NOW you want easier money?
I happened to catch Rick Santelli on CNBC this morning, the first time I had seen him in years. I recall he always used to complain about the zero interest rate/QE policies of the Bernanke/Yellen years, and indeed mocked the idea that easier money could somehow create growth when bad supply-side policies were holding the economy back. And yet, now that unemployment is down to 3.7% and inflation is back up to 2%, he suddenly opposes a rate increase. I nearly spit out my coffee.
A number of people have recently asked me about what’s going on with all the conservative commenters suddenly opposing higher interest rates. Didn’t they warn us a few years back that low rates were causing artificially high asset prices? If so, wouldn’t we want to unwind these asset bubbles with slightly higher (albeit still extremely low) rates?
Steve Chapman pointed me to a Wall Street Journal piece by Stanley F. Druckenmiller and Kevin Warsh:
The time to be dovish was when the crisis struck and the economy needed extraordinary monetary accommodation. The time to be more hawkish was earlier in this decade, when the economic cycle had a long runway, the global economy ample momentum, and the future considerably more promise than peril.
I do recall lots of conservatives favoring a more hawkish policy in the early 2010s. During most of this period, unemployment was in the 8% to 10% range and both inflation and inflation expectations were unusually low. I would have thought that was the time to be more dovish, not more hawkish. But let’s say I’m wrong and that Bernanke’s monetary stimulus was excessive, perhaps because it triggered high asset prices. In that case, why would someone who had a hawkish view in the early 2010s now oppose interest rate increases, at a time when asset prices are even higher?
In the forlorn hope that I won’t be misunderstood, let me acknowledge two points:
1. There’s a very respectable argument that the Fed should not raise rates tomorrow. That’s not what puzzles me.
2. People have a right to shift their views on the Fed policy stance, indeed that’s appropriate when conditions change. Thus in the early 2010s I thought Fed policy was clearly too tight, whereas now I think it’s about right, because we are close to their inflation and unemployment rate targets.
Many of my commenters are conservatives who oppose a rate increase tomorrow, but also thought money was too tight in the early 2010s. That’s fine. What puzzles me is those who thought it was too loose when inflation was 1.5% and unemployment was 8%, but now think that the Fed is likely to make it too tight by pushing rates up to . . . 2.5%—at a time of 2% inflation and 3.7% unemployment. What’s your model?
The elephant in the room is the head of political party with an elephant mascot—Trump. He thought rates were too low before he became president, and now complains they are too high. He thinks his trade war is a reason not to raise rates, even though he also claims that trade wars boost American GDP growth by bringing jobs home, which would actually be a reason to raise interest rates. Of course, no thinking person takes Trump tweets at face value; it’s all politics. But that raises an interesting question. The bizarre flip flop of many conservative commenters regarding monetary policy occurred at roughly the same time as the Trump flip flop, which we all know reflected political considerations.
I don’t wish to impute bad motives to those I disagree with; indeed I’m probably missing something. I eagerly await a coherent explanation of why a tighter policy was needed when the economy was severely depressed and asset prices were far lower than today, and 2.5% interest rates are excessive at a time when the economy is booming, inflation is back at 2%, and asset prices are far higher than in the early 2010s.
Again, I am not saying these conservatives are wrong today. There are respectable arguments for not raising rates tomorrow. I simply don’t understand the conservative model of monetary policy. You may disagree with me, but when it comes to monetary policy I’m no moron. I can generally teach even theories with which I disagree, and indeed I often taught the Keynesian model to my students. But I wouldn’t even know how to explain modern conservative views on monetary policy to my students. What is the model?
When I go to conservative monetary policy conferences, I hear one speaker after another rail against “discretion”. But when I read modern conservative commentary on monetary policy, I’m confronted with policy judgments that seem far, far, far more discretionary than anything that came out of new Keynesian economics. At least the new Keynesians favored targeting inflation at 2% and unemployment at the natural rate. That’s not ideal, but it’s a sort of guidepost.
In contrast, consider this uber-discretionary set of claims:
In a first-best world, the Fed would have stopped QE in 2010. It might then have mitigated asset-price inflation, a government-debt explosion, a boom in covenant-free corporate debt, and unearned-wealth inequality. It might also have avoided sowing the seeds of future financial distress. Booms and busts take the Fed furthest from its policy objectives of stable prices and maximum sustainable employment.
So a tighter money policy in 2010 would have moved us closer to the “policy objectives of stable prices and maximum sustainable employment” because it would somehow prevent “booms and busts”? Exactly how does that work? I haven’t seen such fancy footwork since James Harden went up against the Utah Jazz.
And what happened to conservative support for the Taylor Rule?
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18. December 2018 at 16:19
Scott,
What do you make of this? (not spam!)
https://ibb.co/L0VjG49
Oil and TIPS spread smoothly sinking since early October, concurrent with broad stock market drops (though these have admittedly been more volatile). Look like an AD problem? Not seeing it in your NGDP futures.
18. December 2018 at 17:49
Ram, Oil and TIPS move together (due to a lag in TIPS adjustments), and you need to adjust TIPS spreads for oil shocks to get a meaningful estimate of inflation expectations. When oil falls sharply, TIPS spreads underestimate actual inflation expectations. Vice versa when it soars much higher. We’ve seen this before. Oil is falling partly due to global demand factors, partly due to fracking, and perhaps a bit due to the US economy.
Is this 1998 or late 2000? Time will tell.
I do think downside risk to NGDP is increasing, but I don’t think the central forecast is changing all that much. Certainly NGDP growth will slow quite a bit from the recent pace, which was unsustainable if you want 2% inflation.
I do agree that the NGDP market isn’t picking this up, but recall that the contract only goes to 2019:Q1. I think the recession risk is still further out. I still expect about 4% NGDP growth over the next 12 months.
Having said all that, I have no objection to people saying don’t raise rates—it’s a close call.
18. December 2018 at 17:53
@ram Remember on Oct 3 Powell said:
“We may go past neutral. But we’re a long way from neutral at this point, probably.”
In other words, he thought a lot of “tightening” needed to still be done!
18. December 2018 at 18:04
advocating hikes in 2010 but not today is not actually all that inconsistent from a “conservative” perspective. There was a large tightening effected in 2014 as evidenced by a sharp appreciation in DXY, and a collapse in commodities, sharp decline in Chinese FX reserves… all of which preceded a deceleration in nGDp growth.
One way or the other, the Fed DID tighten in 2014. FWIW the Fed balance sheet started contracting in Dollar-duration terms in 2014. Also, the decision to announce a QE exit while undershooting the inflation target could have had a a significant negative effect on expectations. I’d contend that QT effectively happened then (hence it doesn’t concern me much now).
At any rate, it’s wasnt that unreasonable from a conservative or “hard money” perspective to be arguing for hikes in 2010 before the 2014 tightening came to pass.
As for today, as you note, there’s plenty of reason to suggest the Fed should take a pass tomorrow. When Powell said “we’re a long way from neutral” the markets told him resoundingly that he was wrong.
18. December 2018 at 21:03
Scott, as someone who is a) conservative b) thinks policy was too tight in 2010 (Bernanke was the worst Fed Chair in history) and c) also thinks current monetary policy is too tight, let me tell you why.
It is because I believe..
1) Higher real GDP growth generally increases aggregate utility, which is a good thing.
2) Sticky wages/prices are not a step function(i.e. beyond “full employment,” higher NGDP still gets you some additional real growth.)
3) The tax cuts have permanently raised the real growth rate at full employment.
4) U6 is not a great measure for gauging “full employment.”
I know you disagree with 2, 3, 4. I don’t think you’re a moron, but you’re definitely wrong about all of them. 🙂
18. December 2018 at 22:08
Scott, are you some kind of duck who wakes up every day and has to figure out what his wings do??
You literally COINED the term Warstlerian.
Defined by the Fed as bankers have a moral obligation to PREFER and FAVOR dereg and low tax fiscal stances.
So, you 100% TOTALLY GET the logic of “conservatives.”
You TOTALLY GET the idea that Obama gets punished and Trump gets rewarded by a Central Bank and WHY. You might not like it, but stop playing coy, deal with the strong simple logic.
—–
Scott, I’m not sure how smart you are, I think you are very smart. But I CAME BACk HERE because the fed has stepped in it, and PROVEN WHY they can’t be “neutral” on politics.
They are proving in game theory WHY they must be Warstlerian.
Trump Bump is real, you slash regs and taxes and you get higher growth, that’s NOT UP FOR DEBATE.
BUT!!!! You have to think like a game player and consider the incentives.
When Trump is dancing around crowing about how great he is for the Economy….
If the Fed DOES NOT give him extra rooms to run, if they do not reward him,
The Fed is incentivizing Trump to have a trade war. He might not think trade wars hurt in long run, but he knows there is short-term pain…
If YOU ARE TRUMP, you’d think, “well if the Fed isn’t going to reward me, I’d prefer my Economy slow down BECAUSE OF TRADE WAR”
Everyone here can understand this is how Trump thinks.
So DEAL WITH IT DIRECTLY, stop trying to spin a “boy attitudes change when politics change”
YES and they should because Warstler is right. Bankers / Econos cannot think like bureaucrats and public sector employees, they need to DESPISE GOVT.
18. December 2018 at 22:18
Marcus, I think we both agree that Fed forecasts of their future behavior are less interesting than market forecasts of their future behavior.
Brian, You may have a point there, but I can’t understand what it is. Could you try to explain it in a different way? You seem to be saying that tightening in 2010 made sense because policy was tightened in 2014. (Btw, policy was not tightened in 2014—NGDP growth sped up.)
dtoh, I disagree, but even if you are 100% correct it doesn’t really address this post. The post is about the odd inconsistency of many conservatives on monetary policy. In contrast, your views seem consistent, they seem to follow an understandable principle. So the post is not aimed at you.
Also, I’m more skeptical of #1 than I am of #2 and #4, although higher RGDP may boost utility. I think most economists agree that monetary stimulus can push you beyond full employment, but most believe it will only do so in the short run. In the long run, trying to do so will cause a recession. We’ve seen this movie before.
BTW, just to be clear, I don’t think the Fed should use U3 or U6 when setting monetary policy. I mention unemployment because the Fed prefers to use the unemployment rate as one of its targets (unfortunately). I wish they used NGDP instead.
And I definitely don’t think the Fed should be in the business of trying to promote growth by printing money, they should be trying to provide a stable monetary system, which makes market economies work better.
18. December 2018 at 22:23
Scott,
Think about it this way, flip it over:
Imagine Trump knows for sure the Fed is going to raise rates once NGDP is over 5% and lower rates if growth falls below 4%.
Trump wants to have a trade war.
You are the Fed. You don’t want Trump to have a trade war.
DO YOU NOT SEE how the Fed by being politically “neutral” and not having an opinion on Trade War is the same thing as the Fed not having an opinion on fiscal (regs and taxes)???
WE WANT the fed to admit their biases! WE WANT the fed to favor and reward dereg, low taxes, and free trade!
The Fed is the natural partner of the GOP.
The public sector is he natural partner of the Dems.
We aren’t Pollyannas here.
Th Fed, bankers, and govt Economists have to be natural default Libertarians, or it all goes to sh*t.
19. December 2018 at 02:45
“I don’t wish to impute bad motives to those I disagree with; indeed I’m probably missing something. I eagerly await a coherent explanation…”
😀 😀 😀
This made me spat out my morning coffee. You’re right, Republicans and bad motives absolutely can never exist together.
19. December 2018 at 02:47
Honestly, is anyone pressing Republicans of their infinite hypocrisy on this?
19. December 2018 at 03:21
Scott,
it’s TDS again. Trump says about himself, that he is a “low-interest-rate guy”, who thinks that “bad things” are going to happen to the economy when you raise them. That’s why he attacked Yellen, because he (correctly) thought low interest would help Obama’s economy. His guess was that the FED would raise interest later, when he was President, and that this would not be ideal for the economy, and funnily enough that’s what actually happened.
I know that his theory will be labelled as “wrong” by you (like always) but his simple-minded theory is surprisingly consistent (for Trump) and, compared to all the other conservative theories out there, it’s also surprisingly close to the truth.
19. December 2018 at 04:03
Perhaps for some conservatives nine years ago ZIRP and QE seemed novel (unconservative!) and scary. Perhaps for some conservatives after nine years of anchoring raising rates much more once having lifted above zero may seem a bit of a change from what seems to be working (unconservative!).
19. December 2018 at 05:10
Many moons ago the Wall Street Journal opined that the Fed was too tight. Inflation back then was running about 5%. I am describing the time that President Ronald Reagan was in a running battle with Fed Chairman Paul Volcker. President Reagan was irked enough with Volcker to publicly propose that the Federal Reserve be placed into the Treasury Department.
As long as President Obama existed, the Wall Street Journal ranted and railed about too-easy money.
Now the Wall Street Journal says Chairman Powell should ease up.
Let us not even mention the federal deficit.
Scott Sumner recently said no matter how cynical he becomes, the bar keeps getting raised (or lowered) in Washington DC (or New York) and Scott Sumner cannot keep up (or down).
Can we really blame the voters of this country for having no faith in the establishment? When the sanctimonious sermonizers are always frauds? When the pompous pettifoggers pivot on their principles in the blink of an eye?
The real reason people in Washington detest Trump is that he is an obvious liar. One is expected to lie so skillfully that it cannot be detected, or there is at least an element of plausible deniability.
Trump’s rank amateurism is reviled by Old Washington hands.
19. December 2018 at 05:56
It’s quite simple, when there is a Democrat in the White House interest rates should be as high as possible.
When there is a Republican in the White House, rates should be as low as possible.
19. December 2018 at 06:00
Christian, Scott gets it. He’s playing to the cheap seats. It’s sad.
He got it 6 years ago:
http://www.themoneyillusion.com/might-the-second-domino-fall-first/
“Part 2. Matt Yglesias (unintentionally) staged a sort of debate between Morgan Warstler and myself. In this post Yglesias points out that the ECB acts as if it’s dual mandate is low inflation plus fanatical Warstlerian anti-statism. For those who don’t read my comment section, Morgan Warstler is a colorful commenter who is totally obsessed with the idea that the Fed and ECB both should and will use this crisis to screw public employees everywhere and implement far-reaching market-oriented reforms. Then Yglesias presents my counterargument to Morgan, which is that central banks should stick to stabilizing NGDP growth and leave public policy-making to democratically elected legislatures.”
—
This is why I just came back here, it dawned on me that Trump’s trade war really began in earnest when the Fed started pissing on Trump’s BEST STOCK MARKET EVER.
Scott reread that.
I realized we now have in TRADE WARS the DEFINITIVE ANSWER to why Scott is wrong that:
“central banks should stick to stabilizing NGDP growth and leave public policy-making to democratically elected legislatures”
Let me be clear here IF THE FED COMMITTED TO an NGDPLT policy, or even just let the fed be run by computer…
Then Scott would be right, in fact at this site, Scott once posted on an insight I’d given him that if the fed truly adopted Scott’s NGDPLT, our elected officials become 100% RESPONSIBLE for a great economy like 4.5% RGDP and no inflation or a sh*tty Economy like 0% RGDP and 4.5% inflation.
——
So in Scott’s UTOPIA, YES we would have the incentives lined up so Trump would be far more concerned if Trade War slows down the Economy.
BUT, we don’t have that.
We have a Fed that has biases. My point has always been, the Fed should be a computer, but if it isn’t, then the fed MUST HAVE BIASES TOWARDS THE PRIVATE SECTOR.
If the Fed doesn’t LET TRUMP RUN THE ECONOMY HOTTER than they do Obama, Trump by gameplay becomes like Obama.
Obama CHOSE to regulate the Economy, and shift the pie around rather than grow it. He CHOSE to let the EPA interfere with business. He CHOSE to favor his voters and screw the Trump Belt.
And the “neutral” Fed REWARDED OBAMA by keeping rates lower.
Trump is now CHOOSING the reverse.
But since IN REALITY when simple stuff like just killing the EPA makes the Economy boom, when the Fed raises rates on Trump’s YUGE AND VERY BEAUTIFUL STOCK MARKET…
The Fed is MAKING PUBLIC POLICY.
So Trump says, “well if you aren’t going to let me run the dereg’d low tax Economy hot, I’ll slow it down in ways that FAVOR TRUMP BELT VOTERS.
Trump is happy to take 25K manufacturing jobs in Trump Belt and screw the longshoreman in Long Beach and the Amazon resellers who are good at FB ad campaigns for cheap Chinese goods.. they are Dems.
So let me repeat, the Fed is PUSHING TRUMP TO TRADE WAR.
Until the Fed IS WHAT I AND SCOTT WANT IT TO BE, until they get their discretion, than logically, Scott must admit, the next best thing is a Central Bank that REWARDS: dereg, low taxes, no trade war.
Until we are sure bankers are not playing favorites, they must ALWAYS FAVOR the libertarian policy basket.
19. December 2018 at 06:09
1) I was completely lost trying to understand Morgan’s ramblings.
2) I thought this post was excellent, but I would argue the confusion exists because many (most?) people continue to confuse low interest rates/high asset prices with easy money. I work in the finance world and I can’t tell you how many times I’ve had this argument-fed should raise rates because asset prices are too high, even though inflation, inflation expectations and NDGP Growth are below trend).
3) I wouldn’t hold my breathe for a politician to have coherent views on economics.
4) “And I definitely don’t think the Fed should be in the business of trying to promote growth by printing money, they should be trying to provide a stable monetary system, which makes market economies work better” I absolutely agree and I think most people would, I think the real issue is how people define a “stable monetary system”.
5) If you think the right is crazy about this, just wait the main stream left starts shouting at the fed for inequity and promoting inequality (it’s already happening).
19. December 2018 at 06:40
Morgan, you have got to learn how to write more coherently if you want to be taken seriously, but this is the wrong blog to argue that the Fed was accomodative towards Obama. The consensus here is that rates were too high in 2014-2015 (to say nothing of Scott’s well-received criticism that the Fed badly messed up in 2008-2009 to deepen the Great Recession), so the Fed, if anything, helped bring about Trump’s election by not providing the appropriate support for economic growth toward the end of Obama’s term.
I think Morgan’s overall point might be that one of the best arguments for keeping rates low is the heavy economic risk from Trump being some combination of misguided/incompetent/corrupt but that the Fed hedging this risk (which the stock market sure seems to notice) in its rate path would enable bad policy from Trump.
19. December 2018 at 07:03
Scott,
You are 100% right. The conservatives that you refer to are prioritizing politics over good policy. Same is true of deficits. The Warstler talk is nuts and incredibly undemocratic, another recent feature of conservatives. They idea that the Fed should hold the economy hostage to force democratically elected officials to enact their policy preferences is deeply disturbing. What about the department of energy? Should they threaten to neglect their responsibility for safeguarding our nuclear arsenal unless congress enacts green energy legislation? Would it be ok for FEMA to withhold assistance? I’m sure the CIA has some policy preferences that the could demand in exchange for information about an imminent threat. I usually try to be respectful when making comments, but I’m making an exception today.
And to answer the actual question, there is no model, just opportunism and blame shifting.
19. December 2018 at 07:07
Scott,
I’m not trying to be cynical, but I honestly think Republicans favor a weak economy when Democrats are in the White House. It’s quite clear that, contrary to their rhetoric while Clinton and Obama were in office, Republicans believe that both monetary and fiscal stimulus work. And they favor stimulus when a Republican is in the White House, even when it isn’t needed. This goes all the way back to Nixon.
Obviously, the overlap between “conservative” and “Republican” is not total, and real traditional American conservatives certainly don’t like the direction the party has taken, but I think this is at least part of the answer.
19. December 2018 at 07:08
Good post, Scott.
Politically-minded people of all stripes can’t help but view monetary policy from a political lens.
But yes, conservatives are egregiously hypocritical about this. The Druckenmiller/Warsh excerpt is appallingly dumb.
And yes, on this, Trump has been the very embodiment of conservative hypocrisy.
Politics aside, I think the Fed should hike today, since the market has already priced it in, but more dovish hints going forward — maybe a real acknowledgement that rates HAVE normalized (“new-normalized” that is) and the box plot should go in the garbage — would be welcome.
19. December 2018 at 07:25
Tom and Derek it is simple.
Greenspan gave Clinton a choice: you be the balanced budget POTUS, no new spending for you and I’ll be able to keep rates better off for the private sector.
Clinton took the deal and threw his entire campaign promise list under bus and Robert Reich and Carville and the rest all KNEW IT and ADMITTED IT.
That’s it.
it happened.
—-
Something changed. The Fed with Obama didn’t punish him for his EPA rules. The fed didn’t punish him for Obamacare.
—-
We spent a decade ALL ADMITTING the ECB was punishing Greece and EU southern states to MAKE THEM BE MORE deregulated and less lazy. These forced Ordoliberal values on the Obama types countries.
this happened.
—
My point is that Scott doesn’t get to pretend Alan Greenspan and the ECB attitude was COHERENT and LOGICAL.
That bankers force the Protestant Work Ethic on kings and democratically elected governments is NOT NEW.
it is GOOD and RIGHT.
—-
And now we are seeing in Trump’s trade War a negative effect fro bankers not being biased to the private sector.
A LEGIT ARGUMENT can be made that Fed policy of not punishing Obama for not being Bill Clinton 2.0
Caused the shift inside the GOP toward protectionism.
Reread that.
If the Fed right up front told Obama, that they’d be MORE ACCOMODATIVE if he did all fiscal stimulus as tax cuts and no govt spending.
The economy would have gotten better faster when Obama was forced to bend the knee.
If they told Obama this Obamacare thing is terrible and told America Obama’s real unemployment rate based on 67% LFP is much higher if they told Obama to focus make the govt more productive, and stop the EPA waterways junk, we could have had Trump’s boom 3 years earlier.
19. December 2018 at 07:36
Morgan, would you consider yourself not-crazy?
19. December 2018 at 08:19
Nuts but not crazy. I create and run startups for a living. Investors (the market) trust me.
But you do have to read me carefully. Scott’s WP comment system doesn’t allow edits and I touch type (staring at keyboard) and don’t spend lots of time on edits. Folks with big brains take the time and get my point. Who cares about the rest?
Again, Greenspan and the ECB did indeed push Clinton and Greece to not be Obama (you didn’t build that). And that’s good thing.
Scott understands this idea, so his post topic is shallow and derivative.
The Trump Bump was real. Slashing regs and lowering taxes does grow the Economy.
So my theory is when Trump saw the Fed keep raising rates and not REWARDING him for not being Obama (like ECB and Greenspan would have), Trump got serious about the trade war…
If you are Trump and you have a Trade War NOW and take the stock market hit NOW, you are simply pushing the Fed to be more accommodative in 2019.
For the Fed to TRULY become politically neutral, they must lose all discretion.
For the Fed to TRULY become politically neutral, they must lose all discretion.
For the Fed to TRULY become politically neutral, they must lose all discretion.
And if they aren’t going to lose their discretion, then they must be biased towards free market policies.
This is an Iron Law. Bankers only invest in govt when there are war profits to be made. The rest of the time they invest in the private sector and are wary of government.
Obama was bad for the Economy. Anyone who argues against this is worried about something silly like Social Justice and not about Animal Spirits.
The Fed while pulling us out of the collapse could have done it and still kept Obama from doing Obama policies.
Greenspan would have broken Obama and sped the recovery up by years.
19. December 2018 at 09:20
Morgan,
The ECB did attempt to force free market reforms by tanking the economy. In doing so they caused significant human suffering. For Greenspan, it led to a period of growth and balance budgets. In both cases they were being undemocratic. The FED has a dual mandate. It’s not the preferred mandate, but it is the law as enacted by Congress, as opposed the an “iron law” which merely reflects your experience working in whatever sector you work in. They should comply with the law. And there are always war profits to be made. Whose to say we won’t have a fed chair who is more interested in war profits than the private sector. What result would that yield? I also think you are wrong about Greenspan and Obama. Obama did not appear to believe in monetary offset as evidenced by the fact that he left chairs on the board vacant, and therefore would not be impressed by Greenspan’s threats. Greenspan would likely need to cause considerable harm and human suffering before he “broke” Obama. And tanking the economy could also lead to an expansion of government as it did during the depression, which i think we both agree was caused by monetary policy. Non-elected officials misusing their power to force elected officials to ignore the will of the people who elected them is a direct assault on liberty. You may not be crazy but I do believe you are misguided on this subject. I agree that removing or reducing discretion would be better, but you appear to be arguing for greater discretion beyond the legal mandate.
19. December 2018 at 09:37
Morgan,
that’s a great new angle. It’s all about monetary offset.
Obama’s economic policy was so bad that the FED had to keep rates so low for such a long time. Trump’s economic policy is so good that the FED thinks they have to offset him by raising rates.
Scott will be so mad about this. =)
@OtherBob
You are reading way too much into Trichet’s incompetence. He didn’t try anything, he simply didn’t know what he was doing.
19. December 2018 at 10:09
Scott, agreed the my previous post was a bit garbled. I was half responding to you and half to an unfair quip I had heard from Steve Liesman to Stephen Moore about “where have all the hard money guys gone now that Trump is in office?” Your point was better-constructed, but I think similar in tone. Let me try again to make the case that Druckenmiller, Warsh at al are being more consistent than it might appear at first blush.
In 2010 we had just emerged from a near-ditch economic experience on the back of QE and what many saw as least-of-all-evils program of government “bailouts.” DXY averaged around 80 for the year, Gold around $1200 (all-time highs to that point), WTI traded $80-$100 and 2s-20s Treasury curve gyrated between 210 and 290bps (record steeps). Admittedly, Core PCE swung from 1.7 to 1.0 as 2010 wore on but consistent with the other indicators suggesting robust liquidity it did bounce strongly in 2011 to a cycle high of 2.2% in early 2012.
Given that we did not know in 2010 that the Eurozone was going to soon nearly blow itself apart, anyone who believes in assessing the stance of monetary policy based on market-based indicators of liquidity conditions – as opposed to an output gap methodology that effectively targets the unemployment rate – would have had some justification for calling for a tightening. That’s not to say it was the right call, but we’re arguing consistency of a rate hike call in 2010 vs a STOP call today.
Obviously, all of the indicators I’ve mentioned are appreciably tighter now than in 2010, save for the Gold price but a gold price that’s unchanged on 8 years ago isn’t screaming easy liquidity. As I noted above, I believe something associated with the Fed QE exit announcement after persistent inflation-target undershoots elicited a liquidity tightening beyond what they intended or even understood what was happening. Chine’s reserve hemorrhage, devaluation and slowdown probably exacerbated things but no matter – there was a considerable tightening in liquidity conditions in 2014 which has not to this day been reversed. Nominal GDP did in fact decelerate notably from early 2015 to mid-2016.
Of course, nominal GDP has accelerated now to 5.5% y/y, but the liquidity indicators that a “conservative” might employ – DXY at 97, $48 oil, flatlining Gold and a pancaking yield curve – would lead to the conclusion that what we’ve witnessed is an increase in the real component of nGDP, presumably as a result of deregulation and tax cuts.
The “conservative” playbook is pretty clear on this: if there’s no sign in market-based indicators of an inflation outbreak the Fed should let the policy changes do their work by letting the economy run. Hence the call by “conservatives” for the Fed to pause now.
19. December 2018 at 10:24
Michael,
that’s not only your thinking, it’s pretty much exactly what Trump said around 2015/2016.
Do you honestly think Democrats want a strong economy when Republicans are in the White House? The stance of the economy is the most important factor that gets you in and out of the White House, so of course Democrats and Republicans want the other party to fail.
19. December 2018 at 10:50
Other Bob / Christian…
The EURO was created by the greatest living Economist Mundell.
And if you really get down to it I MEAN DEEP DOWN where guys like Keenan think I’m crazy, Mundell, Keynes (real Keynes like Farmer today, not the DeKrugman bastardization), HAYEK, Uncle Milty they all had a true goal:
INCREASE ANIMAL SPIRITS, FAVOR INNOVATORS, WEAKEN BUREAUCRATS, RAISE THE STATUS OF MORGAN’S TRIBE, WEAKEN THE ACADEMICS.
In short, they embrace Ordoliberalism, get out fo the wagon and pull, trust the private agency of man.
—-
Mundell looked at Greece and said, “hey guys like Morgan are not in charge, that’s bad!”
Mundell looked at Florida and said, “hey, guys like Morgan are in charge!”
And he devised a NON-DEMOCRATIC BANKER SOLUTION to force Greece to become Florida. And the sumb*tch got it done!!! Greece is a tourist place that has to let the guys who run the private tourism based industry to be treated like gods, and the cops and bureaucrats and everyone else… they have to get out of the way.
Forcing Greece to become Florida is good right and noble. It helps the Greeks in the whole.
Of course, it was non-democratic Other Bob!
Bankers do not worry about what voters want, they worry about ROI.
—-
NOTE EVERYONE: How crazy Scott has gotten here, tons of free market Economists are impressed with Trump’s deregulation.
Scott’s examples are TERRIBLE.
Trump slashed the EPA, made School Choice super easy, tossed Obamacare (Health insurance plans cost less than half for healthy people), it’s CRAZY Scott would claim Free Market Econos don’t support trump’s Economic policies
BUT NOTE, SCOTT ALSO ADMITS TO MY LARGER POINT:
“If one looks at the areas the Trump administration is choosing to deregulate and those where there is increased regulation, it seems clear that the motive is not primarily any sort of free-market principles. Rather, it’s a desire to aid certain politically important special interest groups. Bankers and coal-mining firms clearly have a higher priority than low-income people selling pot and facing the risk of imprisonment or American consumers who want access to cheap imports.”
YES YES THIS EXACTLY!
Because the Fed is offsetting trump’s BETTER POLICIES, Trump is being urged to have a trade war!
A trade war can slow down short-term growth and keep the Fed from raising rates WHILE TRUMP VOTERS get the benefits.
https://www.marketwatch.com/story/why-free-market-economists-arent-impressed-with-trumps-deregulation-efforts-2018-12-19
19. December 2018 at 10:57
Christian,
Both Trichet and Draghi consistently trie to strongarm governments into adoption reforms. The threats were implicit but they were clearly there. Trichet explicitly threatened Ireland and Draghi did the same with Greece.
Morgan,
You write: “This is an Iron Law. Bankers only invest in govt when there are war profits to be made. The rest of the time they invest in the private sector and are wary of government.”
That is a ridiculous statement. Banks hold massive amounts of government debt. The whole reason for the european bailouts was that northern european banks held such huge amounts of mediteranean government debt that they would fail of the Mediteranean countries restructured their debt. They weren’t bailing out Greece. They were bailing out German banks. And who do you think holds our treasuries? Do you think all our treasuries are held by household? Banks, which are run by bankers. Iron law- lol. And finally, bankers and central bankers have very different jobs and skill sets.
19. December 2018 at 11:03
See how dumb Ben White is here vs. what I’m saying:
https://www.politico.com/story/2018/12/19/trump-stock-market-tariffs-1038383
The Fed is taking away Trump’s DOW MAN title
So Trump will be TARIFF MAN instead
Scott, you can steal my insight if you want.
19. December 2018 at 11:18
I think I have Morgan derangement syndrome. Creation of the Euro zone was pure folly. It was created by politicians against the advice of economists. Florida works because of massive transfers from other states due to our fiscal union. Without the fiscal union Florida would be Greece.
Milton was very much in favor of liberty. FED chair is a bureaucrat and thus should have limited powers.
19. December 2018 at 11:26
Maybe the differences were that interest rates were near 0 in 2010, and 2.5 now. Also, the economy was early cycle and growing (albeit, very slowly), whereas now a lot of people think we are in correction territory.
Just two guesses I had.
19. December 2018 at 11:42
Christian, So Trump wanted the Fed to damage the economy so he could have an easier time getting elected? Maybe, but unlike you I hold Trump accountable for what he actually says. He said rates were too low, creating an asset price bubble.
Morgan, Take a deep breath; the Fed is targeting inflation at 2%. Don’t make things so complicated.
Brian, That’s a reasonable view. They did hike, and in my view they might have wanted to shift the future path a bit more dovishly than they did today. I view the fast growth of 2018 as unsustainable, which suggests that rates might need to back off at some point, as the economy slows. At the same time, higher rates today may be appropriate, given the recent fast pace of NGDP growth.
Brian, You said:
“The “conservative” playbook is pretty clear on this: if there’s no sign in market-based indicators of an inflation outbreak the Fed should let the policy changes do their work by letting the economy run. Hence the call by “conservatives” for the Fed to pause now.”
But there were no market based signs of inflation in the early 2010s.
I’d add that what you are describing is an incredibly discretionary policy.
other Bob, You are wrong about Florida. Social Security payments are not “fiscal transfers”, Brits retired in Spain still get their government pensions.
19. December 2018 at 11:43
Other Bob,
I don’t doubt that but that’s not what you wrote the first time.
I read this as: Trichet tanked the European economy on purpose through monetary policy, when in reality he was just really bad at monetary policy.
I’m very much in doubt about the European Union. The EU commission is going berserk because Italy won’t meet the deficit criteria next year. I don’t know if they got a point or not, but countries like France never met it since 2007, and no one cares at all, so which way is it???
19. December 2018 at 11:48
Christian List,
Democrats not only supported the George W. Bush stimulus bill early during the Great Recession, but actually favored a larger stimulus.
https://www.nytimes.com/2008/02/08/washington/08fiscal.html
Also, Democrats pushed higher deficit spending during his father’s administration and weren’t shy about deficits under Reagan either.
19. December 2018 at 12:18
Scott, this is extremely simple.
When the Democrats hold the White House, the Republicans actively promote bad policy when they believe that voters will blame Democrats for the resulting bad outcomes. Remember Mitch McConnell: “The single most important thing we want to achieve is for President Obama to be a one-term president.” Political power is more important to Republicans than aggregate utility. That’s why the fake debt ceiling crises, government shutdowns, and disastrous monetary policy recommendations come to a halt when a Republican is president.
In other words, they have the standard model. They just sometimes advocate the opposite of what the model is telling them.
I’m not strongly partisan. I’m sure the Republican partisans will be glad to point out a million examples of Democrats knowingly advocating bad policies to damage the country during Republican administrations. I would regard that response as confirming my theory here.
19. December 2018 at 12:32
Scott, the Fed either turns over discretion to an algorithm OR they must use their discretion to REWARD dreg, low taxes, free trade OR they can expect to see their goofy neutral or democratic claims cause terrible Fiscal. They helped Obama be bad for Economy and keeping Trump from being great.
Trump’s Econ policy basket is BETTER than Obamas. And being neutral when 1 > 0 is bad.
The Fed is urgingTrrump to be Tariff Man, because they won’t do what is right and use their discretion to favor trump and punish Obama.
19. December 2018 at 12:34
The Fed is telling Trump, “GO AHEAD AND HAVE A TRADE WAR, WE’LL JUST LOOSEN UP MONETARY.”
My claim stands.
19. December 2018 at 12:44
Scott,
I think Trump’s opinion looks like this: Low interest rates means easy money. Easy money means a booming economy, with the side effect that “bubbles” (always) arise. “Bubbles” that, according to his opinion, have to burst sooner or later anyway. So Trump is of the opinion that the one who creates the “bubble economy” in his term, must also destroy the “bubble economy” in his term, and not transfer it to another President, and surely not to him.
Let’s be honest hear: The thinking in terms of low interest = easy money, and “bubbles” that have to burst sooner or later, is in fact a very common thinking among politicians, ordinary citizens and even economists.
Yes, that might be true in a certain sense, but it fits into what I described above.
He said things like:
In psychoanalysis, the second paragraph can be described as “Übertragung”: Trump transfers his views into Obama’s: He thinks, because he himself would think and act like that, Obama will think and act like this as well. A pretty common view, I guess, and often not so mistaken.
Funnily enough, he might also have been right about Yellen being a pretty political figure. Where’s the soundbite where she says something about FED policy in like August/September 2016 that would favor Hillary/Obama heavily, and then around after the election she says the exact (!) opposite. I think it was about fiscal stimulus? I think you praised how responsible she is, and then I found her first piece from August/September, and you said something like: “Gee, I wonder what changed since then!”
I might have been even more extreme, it might have been a time interval of only 4-6 weeks or 2-4 months max. I just can’t find it right now. Grrr.
19. December 2018 at 13:00
Michael,
of course Democrats support as much fiscal stimulus (and even deficit spending) as possible, since when aren’t they??? I don’t think your example is good. Do you think it is good? Your example is similar too: “Look, the GOP has backed a Democratic law that enforces massive tax cuts on high earners. It’s a real miracle.” –> No, it’s not. When there’s at least 50% or even 99% of their own ideology in the law, of course the other side will most likely support it.
I agree in so far that the Democrats seem more “reasonable” over the course of history, but I think that’s (in part) simply because of the political constellation that often consisted of a Republican President that HAD to come to terms with a Democratic Congress. It was rarely the other way round, and that’s (one reason) why the other constellation didn’t work out as well so far.
19. December 2018 at 13:04
Morgan,
There is a big problem with your “thesis” if monetary policy is indeed too tight right now. I think it is, and so does Trump, although, presumably for different reasons.
19. December 2018 at 13:05
The Fed just promised 2 hikes in 2019.
I suspect Trump will Trade War with China etc until the Fed changes their guidance.
19. December 2018 at 13:16
CHristian,
Good points. I agree.
Michael,
You are very right about the GW stimulus. Excellent point.
Scott,
I don’t think I’m wrong. Brits aren’t the only retired people in Spain. There are Spanish retired people living in Spain too. Brits also don’t get the equivalent of medicare in Spain. And Medicare is significant. Spain also funds their own military bases and government institution. Per capita, Florida receives close to $4k more from the federal government than it contributes annually. West Virginia receives $9k. If West Virginia was part of our monetary union but not part of our fiscal union it would be considerably worse off. Maybe not Greece, but Portugal? If West Virginia had their own monetary regime they might be better off. Florida is not as good of an example but Morgan picked Florida.
19. December 2018 at 14:30
While I agree with the point that there are far to many hack “economists” who are not, in fact, economists, but partisan cheerleaders, I am of the opinion that fundamentals have dropped sufficiently in the last quarter, that I would have advised the Fed to hold off from further rate hikes.
Stock market is down.
Real Estate prices are down.
TIPS break-even spreads are down.
There are enough clouds in the forecast to call for a pause.
19. December 2018 at 14:38
Nominal GDP at 5.5% suggests that by the professor’s calculus of 5% NGDPLT monetary policy is about right.
Actually, NGDPLT (as originally formulated) would suggest that we should run above 5% nominal to make up for the the years we ran below 5%. Unless, the formulation of NGDPLT has in fact changed.
19. December 2018 at 15:15
Doug M, yep.
19. December 2018 at 15:32
Morgan,
If you’re confident in your perspective, you should be long the stock market now. Are you? In fact, you should buy some calls.
19. December 2018 at 15:38
Morgan,
I’d also point out that merely having one or two fewer rate hikes next year is almost meaningless. It’s the market perception of the reaction function that matters. The market already doubted the Fed’s forecasts.
And no, NGDPLT doesn’t suggest that there should necessarily be catch up level targeting to make up for several years of undershooting targets. Money’s neutral in the long run. Wages eventually adjust.
I think the Fed has remained too tight due to its reaction function, not the fact that we’re way under the level we’d have with NGDPLT.
19. December 2018 at 17:48
Ken, Yo may be right, but that’s a sad commentary on our country. I can understand a politician doing that, but I’d hope that economists, journalists, pundits, investors, etc. would have higher standards.
Christian, You said:
“In psychoanalysis, the second paragraph can be described as “Übertragung”: Trump transfers his views into Obama’s: He thinks, because he himself would think and act like that, Obama will think and act like this as well.”
For once I agree.
Doug, How does your views on the wisdom of raising rates today relate to this post?
Also, the Fed is not targeting NGDP at 5%, they are targeting inflation at 2%.
19. December 2018 at 21:55
Kenneth Duda,
If you see my comments above yours, it’s clear that Democrats have supported fiscal stimulus whether Republicans or Democrats we’re in the White House. Republicans consistently favor stimulus when Republicans are in the White House, but oppose it when Democrats are in office. This has gone on since Nixon.
19. December 2018 at 23:19
Is it really that hard to understand?
The Fed (and other Central Banks) have induced an artificial bubble in asset prices over the last decade.
Their policies were unwise.
Those policies created distortions and ‘malinvestments’.
As a result, we now live with a very precarious financial system (and its handmaiden — a very precarious economic system) directly as a consequence of foolhardy central bank activity.
We live on a very large Debt Mountain, the foundation of which can crack at any time, as the result of the slightest disturbance to that undergirding — an underpinning which consists of Central Banks’-created huge amounts of net-new Credit Money, injected into the financial system over the last decade.
Not only the Fed, but the PBOC, the BOE, the ECB, and the BOJ (and others) have been responsible for creating this mess.
So any thinking person (not just conservatives) is going to realize that any action that threatens to implode this shaky house of cards is undesirable.
It was never a good idea to paint ourselves into a corner like this in the first place, but once we did so, why in the world would it be a good idea to demolish the whole shaky edifice by removing its supports?!!
20. December 2018 at 06:13
I think it’s objectively true that Republicans are entirely Machiavellian and Democrats aren’t.
20. December 2018 at 09:20
You lost me at “it’s objectively true that”.
20. December 2018 at 12:39
Viirlaid, Congress told the Fed to control inflation and output, not to target asset prices. I think it’d be a huge mistake to target asset prices, but if we go that route the Fed needs Congressional authorization.
20. December 2018 at 14:32
I think Ken’s explanation is correct. It’s simple and explains the data.
20. December 2018 at 17:27
ssumner, 20.December at 12:39 — I was not arguing IN FAVOUR of the Fed targeting asset prices, either up or down. (Except perhaps when it is ‘fighting’ price inflation, it seems to ignore highly appreciating financial asset prices, which is a blind spot for them — for example, when CPI is only moderately increasing, as during the Roaring Twenties — and that oversight led to the Great Depression).
What I was pointing out is that the Fed does target asset prices (even if only inadvertently) when it practices LIRP.
Central Banks create harmful distortions which later have to be undistorted, that is unwound, at great societal cost.
Specifically I was providing my response to the question posed in the essay as follows:
“I do recall lots of conservatives favoring a more hawkish policy in the early 2010s. During most of this period, unemployment was in the 8% to 10% range and both inflation and inflation expectations were unusually low. I would have thought that was the time to be more dovish, not more hawkish. But let’s say I’m wrong and that Bernanke’s monetary stimulus was excessive, perhaps because it triggered high asset prices. In that case, why would someone who had a hawkish view in the early 2010s now oppose interest rate increases, at a time when asset prices are even higher?”
My response was that, after having bad policy which initially caused artificially high asset prices, it made little sense to then correct that bad policy with more (bad) policy that would make those asset prices crash.
It would have been better to never have had the initial bad policy of course.
But now to ‘correct’ with a society-damaging ‘good’ policy simply does not seem like good policy to me.
20. December 2018 at 17:31
Sorry typo — please correct… I cannot find EDIT feature…
IN FIRST PARAGRAPH should have been:
(Except perhaps when it is ‘fighting’ price DEFLATION, it seems to ignore highly appreciating financial asset prices, which is a blind spot for them — for example, when CPI is decreasing or only moderately increasing, as during the Roaring Twenties — and that oversight led to the Great Depression).
21. December 2018 at 21:08
The elephant in the room is asset prices. Monetary policy affects those first, the real economy with a lag. Beginning rate normalization five years ago could have headed off the stock market bubble that is now cracking.
It’s become much harder to raise rates now because of the mass of debt that was nursed into being by holding rates too low too long. The more debt there is the higher the cost of serving it when rates rise. In effect, low rate policy is like a drug … the more it’s used the more it’s needed, and the harder it is to withdraw.
22. December 2018 at 09:26
Viirland, You can’t beat something with nothing. If money was too easy in the early 2010s (it was actually quite tight) then what do you propose instead, and why? What should the Fed be targeting?
(There’s the libertarian argument that we should just go back to gold, but the conservative arguments in the press are taking the Fed as a given. So it has to do SOMETHING.)
Bill, “Rate normalization” five years ago would have caused a depression. The Fed’s job is to provide a stable macroeconomy, not to worry about asset prices.
Indeed the Fed should not even target rates, they should adjust the money supply to keep NGDP growing at 4%.
22. December 2018 at 10:38
Michael, my perspective is Fed wrong on labor slack.
How can you miss my point???
BUT with labor slack its again based on being biased toward Protestant work ethic, toward Rawlsian Ordoliberalism.
Not towards Democracy. We don’t ask people if they want to work or not in a survey. Who cares???
I think Fed should use 97 or 2000 and say we aren’t stopping our outright political bias unless LFP IS BACK TO RECENT HISTORICAL HIGHS.
So if you read and understand my perspective, they punish bad fiscal that keeps more in the wagon and reward good fiscal that pushes them out.
Greenspan and ECB, outright bias towards deregulation, lower or more efficient taxes, reduced public sector, free trade.
—-
So sure I’d be long stock market IF FED DID THIS…
I’d love NGDPLT because when you see it mechanized, meaning when you see the new game gets played with the new rules…
Under a true NGDPLT regime, voters will immediately reward policies that generate RGDP and punishes policies that generate inflation. Incentives are much better aligned with NGDPLT.
Parties will literally win or lose based on how much inflation is needed to fill their 4.5% cup.
I dont think you think this deeply about it, but rest assured I’m right.
22. December 2018 at 16:28
Conservatives tend to have fixed income and real estate income so they benefit from low inflation. Since they have jobs or are retired a proportion of them did not worry if the unemployment rate would take years to recover. A slower recovery helps give conservatives their preferred inflation rate. If there is more inflation they can re-invest at higher rates and raise rents but they have a low turnover fixed income style and low occupant turnover
in real estate. In the period 2010 to 2014, conservatives called for an end to QE and for higher rates because they were concerned about future inflation. QE and zero interest rates were a novel and scary thing and conservatives do not like novelty. Inflation is neutral for their equity allocation so conservatives worried about the risk inflation poses for low turnover fixed and semi-fixed income relative to their spending needs.
If you have loans on real estate, unexpected inflation is a windfall and conservatives do not count on windfalls so they do not focus on windfalls. Wisely conservatives know inflation is not a real economy phenomenon but unwisely they fail to fully appreciate the economy-wide coordinating benefit of inflation.
Some conservatives complained about asset bubbles but that was just politics. Conservatives do not actually fear asset bubbles; they fear that their conservative tendencies will cause them to miss out on the enjoyment of the inflaton of the bubble.
As other commenters said, for many conservatives it was simply that anything stimulative in the Obama years is a bad idea because it helps Obama.
When Trump got elected they started putting more of their rental income into stocks. Some of them were earlier when they recognized the qualities of FAANG stocks. It may be that they still have gains but the volatility of 2018 made them feel like they had bad timing. Because they are conservatives; not robots, they focus on the volatility. Hence conservatives want fewer rate increases in the near future.
Fed QE ended and ECB QE is coming to an end and conservatives belatedly decided their QE fueled inflation fear was unfounded. The Fed disagrees with the conservatives about the future inflation citing low unemployment and wage gains. Trade war, lapping the corporate tax cut, a Democratic House, imminent Brexit, cause lower growth expectations and cause
equities to sell off reinforcing the feeling they had bad timing.
Some of the conservatives just want to echo Trump’s preferences.
Conservatives wrongly believe QE is powerful because they are impressed with big numbers, 4.5 trillion! so they feared QE fueled inflation in earlier years. It is easy to cite numbers that are bigger than that one. Now that ECB QE is ending and Fed fund rates are still rising they fear the consequences of the absence of a powerful force.
QE is neither powerful nor weak; it just is. Given what it is; 4.5 trillion was the number we, collectively, incidentally arrived at.
24. December 2018 at 13:05
Morgan makes some really interesting points.
17. May 2020 at 18:20
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