    I’d like to see a response to this point made by Bernanke:

    “By buying securities, are you “monetizing the debt”””printing money for the government to use””and will that inevitably lead to higher inflation? No, that’s not what is happening, and that will not happen. Monetizing the debt means using money creation as a permanent source of financing for government spending. In contrast, we are acquiring Treasury securities on the open market and only on a temporary basis, with the goal of supporting the economic recovery through lower interest rates. At the appropriate time, the Federal Reserve will gradually sell these securities or let them mature, as needed, to return its balance sheet to a more normal size. Moreover, the way the Fed finances its securities purchases is by creating reserves in the banking system. Increased bank reserves held at the Fed don’t necessarily translate into more money or cash in circulation, and, indeed, broad measures of the supply of money have not grown especially quickly, on balance, over the past few years.”

    How does this fit into the thinking about the Fed’s ability to hit any arbitrary NGDP or inflation target?

  23. Gravatar of Saturos Saturos
    2. October 2012 at 06:14

    Mr.(?) Alekseyev, effective monetary policy doesn’t require a large base. High base demand is a symptom of failed policy. The mere fact that the Fed could permanently expand its balance sheet is enough to guarantee it will hit any explicit nominal level target it sets, without in fact having to do so. See this post: http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/10/engdp-level-path-targeting-for-the-people-of-the-concrete-steppes-.html

    Of course Bernanke has not set an explicit target, and so his policies remain ineffective.

  24. Gravatar of Y.Alekseyev Y.Alekseyev
    2. October 2012 at 06:39

    @Saturos: that’s all interesting and all the stuff I’ve heard before. But it does not answer the question. All it talks about (and all Nick Rowe talks about) is how the Fed COULD permanently expand its balance sheet by buying whatevers on the open market and then maybe burning those whatevers. But that’s not what the Fed has been doing, nor, it would appear, is it something that the Fed is planning on doing at any point. And yet the market monetarists keep emphasising that the Fed should just announce the NDGP target and watch the magic happen – and continue to pay absolutely no attention to the tools that the Fed has available at its disposal, even though the tools that market monetarists have in mind are wildly different from those used by the Fed in the real world that it’s not even funny anymore. In other words: the Chuck Norris of Nick Rowe’s story is the Fed threatening to boost bank reserves. It’s just not very threatening.

  25. Gravatar of Saturos Saturos
    2. October 2012 at 07:07

    All the Fed ever does is expand (and contract) its balance sheet. That’s how monetary policy works, that’s how it affects interest rates. It can choose which assets to buy, and how many it buys, but that’s all it does directly. What it does indirectly is signal the future path of the monetary base by making commitments – a lower FF target now signals a more accomodative path of the base, or an intention to raise the level path of NGDP.

    Actually that’s not quite true. Starting in 2008 the Fed introduced a new tool: IOR. As long as it pays IOR, it’s monetary injections aren’t very effective, and all that’s left is “credit policy”, which isn’t very effective and is subject to other accusations besides. The Fed could actually pay negative IOR as a way of mobilising the base, an idea with which Bullard has toyed.

    But you are mistaken in thinking that OMOs represent a specially market-monetarist policy tool – the Fed always conducts OMOs (and does a few other things occasionally like changing its discount window rate or modifying reserve requirements.) What’s different about MM is the rule according to which we advocate the OMOs to be conducted, which makes them a million times more effective as “the market does the heavy lifting”.

  26. Gravatar of Saturos Saturos
    2. October 2012 at 07:12

    But you are right, the promise to keep rates low till 2015 is still just a promise to maintain a temporary monetary injection (a sterilized one at that). What we need is a promise to set the monetary base at whatever level is required to hit the desired levels of NGDP, and to maintain the base at those required levels at all times, whatever they may be.

  27. Gravatar of Saturos Saturos
    2. October 2012 at 07:13

    And finding those required levels means doing forward looking monetary policy, it means targeting the forecast.

  28. Gravatar of ssumner ssumner
    2. October 2012 at 11:45

    John, Targeting unemployment is a really bad idea. And yes, banish both ‘inflation’ and ‘price level’ and focus on NGDP.

    Dan, See Saturos. Also note that the markets seem to believe all that “mumbo-jumbo.”

    Saturos., In my view tight money hurts the elderly, especially those who are more affluent (i.e influential.)

    Angus seems to confuse supply and demand shocks. If the Fed targets inflation most of the actual variation of inflation will be due to supply-shocks, and hence negatively correlated with output.

    Yes, Hangzhou is a nice city and has a bright future. That Maoist village is all show, it’s not true communism.

  29. Gravatar of ssumner ssumner
    2. October 2012 at 12:48

    Saturos, I don’t have any problems with the China SOE article, although he leaves out some of the positive trends.

  30. Gravatar of TheMoneyIllusion » Then and now TheMoneyIllusion » Then and now
    2. October 2012 at 13:36

    […] Today we know exactly who was right about the 1970s, but it remains to be seen who will be shown to be right about the 2008-2012 period. However things are moving our way, bit by bit. […]

  31. Gravatar of TheMoneyIllusion » Interest rates are an “unreliable indicator” TheMoneyIllusion » Interest rates are an “unreliable indicator”
    4. April 2013 at 18:30

    […] 2013.  In 2013.  In 2012.  In 2012.  In 2012.  In […]

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