Recent articles
I have three new pieces that just came out. At The Hill, I have an article that discusses wages:
On Friday, the government announced average hourly wage growth for October, which came in at an annual rate of 2.8 percent.
The case was similar in September, and the media reported that Fed officials may react by tightening monetary policy. Not surprisingly, this puzzles lots of people: Shouldn’t we welcome higher wages, especially after decades of sub-par wage growth?
The short answer is that we should welcome higher “real” wages, but the Fed does have reason to be concerned about higher “nominal” wages. . . .
It’s true that printing lots of money can lead to higher nominal wages. However, as workers in places like Mexico and Argentina have discovered, if productivity is stagnant, then large nominal pay raises do not translate into higher real wages.
The recent 2.8 percent average hourly wage growth doesn’t pose a large threat, but the Fed has good reasons to be wary of a steep upsurge in nominal wage growth.
At Mercatus, I have a new policy report discussing the Hypermind NGDP prediction market:
It is difficult to understand why it took so long for an NGDP prediction market to be created, as NGDP is probably the best single indicator of whether monetary policy is too expansionary or too contractionary. Given that the Fed has already expressed an interest in TIPS spreads, it likely would be equally interested in market forecasts of NGDP growth.
Had this market been in existence during 2008–2009, it might well have provided valuable signals to the Fed. After all, even Ben Bernanke admits that the Fed erred in September 2008, when it refused to cut its target interest rate from 2 percent right after Lehman failed. At the time, TIPS market expectations of inflation were much lower than Fed forecasts. But NGDP growth expectations are even more informative about the state of the economy than inflation expectations.
In the end, the Hypermind NGDP prediction market is a sort of demonstration project. One would hope that the Fed will set up its own (better-funded) NGDP futures market, which could help it to make more informed policy decisions. The cost would be trivial relative to the potential gains from more effective monetary policy.
At The Bridge, I have a piece pointing out that monetary policy is becoming increasingly accommodative:
Thus whether you judge policy solely by considering inflation, or both inflation and employment, you reach the same conclusion. Policy was too restrictive to hit both the Fed’s inflation target and its employment target during 2009-16, and policy is now relatively accommodative, with inflation above the two percent target and the unemployment rate below the 4.0 percent to 4.6 percent range that the Fed views as “full employment”.
The fact that monetary policy is increasingly accommodative does not necessarily imply it is too accommodative. The Fed needs to look beyond the current data and forecast the impact of its policy on the future condition of the economy. Inflation has recently been pushed up by a sharp rise in oil prices, and it’s possible that it may fall back below two percent during 2019. Even so, the balance of risks has recently shifted, and the long period of excessively restrictive monetary policy is over.
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8. October 2018 at 12:56
That third piece makes no reference to the trend of nominal GDP. Ol’ Sumner going soft?
8. October 2018 at 14:27
John, Soft? Not sure what that even means. In any case, the Fed targets inflation and employment, not NGDP. So the stance of policy needs to be evaluated in terms of the target. That’s why I don’t talk about NGDP.
8. October 2018 at 15:39
Scott,
An NGDP futures market was not needed to know policy was too tight after Lehman. Even my pet turtle could have figured that out.
The problem was a totally incompetent Fed that would not use its policy tools even when they knew they were way off target.
As I have said many times, Bernanke was the worst Chair in the history of the Fed, and the whole FOMC should be replaced with an application running on a smartphone.
8. October 2018 at 16:34
dtoh, the overwhelming pressure on the Fed at the time from the public was that they were too accommodative.
8. October 2018 at 16:58
I like the idea of an NGDP futures market.
Is there a parallel in the oils futures markets?
My understanding of the oil futures market is that it is both gigantic, hundreds of billions of dollars traded daily, but mostly financial wagering. That is, it is not large producers and consumers of oil hedging exposure to unpredictable price swings.
For example, back in 2008 I played the oils futures market, with fantastic results ( for those on the other sides of my positions).
How large does one anticipate an NGDP futures market will become? Would the Fed take positions?
8. October 2018 at 17:49
Kevin,
Yep. That’s why the Fed is supposed to be independent and ignore the public and politicians who don’t know s**t about monetary policy.
8. October 2018 at 17:55
Benjamin,
Hey. In the old days I used to know a thing or two about the futures markets. Basically you need to have both hedgers and speculators for a viable market. Most of the trading volume comes from the speculators who make the market liquid, but generally, if there’s no real need for they underlying contract, the market won’t survive.
That’s one of the problems with Scott’s idea for an NGDP futures market. I’ve commented on this and alternative approaches at length in the past.
9. October 2018 at 00:10
Why do you need NGDP futures again?
Is there no adequate alternative?
For example, why are futures on S&P 500, or Russell, or Wilshire) not good enough? A situation where NDGP falls, but not S&P 500, seems hard to imagine.
9. October 2018 at 02:46
Re job markets:
Here is an interesting FRED chart, on total hours worked in the US.
https://fred.stlouisfed.org/series/B4701C0A222NBEA
Of course the chart peaks in 2008 at index level 105.5, sinks through the Great Recession, then regains former high point in 2014 and now at 111.1.
So, Americans in aggregate are working about 5.3% more hours now, than in 2008.
Sheesh!
Unless there is serious shrinkage of the labor force, how could a national labor force working 5.3% more hours now than in 2008 lead to “widespread labor shortages” (The Fed’s terminology).
Yet FRED says there has been a growth in the civilian labor force since 2008!
https://fred.stlouisfed.org/series/B4701C0A222NBEA
I suspect the official employment rate has become misleading.
I put it mildly.
9. October 2018 at 05:23
dtoh:
I have wondered the use of an NGDP futures market as a hedge.
Perhaps some economic players would hedge, that is go short on the NGDP futures market, to provide downside protection in the event of a recession.
Of course, one can already hedge stocks and bonds, which move as proxies for recessions, so this may not be an useful addition to the market.
9. October 2018 at 08:00
Christian,
A supply shock would send NGDP higher and S&P 500 lower…
9. October 2018 at 10:11
Ben and dtoh, dtoh said:
“Hey. In the old days I used to know a thing or two about the futures markets. Basically you need to have both hedgers and speculators for a viable market. Most of the trading volume comes from the speculators who make the market liquid, but generally, if there’s no real need for they underlying contract, the market won’t survive.”
For the 1000th time, my market does not require any trading volume at all. It is nothing like a traditional futures market. I wish people would actually take the time to read what I’m proposing, instead of assuming they already know without any effort.
Maybe my mistake was in calling it a futures market. I should have called it a HGTUYRDSE market.
Saying you understand my proposal because you know something about futures markets is like saying you understand the gold standard because you have traded gold futures. The gold standard also did not require any trading volume. It was a price peg.
9. October 2018 at 14:13
What about my (stupid) question? So there’s not one existing market or index that correlates higly enough with future NGDP? That’s hard to believe, especially in such a highly developed economy. So we need a whole new prediction market? That’s really sad. Please think about this very thoroughly again. If you solve this problem elegantly, the Nobel Prize is yours.
9. October 2018 at 18:53
“Eventually, the buying and selling of government bonds could even be automated, with every “long” or “short” purchase on the futures market triggering a corresponding open-market operation. For instance, each $1 purchase of a long position in a nominal GDP futures contract might trigger a $1,000 open-market sale by the Fed, while a $1 purchase of a short position would trigger a $1,000 open-market purchase by the Fed. Investors would effectively be determining the size of the monetary base.”–Sumner.
Okay, so the Fed does not play in the futures market, but responds to movements in the NGDP futures market by the unlimited buying and selling in “open-market” operations. I assume this generally means the Fed buys and sells Treasuries, but maybe also equities?
Does this become, in effect, an automated quantitative-easing program?
That is, the futures market says we are headed for recession, or we are in one we will not get out of soon, so the Fed buys lots of lots of Treasuries (maybe some equity ETFs?). The Fed operation is open-ended and the Fed keeps on buying until the situation is rectified.
The fascinating (and perhaps taboo) question: Doe Fed buying of bonds, when coupled with concurrent federal deficits, become helicopter drops? Michael Woodford seems to hold open the door to this view, in oblique fashion.
Another question; Suppose the NGDP futures markets results, in practice, in a Fed balance sheet that, on average, grows over time. Does that matter? (I think not, but I suspect it could be likely).
10. October 2018 at 06:29
The equivalent of TIPS, but for NGDP, would be quite valuable, notwithstanding its predictive ability. Indeed, since government revenues are proportional to NGDP, they would provide an interesting tool to smooth out the government’s budget.
Most likely, such a market would not even need to be subsidized!
10. October 2018 at 11:43
@LK Beland and Irving
Thanks for your comments.
13. October 2018 at 13:50
If the fed set up a robust NGDP growth prediction market, how would it use this market to actually set interest rates?
I.e. this prediction market would have a lot of data about events going on in the world but very little data about the Fed’s plans. In this future world, should the fed provide the prediction market with more information? e.g., move to a continuous (daily) interest rate policy with 1yr of future rates published daily (or something similar)?
Could we go further and construct a market mechanism that sets the daily rate such that the market clears only when interest rates are set at a rate such that NDGP growth prediction = 4%? (decentralized fed)?
I guess the root of the question is – does the Fed add more information to the data publicly available/priced in to the market, or is the Fed just computing a hard to describe function?