The dog still isn’t barking

I always try to find something interesting to say about the jobs report.  The obvious headline was the 321,000 new jobs, plus an upward revision in previous months totaling another 44,000.  The past three months are very strong.  Hourly wages were up a strong 0.4%, but over the past 3 months, or 12 months, we are still seeing only about 2% trend wage growth–no real breakout yet.

In my view it’s the bond market that is the most interesting—the dog that isn’t barking.  I’ve been talking about low interest rates being the “new normal” for quite some time, but I would have expected somewhat higher interest rates with this sort of strong jobs growth.  The argument that the Fed is artificially holding down bond yields no longer holds, for two reasons; QE has ended, and more importantly TIPS spreads have been falling.  They are only 1.74% on the 10 year, and 1.98% on the 30-year.  The 10 year yield of 2.26% really drives home the point that low rates are the new normal.  People at the Fed think they’ll be “normalizing” rates at about 4% a few years down the road.  That now seems like a pipe dream.  The old rules no longer apply.

A trend wage growth of 2% isn’t enough to get you 2% trend inflation, because while productivity growth has been slowing, it’s not zero.  The Fed is a long way from achieving a 2% trend rate of inflation.

What does this say about current monetary policy?  Just what I have been saying for months—we don’t know if it’s too easy or too tight until we are told the Fed’s objective–in clear, easy to verify terms.  Many of the conservatives at the Fed would prefer they simply focus like a laser on 2% inflation, and ignore unemployment.  For that group (assuming they are intellectually honest) money is clearly too tight right now.  It’s not even debatable.  For the dual mandate doves like Yellen, things are less clear.  If the goal is 3% NGDP growth long term, then money may well be too easy.  If it’s 5% trend NGDP growth, then money is too tight.  If it’s 4%, then perhaps the Fed is close to being on target.  The Fed won’t tell us what outcome they think would be desirable, in terms of a single number that is a weighted average of its dual policy goals.

Then why was I able to say money was unambiguously too tight for so many years? Because it was too tight in terms of any plausible Fed goal.  That’s no longer true.

PS.  If my comment on the hawks and doves didn’t startle you, read it again—you weren’t paying close enough attention.

PPS.  I have a new post at Econlog, on the 1921 depression.

Update:  Greg Ip has a post speculating that the Fed may engage once again in “opportunistic disinflation,” only in the opposite direction:

Two decades ago, inflation was above any reasonable definition of price stability. In contemplating how to get it lower, Fed officials came up with the moniker of “opportunistic disinflation.” The Fed would not deliberately push the economy into recession, but it would exploit the inevitable recessions and resulting output gaps that came along to nudge inflation closer to target. In 1996 then governor Laurence Meyer defined it thus:

Under this strategy, once inflation becomes modest, as today, Federal Reserve policy in the near term focuses on sustaining trend growth at full employment at the prevailing inflation rate. At this point the short-run priorities are twofold: sustaining the expansion and preventing an acceleration of inflation. This is, nevertheless, a strategy for disinflation because it takes advantage of the opportunity of inevitable recessions and potential positive supply shocks to ratchet down inflation over time.

Of course positive supply shocks are a fine time to engage in disinflation, but recessions are the worst possible time.  That didn’t stop the Fed from engaging in disinflation in the 1991, 2001, and 2009 recessions.  It’s a procyclical policy, which makes the business cycle worse.  Let’s hope they don’t use the next boom as an “opportunity” to raise inflation, and then the inevitable recession that follows as an opportunity to reduce it.



21 Responses to “The dog still isn’t barking”

  1. Gravatar of E. Harding E. Harding
    5. December 2014 at 17:08

    Scott, it’s amazing. Survey-based inflation expectations have been above all measured actual inflation rates for nearly three years. The last time anything similar happened was during the Great Disinflation of 1981-2. Money is still tighter than what most people expect. How long do you think this unexpected disinflation will last?

  2. Gravatar of Major.Freedom Major.Freedom
    5. December 2014 at 17:36

    QE has not ended. The Fed continues to engage in “unnatural” OMOs. QE was just a temporary increase in the size of OMOs. The prospect of continued heightened Fed “support” has still, for now, made bonds attractive. Remember, it could be a long time before any given monetary inflation leads to higher final goods prices, especially when the real state of the economy is weakened and stock and bond speculation continues to absorb much of the inflation.

    TIPS spreads don’t tell us whether it is the Fed that is holding down rates. TIPS spreads just tell us expectations of two price variables, and we are not supposed to reason from price changes.

  3. Gravatar of Lorenzo from Oz Lorenzo from Oz
    5. December 2014 at 19:08

    For the RBA, “opportunistic disinflation” is a case of been there, done that, don’t want to go there again.

    The original version of what became the official RBA target of “2-3% inflation on average over the business cycle” first turns up in a April 1993 speech by RBA Governor Bernie Fraser.

    It was after “the recession we had to have” when the RBA found it had driven inflation expectations way down (although that had not been the original intention), and the April 1993 speech was the RBA deciding to run with it.

    A 10-year anniversary speech by the then Deputy Governor (now Governor) Glenn Stevens, provides some more context.

    So, does that make the Fed 21 years behind the RBA?

  4. Gravatar of E. Harding E. Harding
    5. December 2014 at 20:16

    Also, I’m really puzzled about the skyrocketing of industrial equipment investment:

  5. Gravatar of Benjamin Cole Benjamin Cole
    5. December 2014 at 20:17

    Excellent blogging.

    True, the Fed has used every recession to crank down on inflation, and in the process became increasingly squeamish or peevish about ANY rate of inflation (along with America’s right-wing, which inexplicably has adopted inflation-fighting as one of its storied and righteous virtues).

    For Nixon-Reagan-Volcker, anything under 5% was good enough. Then, sometime in the 1990s, 3% was okay, at least if one looks at Greenspan (a GOPer, btw).

    The Fed now evidently targets 1.5% inflation, while many right-wingers call for 0% inflation, or even deflation (Plosser, Cochrane).

    And yes, the new norm (if Japan is a guide) is very low inflation and interest rates for as far as the eye can see. The Fed may think it can tighten its way to higher interest rates, but they will be surprised.

    Investment tip of the day: Given the new norm reality, check our mortgage REITs. Fat yields.

  6. Gravatar of Benjamin Cole Benjamin Cole
    5. December 2014 at 21:22

    E Harding:

    Until recently, a “weak” dollar has helped US manufacturing. People started to invest.

    Little noticed, today about 60% of business income goes to labor, down from 70% 30 years ago…

    I think Pethokoukis had a post recently showing healthy profits per employee in U.S. manufacturing…

  7. Gravatar of Kevin Erdmann Kevin Erdmann
    5. December 2014 at 21:42

    E. Harding, why are you puzzled?

  8. Gravatar of Daniel Daniel
    6. December 2014 at 02:57

    I think it’s more than obvious that economists don’t buy into their own models. In the battle between the gut and the forebrain, the gut wins – every time (present company included).

    assuming they are intellectually honest

    A pretty big assumption, I’d say.

  9. Gravatar of ssumner ssumner
    6. December 2014 at 07:38

    E. Harding, Two points:

    1. I’m confused, the graph you show has surveyed inflation expectations below inflation during the great disinflation of 1981-82.

    2. I would suggest ignoring inflation surveys, the public doesn’t know what inflation is, hence their estimates of inflation are not informative.

    Lorenzo, Yes, we are far behind you guys.

    Ben, Very good points.

    Daniel, Yes, there was a bit of implied sarcasm in that assumption.

  10. Gravatar of flow5 flow5
    6. December 2014 at 08:06

    “argument that the Fed is artificially holding down bond yields no longer holds, for two reasons”

    Exactly, and yields bottom in Dec. (along with the commodity complex on 12/11/14).

    “we don’t know if it’s too easy or too tight until”

    Yes we do. Monetary policy operates with a definitive lag.

  11. Gravatar of E. Harding E. Harding
    6. December 2014 at 08:30

    @Scott Sumner

    I’m confused, the graph you show has surveyed inflation expectations below inflation during the great disinflation of 1981-82.

    -You’re right; by “anything similar” I meant there being any discrepancy between inflation and survey-based inflation expectations. I should have added “although, during the Great Disinflation, inflation expectations were below measured inflation, not above”.

  12. Gravatar of flow5 flow5
    6. December 2014 at 08:46

    Life is NOT like a box of chocolates… You never know what you’re gonna get – Forrest Gump, 1994

    Sumner, you’re so reserved. I was always under the impression that FOMC targeted gDp, just like they support the gov’t bond market. Such a directive is inherent, not explicit. It’s just that the Fed’s technical staff never learned how to do it.

    The problem is that the Fed doesn’t know money from mud pie.

    From “The Money Supply” (FRB-NY) “Chairman Greenspan added, “The historical relationships between money and income, and between money and the price level have largely broken down, depriving the aggregates of much of their usefulness as guides to policy”.

    Such statements are widely accepted – but estranged from reality.

  13. Gravatar of Adam Platt Adam Platt
    8. December 2014 at 07:04

    Scott, this is the first time I have a major disagreement with you.
    You said (in reference to the dual mandate): “If the goal is 3% NGDP growth long term, then money may well be too easy. If it’s 5% trend NGDP growth, then money is too tight. If it’s 4%, then perhaps the Fed is close to being on target”

    Something I’ve noticed among NGDP advocates is that too often they write as if it isn’t that important what the NGDP target is, as long as the central bank sets an NGDP target. That is wrong. The Fed has only been on a 4% NGDP growth trajectory since mid-2009, WITHOUT fixing the previous 10% undershoot during the recession. Furthermore, the pre-recession NGDP growth rate was closer to 6.5%, so even if they had stuck to a 4% trend since INCLUDING the recession, that would still be a significant undershoot (though much less of one), and you would still have unnecessary unemployment and debt overhang.

  14. Gravatar of Charlie Jamieson Charlie Jamieson
    8. December 2014 at 09:36

    The Fed doesn’t really need to act to keep rates down. Everybody knows it needs to keep T-rates low to help the government budget from being overwhelmed by interest payments. I don’t think there’s any doubt that if the market tried to push rates higher the Fed would step in aggressively.
    Also, there is a feeling that the Fed will also step in to buy any kind of distressed debt. I think the Fed will buy student loan debt, for example.

  15. Gravatar of Don Geddis Don Geddis
    8. December 2014 at 10:37

    @Adam Platt: Having a level target (hence “NGDPLT”, not just “NGDP growth targeting”) is vastly more important than the specific NGDP growth trend line that you choose. You’re absolutely correct, that it is critical to make up for past undershoot. But you don’t do this by (necessarily) forcing a higher trend line. You do it instead by have a policy framework that includes a level target.

    Once you have a LT, the difference between 3%/4%/5% long-term trend NGDP growth, is probably close to irrelevant, in terms of its effect on the macro economy. Any of those numbers would be fine (for the US). (5% may help slightly with labor’s sticky wage resistance to nominal wage cuts, but that effect is swamped by the benefits of level targeting. Failure to correct for past errors is what causes the major macro damage.)

  16. Gravatar of ssumner ssumner
    8. December 2014 at 17:39

    Adam, The 6.5% rate you refer to was the rate during the expansion, not the trend. Some catch up was desirable, but we are rapidly approaching the natural rate of unemployment. Even so, I have no objection to some catchup if that is followed by a NGDP target path. What I don’t like is discretionary policy.

    Catch up would have been very valuable in 2009, now the main goal should be to get a stable monetary REGIME in place. It’s too late to prevent the long recession, which is almost over.

  17. Gravatar of Quotes & Links #19 | Seeing Beyond the Absurd Quotes & Links #19 | Seeing Beyond the Absurd
    9. December 2014 at 01:08

    […] 2) The dog still isn’t barking […]

  18. Gravatar of TallDave TallDave
    9. December 2014 at 12:30

    America’s right-wing, which inexplicably has adopted inflation-fighting as one of its storied and righteous virtues

    I have these argument with my friends on the right all the time. They still see everything through the lenses of TGI and Zimbabwean moneyprinting. They are terrified by the national debt, even more terrified of inflating it away, and deeply suspicious of anything that looks like rewarding the spendthrift.

  19. Gravatar of Adam Platt Adam Platt
    9. December 2014 at 15:07


    So true. I have actually found that they see everything in terms of Carter and Reagan. Step 1: Carter had high inflation and was bad. Step 2: Reagan “BEAT” inflation and was good. Step 3: Stop “analysis” there.
    When it comes to debt, I had to correct a conservative one time who had said, and I quote “If we run deficits now, it follows that we’ll have to run an equal surplus at some point later.” A very human misunderstanding but a very profound and clear one just the same. It requires understanding surprisingly abstract concepts such as inflation and debt-to-GDP ratio to understand why that’s wrong. It seems simple to many economists (I’d like to say “all” but clearly that’s not true).

  20. Gravatar of dlr dlr
    10. December 2014 at 14:09

    Scott, surely it’s possible for current NGDP expectations to be “loose” relative to the regime the CB has in mind, but the the regime itself be “tight” in that it is destined to cause nominal frictions due to its departure from existing private market expectations. It doesn’t seem helpful to declare policy as only tight or loose relative to the regime. If Yellen has personally decided she likes the Selgin productivity norm and suddenly now implementing it, you wouldn’t declare that monetary policy is current loose b/c NGDP is growing faster than 0%.

    Overall monetary policy is what should be thought of as tight or loose. Current policy barely (usefully) exists in the first place. If we want to talk about current front year nominal expectations being loose or tight relative to a regime that itself may be loose or tight, I think it takes more nuance than what you’re offering.

  21. Gravatar of ssumner ssumner
    10. December 2014 at 18:38

    dlr, Sure, I agree with that. But if you look at 30 year bond yields, I suspect that the current level of expectations is about 3% to 3.5% trend NGDP growth. The real problem is instability. We could live with even 3% if it was a stable 3%. My fear is that it will be 5% then 1%, averaging to 3%. That’s the problem.

    Anything in the 3% to 5% range would be fine, if stable.

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