Rate cuts increase the Fed’s “ammunition”

I keep seeing this sort of comment:

Federal Reserve Bank of Atlanta President Raphael Bostic said he opposed last week’s interest rate cut because two earlier reductions had provided insurance against global risks and the central bank needed to preserve its ammunition.

It would be interesting to do a search of the Fed minutes and see how many Fed officials are mixed up on this issue.



16 Responses to “Rate cuts increase the Fed’s “ammunition””

  1. Gravatar of Brian Donohue Brian Donohue
    8. November 2019 at 16:53

    Long-term rates are now up 50 bps from the lows on August 28, as Fed cut short-term rates 50 bps and did $270 billion of QE (about 1/3 expected inflation, 2/3 real).

    The idea that lower short-term rates might accompany higher long-term rates is one that most people simply don’t grok, even if the expected inflation part of the story is obvious.

  2. Gravatar of Benjamin Cole Benjamin Cole
    8. November 2019 at 18:08

    Bostic is a worry.

    From the WSJ:

    “Fed’s Daly: Fed Cannot Ignore What Climate Change Is Doing to Economy
    Reserve Bank of San Francisco president says addressing the issue is part of ‘core responsibilities’”


    Other Fed board members have mentioned women’s issues as core to Fed obligations.

    Central bankers today believe central banks are out of ammo, but that central banks have a vital role to play in climate and women’s issues.

  3. Gravatar of Will Will
    8. November 2019 at 18:22

    I’ve thought about this through an epidemiology analogy. When someone contracts a bacterial infection, they are supposed to take antibiotics even after the symptoms stop showing to ensure that the infection is truly defeated — typically this means taking every pill in the bottle.

    The problem is that all-too-often people will stop taking the antibiotics prematurely. They’ll still have some pills left over: they have, in a practical sense, “preserved their ammunition.” Problem is, ending the treatment prematurely allows the infection to re-emerge. (This is, incidentally, one of the causes of resistant strains.) And now their bottle of remaining pills is insufficient to fight the renewed infection and the condition becomes even worse than it was to begin with.

    I don’t think I have to point how how this relates to tightening monetary policy prematurely.

  4. Gravatar of John John
    8. November 2019 at 23:56

    Will, I think your analogy is on point but may I suggest a better one? Your analogy would work perfectly if the bacteria were guaranteed to come back and make you sick every time.

    Here’s the analogy I like, and it illustrates how absurd the “conserve ammo” argument is: Say you want to get a good deal on a car. You study some negotiating tactics online. The dealer offers you the car for $20k. You come up with the brilliant idea that you need more “room to negotiate”, so you suggest to the dealer, off-handedly, how about 1 million? You now have a ton of “ammo”, as the dealer can’t believe his eyes, once you tell him that you won’t actually pay $1 million, he still tries to negotiate with you. He offers 700k, 600k, 500k, etc. You’ve got the dealer to halve the original price! What a great job conserving ammo has done! You keep negotiating until you get to 100k. The dealer will not go any lower, knowing you offered 1 million, you’d be willing to pay $100k. Did the “conserving ammo” strategy do a great job of letting you cut the 1 million offer down to 100k? It sure gave you a lot of “room to negotiate”

    Monetary policy is the same thing. If you stupidly choose to pursue contractionary policy and raise the federal funds rate way above the Wicksellian interest rate, you won’t suddenly become way better off if you cut the federal funds rate 10 months later. In fact, because of your contractionary policy, the wicksellian interest rate will fall, so cutting to the same rate as you would’ve had you not pursued a contractionary policy makes you worse off, not just for the period of time where you inanely pursued a contractionary policy for no reason, but also for the future.

  5. Gravatar of Benjamin Cole Benjamin Cole
    9. November 2019 at 00:13

    Fed Governor Lael Brainard says the central bank needs to guard against climate change—CNBC


    The Fed should also review US trade policy,

  6. Gravatar of bill bill
    9. November 2019 at 08:50

    From the WSJ: “To the extent that climate change and the associated policy responses affect productivity and long-run economic growth, there may be implications for the long-run neutral level of the real interest rate,” Ms. Brainard said in remarks prepared for delivery Friday at a San Francisco Fed conference on the economics of climate change.
    I don’t see how anyone can disagree with that. It even allows that the extent could be zero. Almost everything could have implications for the neutral real rates.

  7. Gravatar of LK Beland LK Beland
    9. November 2019 at 10:08

    This type of comment by Raphael Bostic makes me realize just how necessary and useful The Money Illusion weblog is.

    As a non-economist, I found reading Scott Sumner’s weblog, plus those late-90s Japan papers by Krugman and early 2000s papers by Lars Svensson, absolutely illuminating.

  8. Gravatar of Michael Rulle Michael Rulle
    10. November 2019 at 06:23

    As soon as I read this, I went back to your original blog in 2010 on “reasoning from a price change” and your 2008 Econlog essay (when you were 2/3rds thru Bernanke’s book) on his having helped create the “Great Recession” by being too tight in 2008.

    Bostic’s comment reminds me a little of Richard Fisher back in 2008—-but less hawkish in attitude. I infer from his “insurance” wording that he does not link the last 2 cuts to the markets obvious signaling that the Fed had entered into dangerous tightening mode. Powell, as has been commented by you before, has at least shown very positive signs he believes that markets provide important information, which apparently Bostic does not share, at least to the same degree. This is bad.

    Other commenters have brought up Brainard’s Climate Change comment—-which I think is even worse than Bostic. If Brainard were discussing the impacts climate change political policy were having on the economy, then I assume that is a rational discussion to be had. But if she believes climate change per se needs to be factored into monetary policy, she is worse than a quack.

  9. Gravatar of Brian Donohue Brian Donohue
    10. November 2019 at 07:24

    Excellent analogy by Will.

    Amen to LK Beland.

    To John, When I look at the interest rate data, I see a Fed, since the middle of 2015, telegraphing higher interest rates to a truculent market. The truculence itself slowed the Fed’s path, but the market grudgingly swallowed increases until the middle of 2018. In the second half of 2018, the market was actually leading the Fed up.

    Powell’s mistakes this year were 100% forward guidance. All the concrete cuts this year made sense (maybe a bit more aggressiveness was in order, but we got 0.88% on IOER and markets have stabilized around this level since late August). In point of fact his moves are every bit as “data dependent” as Yellen’s, but he can’t resist throwing a bone to the hawks every time he opens his mouth.

  10. Gravatar of Benjamin Cole Benjamin Cole
    10. November 2019 at 16:27

    bill– you are correct, but on the other hand the San Francisco Fed just held an entire conference on climate change.

    “Bank Regulators Present a Dire Warning of Financial Risks From Climate Change”—NYT

    By the way, that is the same branch of the Fed that has released repeated studies to the effect that the “natural” unemployment rate is 5%, and that the US is now past full employment.

    I happen to be concerned with climate change, I just believe it belongs in someone else’s bailiwick.

    When are you one bedroom apartment in San Francisco rents for more than $3,700, that is per month, you might think the San Francisco Fed would have local economic issues on its mind.

  11. Gravatar of Benjamin Cole Benjamin Cole
    10. November 2019 at 17:35

    I need my tin-foil hat moment:

    Deutsche Bank says one of the top 20 risks for 2020 is:

    “MMT-style fiscal expansion boosts growth significantly in US and/or Europe.”



    Now, that is what I call a risk. More economic prosperity! Rising real wages!

    Stop! Stop!

  12. Gravatar of Nick Nick
    11. November 2019 at 03:22

    Having met a few fed officials I will offer a couple of comments which might be relevant.
    These comments are genuinely believed, they are not just for public consumption but in private they think differently.
    It’s seems hard to break from conventional thinking for a fed governor, I would almost describe their reaction function as “Don’t do something that looks stupid to achieve the dual mandate” rather than “do whatever it takes to achieve the dual mandate”

    I think we will see a gradual trend away from these comments and towards AIT. But it will not be rapid.

  13. Gravatar of Jeremy Cohn Jeremy Cohn
    11. November 2019 at 05:37

    A perspective that I’ve never understood: “we can’t lower rates now, we might need to lower them later. We need to keep them high to retard growth so we can lower them later.”

  14. Gravatar of Ralph Musgrave Ralph Musgrave
    11. November 2019 at 09:24

    Will says he does not need to “point to how” his bacteria analogy relates to “tightening monetary policy prematurely.” Actually I suggest he DOES NEED to prove the analogy.

    Obviously is perfectly possible his analogy is valid: that is, a recession might reappear if it is not well and truly wiped out. But equally it is perfectly possible that the analogy about withdrawing the punchbowl before the party gets going is the more realistic analogy. The punchbowl analogy has certainly outlasted Will’s analogy.

  15. Gravatar of Doug M Doug M
    11. November 2019 at 11:21

    The bullet metaphor misses the target. bad pun

    My preferred analogy is to a water tap. If you are not getting enough water out of the tap, you don’t say, I better not open it all the way because what if I really need water sometime later.

  16. Gravatar of Brian Donohue Brian Donohue
    11. November 2019 at 11:38

    @Ralph, CPI rose 6.1% in 1989. In the 29 years since, it has never exceeded 4.1% and has averaged 2.2%. The punch bowl analogy may be effective, but it doesn’t mean a whole lot anymore. We may have another punch bowl problem in the future, but I’m not seeing it.

Leave a Reply