The Fed proposes, the bond market disposes

Here’s what almost everyone is wrong about.  There’s a debate about whether the Fed should gradually “normalize” interest rates over the next few years.  And indeed the Fed has laid out a plan to raise rates into the 3% to 4% range over the next three years.

Unfortunately, the Fed doesn’t get to decide the path of interest rates.  It looks like they do, but that’s a cognitive illusion. The bond market determines the path of interest rates, reflecting factors such as global credit markets, as well as NGDP growth and the level of NGDP in the US.  If the Fed tried to independently determine the path of interest rates it would lead to hyperinflation or hyperdeflation.

Today was another lesson in humility for the Fed.  Bond yields have been plunging, which is the bond market’s way of saying, “Oh no you don’t, there’s going to be no normalization of interest rates over the next few years.”

Resistance is futile.  The more the Fed resists and tries to force rates sharply higher, the more the economy slows, and the more downward pressure on rates in the bond market.  In the end, the bond market always wins.

The Fed should stop focusing on trying to hit its interest rate targets, and start focusing on hitting its inflation target.  It’s not the Fed’s job to set interest rates. Even better, we should make their job much simpler by switching to NGDPLT.

PS.  The most noteworthy aspect of today’s jobs report is that the wage acceleration that everyone’s expecting again failed to show up.

PPS.  Can someone find me a link to where I can observe fed funds futures prices? Thanks. (I’d guess they are moving in a “Kocherlakota direction.”)

PPPS.  Some die hard opponents of “The Great Stagnation” had held out hope that a fall in U-6 unemployment (the broadest measure) would propel future growth.  Now even that option is mostly gone, as it plunged to 10.0% in September, the same level as in February 1996.)  It will go a bit lower, but it no longer represents a large cache of workers waiting in the wings to propel us forward.  Get ready for the new normal—3.0% NGDP growth—it’s coming soon.


Tags:

 
 
 

48 Responses to “The Fed proposes, the bond market disposes”

  1. Gravatar of Luciano S. Luciano S.
    2. October 2015 at 06:42

    Fed Fund futures: http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

  2. Gravatar of benjamin cole benjamin cole
    2. October 2015 at 06:43

    I like the band market controlling interest rates. Play some smokey jazz.

  3. Gravatar of ssumner ssumner
    2. October 2015 at 06:53

    Thanks Luciano. This may be a dumb question, but the current target is a range of 0 to 0.25%. The futures market lists 0.25% and 0.50%. Can I assume that 0.25% represents no change, and 0.50% represents a quarter point increase?

    Ben, Yeah, band sounds more upbeat. (Thanks, I fixed it.)

  4. Gravatar of adud adud
    2. October 2015 at 06:55

    So what’s our only hope of avoiding, or at least moderating this stagnation? A Rubio presedency?

  5. Gravatar of Quick thoughts on the new employment report Quick thoughts on the new employment report
    2. October 2015 at 06:55

    […] Scott Sumner noted: “Some die hard opponents of “The Great Stagnation” had held out hope that a fall in U-6 […]

  6. Gravatar of Sam Sam
    2. October 2015 at 06:57

    The raw quotes are available at http://www.cmegroup.com/trading/interest-rates/stir/30-day-federal-fund.html.

    The CME’s FedWatch methodology was fixed in the pre-ZIRP era, so it doesn’t account for bands. I believe it treats the current rate as exactly 0.25%, and does not account for the probability of a “mini-hike” from the 0-25bps range to a 25bp target. It’s documented at http://www.cmegroup.com/trading/interest-rates/files/fed-funds-futures-probability-tree-calculator.pdf.

    I never bothered to back out the calculations, but I believe the alternative probabilities quoted in the media (which generally come from those on the bloomberg terminal) use the alternative assumption that all hikes are exactly 25bps, so they also neglect the possibility that the rate will ever again be an integer multiple of 25bps. (I.e. they define the “hike” as a hike to the 25-50bp range.) This could be wrong; if someone knows otherwise please correct me.

  7. Gravatar of ssumner ssumner
    2. October 2015 at 07:07

    adud, I don’t think the President has much impact. Immigration reform is probably the easiest way to boost growth. Ending gridlock in either direction would help there. Tax reform would also help, but less than supply-siders claim.

    I don’t think Rubio would significantly effect growth–maybe 0.1% or 0.2%.

    Sam, Thanks, so I gather I can read the CME as valid probabilities if I treat it as the top of the band.

  8. Gravatar of Matt Matt
    2. October 2015 at 07:17

    Scott- In relation to Sam’s comment I believe that both the CME and Bloomberg recently changed the way they calculated fed funds futures probabilities to reflect the “mid-point” of the contract range rather than the upper band (given that the Fed is targeting a 25 bp range). This happened right around when the Fed was talking up a possible September rate hike, so my guess is that they wanted market odds to more directly reflect that.

  9. Gravatar of Rod Everson Rod Everson
    2. October 2015 at 07:24

    Maybe some will now find this post of mine more interesting (posted August 24th, nearly six weeks ago):

    Is the U.S. Economy in Recession?

    I would add that I think the bond market has precious little to do with short term rates and that unless the Fed finally takes action and raises the funds rate back to the 2% area or so it will remain ineffective. It would be a trivial matter to do so, provided the Fed is willing to forego the nearly $100 bn annual profits on its massive positive carry trade.

    Here’s another long-ago forecast that I’m adding just to see if it’s possible to get a few people to scratch their heads and say “Huh, maybe he’s onto something after all”:

    Where next? Japan and America

    Japan should stand as fair warning to America that the economics of banking is an imperfect science. Thus far, no one has adequately explained to the powers-that-be either a reason why they are in a sustained period of recession, or a reasonable way off that path. Yes, theories abound, but either they are so imperfect that they are not taken seriously, or they have been
    implemented and found wanting.

    There is no reason that we must follow Japan’s path. However, there is also no good reason why we will not. Under current economic theory, we are doing what we must to avoid it, but we are also doing the same thing that Japan did (in monetary terms) and simply expecting different results. If Japan’s economic recessions are being caused by monetary events, as I believe is likely, we might think twice before conducting an imitation of their recent policy, as we now appear to be doing.

    The above quote is from my December 2001 paper, a paper that, incidentally, explains a way out of the current predicament:
    A Strong Form of Monetary Theory based upon Excess Reserves and Bank Demand Deposits

  10. Gravatar of Quick thoughts on the new employment report | Homines Economici Quick thoughts on the new employment report | Homines Economici
    2. October 2015 at 07:50

    […] Scott Sumner noted: “Some die hard opponents of “The Great Stagnation” had held out hope that a fall in U-6 […]

  11. Gravatar of ssumner ssumner
    2. October 2015 at 08:09

    Matt, You will need to be more specific. Do you mean that when the CME shows a 95% expectation of a 0.25% fed funds rate in October, it means they expect a 0.125% rate increase in October to a range of 0.125% to 0.375%? That is a midpoint of 0.25%. That sound very implausible. It seems more plausible to me that the 0.25% represents the expected top of the band for October.

  12. Gravatar of bill bill
    2. October 2015 at 08:49

    Nitpick:
    People like Lacker and Plosser probably think along the lines of “normalizing” rates. I’m thinking that the market doesn’t have a word like that in mind. And when I use “normalize” to describe my wish that the Fed would return to a 0.00% IOR, I’m being a little sarcastic toward the folks that think tightening is what we need right now. I spent 28 years thinking that the Fed was about right or too loose. It’s been weird since 2008 feeling they needed to loosen.

  13. Gravatar of marcus nunes marcus nunes
    2. October 2015 at 08:50

    The Fed´s “TT” Strategy (“Tightening Talk”). They´ve been doing it successfully for more than 1 year!
    https://thefaintofheart.wordpress.com/2015/09/29/inflation-feldsteins-phobia/

  14. Gravatar of TallDave TallDave
    2. October 2015 at 09:22

    There’s a debate about whether the Fed should gradually “normalize” interest rates over the next few years.

    So exasperating. Why (dear God, why?) does anyone think interest rates have a “normal” range? Head->desk.

    Some days I just want to take a 20-year nap and see if the world has gotten any smarter yet.

  15. Gravatar of Kevin Erdmann Kevin Erdmann
    2. October 2015 at 09:23

    Hear! Hear!

    Pressure on nyc, San francisco, and San Jose to allow population growth could easily add 1% rgdp growth due to investment, real housing increase, and more workers moving to highly productive labor markets. It’s like leaving $200 a barrel oil in the ground.

  16. Gravatar of ChrisA ChrisA
    2. October 2015 at 09:35

    I do wonder why one of the trailing Republican candidates doesn’t make NGDP boosting their issue. What would they have to loose? Surely they can’t all be so deluded that they think they have a chance by following their current “orthodoxy” of tight money. Who knows, perhaps they might actually create a debate worth having.

  17. Gravatar of ssumner ssumner
    2. October 2015 at 09:59

    ChrisA, I don’t think either the public or the candidates understand monetary policy, which is probably why they don’t discuss it.

    They might occasionally talk about interest rates, but of course interest rates are not monetary policy.

  18. Gravatar of The Fed is getting exactly what it wants… | Historinhas The Fed is getting exactly what it wants… | Historinhas
    2. October 2015 at 10:17

    […] Scott Sumner says: […]

  19. Gravatar of Matt Matt
    2. October 2015 at 10:30

    Scott- Tbh my knowledge of the calculations themselves are rather rudimentary. But what I meant was that there is a change in the assumption of where the effective federal funds rate lies within the target (not contract) range. My understanding is that whereas before the probabilities were calculated using the top of the 25 bp range they now are done via the midpoint of the range. So the probabilities are generated with the assumption of a move from the current effective rate of around 12.5 bps to 37.5 bps. In the case you mention the 95% chance the CME posts for a 0.25% fed funds rate in October actually reflects the probability that it will be round or about 0.125%, which is slightly confusing. Bloomberg’s a bit better, it lists the probabilities by range; 0-25bps, 25-50, etc.

  20. Gravatar of jknarr jknarr
    2. October 2015 at 10:37

    Scott, interest rates can easily be related back to specific monetary causes.

    3 month rates = monetary base / NGDP

    10 year rates = MZM / NGDP

    This makes the composition of the monetary base particularly interesting — reserves or currency. (More on that at the facts/model thread.)

    Within the monetary base, the data suggests that reserves are more intimately tied with the banking system (debt levels), and currency is tied to NGDP (nominal activity).

    The Fed 100% controls the aggregate monetary base, but not NGDP directly: NGDP is revealed by the relative mix of reserves and currency. The Fed cannot determine the exact mix of reserves and currency; but they provide a reserve-driven price of (unsecured debt) interest versus the alternative zero-yielding (secured debt) currency.

    In short, more reserves (lower rates) invariably bleeds into greater currency demand, and higher NGDP. This effectively deleverages an economy. It’s a feature: overleveraged = massive reserve formation = zero interest rates = currency demanded = higher NGDP = deleverages (reverse process and repeat).

    Currency demand is unobservable, however, because of statutory restrictions on the volume of banknote withdrawal. In other words, currency outstanding is *not* at all equivalent to currency demand. You, Scott, cannot go to a bank, withdraw $40,000 to pay for a car, walk to the dealer, pay, and drive away.

    (They limit currency to law abiding citizens, and then complain that criminals are the only users of cash “” which of course justifies a crackdown on criminal usage of cash. A neat rhetorical trick, no?)

    You seem mystified that the Fed would raise short term rates. Consider the new transmission mechanism for IOR into NGDP: discouraging banks from releasing IOR-paying reserves into currency. Higher IOR discourages banknote formation, as banks have a financial incentive to keep their interest-paying assets.

    Banks love tight money, and the Fed is running tight-money policies: a bull market in cash flow present value (lower interest rates); and scarcity of income (slow NGDP). Banks sell debt & yield hunting — they profit immensely off of income scarcity. (Recall historically that banks love gold, farmers love silver.)

  21. Gravatar of Don Don
    2. October 2015 at 10:52

    Just last week I heard an analyst on a finance/investment show saying they wanted the Fed to raise rates to “lead” the economy into a normal growth level where interest rates (short-term) are 3%. So much ignorance.

  22. Gravatar of andres ariza andres ariza
    2. October 2015 at 11:21

    Scott s,

    you are rigth about fed funds futures price moving in “Kocherlakota direction.

    It is observed in the graph, in the link below, that the fed funds futures price(Month: DEC2016) is moving up, which means tha the implicit rate is moving down.

    http://www.cmegroup.com/trading/interest-rates/stir/30-day-federal-fund.html

  23. Gravatar of ssumner ssumner
    2. October 2015 at 11:32

    Thanks Matt, That make sense.

    Jknarr, You said:

    “Banks love tight money, and the Fed is running tight-money policies: a bull market in cash flow present value (lower interest rates); and scarcity of income (slow NGDP). Banks sell debt & yield hunting “” they profit immensely off of income scarcity. (Recall historically that banks love gold, farmers love silver.)”

    Are you saying that bankers mysteriously lost control over monetary policy 80 years ago, and mysteriously regained it in 2009, just when they were incredibly unpopular? I don’t think so.

    Thanks Andres, Am I reading that correctly that the market expects a fed funds rate of just barely over 1% at the end of 2017? That’s what Kocherlakota predicted.

  24. Gravatar of jknarr jknarr
    2. October 2015 at 12:00

    Hi Scott — good lord, no! The banks only strengthened their control over policy by getting rid of gold 80 years ago. I was referring back further, to 1896. Gold=tight money; silver=easy money. It’s an extraordinarily long argument.

    https://en.wikipedia.org/wiki/Free_silver

    I maintain that banks benefit most from tight money: the present value of income streams rises (yields fall); yield-seeking creates fee-producing financial engineering; while the absence of present income means more borrowing and leverage (high debt / low NGDP).

    Banks have only strengthened their control over monetary policy decade by decade: formation of the fed -> killing off nonmember banks -> US treasury debt assets -> end of US public gold standard -> FRN dollarization of US in 1940s -> Bretton Woods dollarization of globe -> end of gold deliverable -> end of glass-steagall –> creation of national megabanks -> interest on reserves.

    Next pit stop in this mark to fiat debt peonage: eliminating banknotes.

  25. Gravatar of ssumner ssumner
    2. October 2015 at 12:23

    Jknarr, Banks favor tight money but are behind the plot to get rid of gold? You are entering grassy knoll territory. Banks are the least of our problems.

  26. Gravatar of jknarr jknarr
    2. October 2015 at 12:41

    Scott, OK, I’ll bite. There’s a difference between tight money and control. Banks enhanced their control over monetary policy by getting rid of gold (which had been a tighter-monetary policy constraint than bimetallism or a silver standard).

    Simply put, gold had been a tight money constraint, but with the Fed in place (not the case in 1896), banks could enhance discretion & control over monetary policy by getting rid of the gold constraint.

    Now banks have enhanced control over monetary policy, unconstrained by gold (or anything else). They have used this control to again achieve fiat-based tight money — which, since 1980, has yielded extraordinary profits and debt formation for the US economy (alongside slowing NGDP and lower debt yields.)

    Not grassy knoll at all! Enhanced degrees of freedom under fiat; banks profit from tight money.

  27. Gravatar of bill bill
    2. October 2015 at 13:33

    Money was tight from mid 2007 thru… (I wish I could say when tight money ended. I guess it got close with QE3 for a while).
    And bank profits rose in 2008 and 2009? I don’t think they did.

  28. Gravatar of ssumner ssumner
    2. October 2015 at 13:47

    Bill, I agree, the bank conspiracy view just doesn’t fit the facts.

  29. Gravatar of Kevin Erdmann Kevin Erdmann
    2. October 2015 at 14:06

    I have a graph up at my blog. The rate changes today were a little deceptive. My indicator says that the bond market didn’t change their expected date of the first rate hike at all today. The expected slope of future rate changes fell significantly, though.

  30. Gravatar of jknarr jknarr
    2. October 2015 at 14:28

    Bill, money has been relentlessly straight-line tight since 1980 or so: slower NGDP, lower interest rates (see Friedman’s admonition about Japan & tight money).

    Banks received the exorbitant privilege of remaining in business in 2008 and 2009: pretty good for profits! The Fed recapitalized the banks with permanent capital (reserves). The Fed also added the kicker of IOR — now, the seignorage of money creation flows to the banks (at the tune of some $6.6 billion of revenue now), instead of the US Treasury and taxpayer (you and I). Not a bad business, eh?

    Simply put, banks had built up too many instantly-redeemable obligations (leverage), and the Fed had not kept up with reserve collateral: a bank run was in the works since 1995 — it just happened to hit in 2007/2008.

    https://research.stlouisfed.org/fred2/graph/?g=20RG

    Consider that reserves are best understood as permanent bank capital, not money in any NGDP sense. Reserves collateralize debt in the banking system. The flood of 2008 reserves simply recapitalized an overleveraged banking sector. Reserves affect the short rate by two paths: the risk free rate of debt/money and the risky rate of bank counterparty risk. Reserves are collateral, full stop.

    And, while we’re on the topic, stop to consider exactly what these reserves are collateralizing these days. Required reserves are there to collateralize bank deposits, but those consumer deposits are themselves now subordinated to super-senior derivatives.

    http://www.stanfordlawreview.org/print/article/derivatives-markets-payment-priorities-financial-crisis-accelerator

    Scott, banking is not a conspiracy, it’s a business. It just so happens to be a business of national strategic importance, headed by a private bank that is enshrined as a quasi-federal government department.

    Besides, Scott, if 7 guys & gals in DC setting the price of quadrillions of dollar obligations is not a conspiracy, what is?

  31. Gravatar of TravisV TravisV
    2. October 2015 at 17:14

    Are there any good reviews of Bernanke’s memoirs yet?

  32. Gravatar of marcus nunes marcus nunes
    2. October 2015 at 17:59

    The Boston Fed Conference was on Financial Risks & Interest Rate Policy.
    There´s a hilarious quote from Loretta Mester:
    https://thefaintofheart.wordpress.com/2015/10/02/quote-of-the-day-4/

  33. Gravatar of Major.Freedom Major.Freedom
    2. October 2015 at 19:24

    “Unfortunately, the Fed doesn’t get to decide the path of interest rates. It looks like they do, but that’s a cognitive illusion. The bond market determines the path of interest rates.”

    No, that is a cognitive illusion. A bond MARKET doesn’t exist.

    If there was such a thing as a bond market, and a monetary market, then the path of interest rates would be determined by time preferencesz of which the bond market would tend to move with.

    If time preference rises, and profits rates rise, then businesses will not be willing to lend at lower than the rate of profit they can earn by internal reinvestment, and they would not be willing to borrow at more than the rate of provit they can earn.

    With a central bank, it is a cognitive illusion to believe there is such a thing a bond MARKET. There is in fact a world where interest rates are determined by time preference hampered by central bank intervention.

    The Fed has almost exclusive control over the fed funds rate, not directly, but in the sense that the Fed prints faster or slower and the banks react by lowering or raising interest rates from both the money printing and by time preferences.

    “If the Fed tried to independently determine the path of interest rates it would lead to hyperinflation or hyperdeflation.”

    That is only half right. If the Fed tried to PERMANENTLY determine interest rates, that is, if the Fed tried to PERMANENTLY overrule hampered market forces, then yes, that would “lead”, at some point, to hyperinflation or hyperinflation.

    But the Fed has since 1913 only temporarily determined the direction, the path, of interest rates, always pushing against the market, going towards the inevitable end of hyperinflation or hyperinflation, but it has historically refrained from perpetual antagonism against the market. That is why every 5 years or so, or whatever the average is between booms and busts, there is a boom and then a bust. The boom is the central bank pushing the economy towards hyperinflation, but before price inflation gets out of hand, it refrains from continual maximum antagonism, and hampered market forces are partially released, and that then brings about the correction which is usually accompanied by, and partially composed of, deflation.

    “The Fed should stop focusing on trying to hit its interest rate targets, and start focusing on hitting its inflation target. It’s not the Fed’s job to set interest rates.”

    It is not the Fed’s job to hit any target, including NGDP. The Fed’s job is to ensure the state maintains the protectionism of the centralized counterfeiting cartel, that most people call the central banking system.

    The “targets” are at most a secondary, intellectual cover story.

  34. Gravatar of Major.Freedom Major.Freedom
    2. October 2015 at 20:25

    ” Some die hard opponents of “The Great Stagnation” had held out hope that a fall in U-6 unemployment (the broadest measure) would propel future growth. Now even that option is mostly gone,”

    That’s because a huge number of work capable people have dropped out of the workforce altogether and went on the dole.

    The more unproductive consumers there are, the lower overall productivity becomes.

    Gee, I wonder where the government gets all that money to finance the consumption of those people? From the printing press.

  35. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    3. October 2015 at 04:24

    @Jknarr
    Market Monetarists have long criticized the “policy by committee” structure of the FOMC. A “conspiracy” is far fetched though. Also, banks benefit from more leverage, not less. Think of investment banking in the 90’s and now. The industry has gone through structural changes, and is much less profitable now, it seems.

  36. Gravatar of bill bill
    3. October 2015 at 06:06

    relatively steady 5% ngdp growth for the 15 to 20 years up to 2007 is not relentlessly tight.

  37. Gravatar of Ray Lopez Ray Lopez
    3. October 2015 at 06:45

    THE ELEPHANT IN THE ROOM THAT NOBODY, and I mean nobody, HAS COMMENTED ON YET:

    Sumner: “If the Fed tried to independently determine the path of interest rates it would lead to hyperinflation or hyperdeflation.”

    So Sumner correctly sees that the Fed cannot independent determine the path of interest rates (money is neutral, short term and long) and if the Fed tries to print money to reach these targets, akin to pushing on a string, we could get hyperinflation, exactly what I’ve said about NGDPLT, yet Sumner feels the Fed can steer NGDP? Are you kidding me? Do you people not realize that ‘printing money’ to reach an interest rate target is, at certain levels, no different than printing money to reach an NGDP figure? Are you guys really so dumb? Do you think the economy behaves differently when the Fed has different goals in mind, because people say: “oh, the Fed is printing money to reach an interest rate target, so we don’t care”, but if the Fed is targeting NGDP the people will say “Oh my, the Fed is targeting NGDP, that’s different, we will respond accordingly” and the economy will respond? No way Jose. As I said before, the Taylor Rule, targeting NGDP, even playing around with reserve ratios is at some level no different from NGDPLT. It’s all just smoke and mirrors. The only danger–as Sumner implicitly recognizes–is printing too much so that hyperinflation follows, and that’s exactly what Sumners NGDPLT framework could promote, since money is largely neutral and the economy does not respond to money printing except in the extreme (extreme, like Sumner’s proposal fosters). Sorry I can’t dumb that down any further.

    HayZeus H. Christos people. You really are marching off the cliff to the tune of the Pied Piper, like lemmings, and not questioning anything Bozo says.

  38. Gravatar of ssumner ssumner
    3. October 2015 at 08:07

    jknarr, I decided long ago that life’s too short to argue with conspiracy theorists. There is literally nothing I can say.

    Ray, What would I do without you?

  39. Gravatar of ssumner ssumner
    3. October 2015 at 08:08

    Kevin, I’ll have a new post at Econlog later today on the fed funds futures.

  40. Gravatar of Ray Lopez Ray Lopez
    3. October 2015 at 11:39

    @sumner – sorry I called you Bozo. Bozo would not be pleased.

  41. Gravatar of jknarr jknarr
    3. October 2015 at 13:30

    Jose, I think we all agree that the fed committee concentrates too much power in too few hands. I admire your unquestioning faith and insider knowledge of the committee’s goodwill and actions, but that’s a hell of a prior to bring to such a weighty issue. Power corrupts, and the fed has power: this is legitimate skepticism, not lazy accusations of conspiracy. Let the evidence lead you where it will.

    https://en.m.wikipedia.org/wiki/Duck_test

    And yes, banks benefit from leverage – it’s their entire business. Leverage is the result of tight monetary policy. Aggregate bank profits rise with tight policy. And yes, banks are less profitable, but clearly still in business because the Fed recapitalized the industry.

    Bill,
    https://research.stlouisfed.org/fred2/graph/?g=21fd
    NGDP is slowing, yields are dropping. That’s tight money. The easy money was seen from 1970-1980.

    Scott, I really enjoy your blog. Never had any argument from me. Careful what you’re teaching, though. “The surest way to corrupt a youth is to instruct him to hold in higher esteem those who think alike than those who think differently.” You, of all people!

  42. Gravatar of Philippe Philippe
    4. October 2015 at 03:40

    “If the Fed tried to independently determine the path of interest rates it would lead to hyperinflation or hyper deflation.”

    the Bank of England pegged its base interest rate at 5% for over a century:

    http://www.iimahd.ernet.in/~jrvarma/blog/Y2009/BOE-rates.png

  43. Gravatar of Ray Lopez Ray Lopez
    4. October 2015 at 06:08

    @jknarr – you got the better of Sumner, for what that’s worth. But you’ll never convince him of anything he does not already believe. Further, since money is neutral, it’s not a big deal what banks and bankers do, though I don’t like the small $6.6 B subsidy they get from the Fed on their reserves.

    @Philippe – the flat line to 1815 looks unnatural. It implies the market rate was probably less than the BofE rate.

  44. Gravatar of Scott Sumner Scott Sumner
    4. October 2015 at 08:56

    jknarr, I have no problem with thinking differently, I just don’t like conspiracy theories.

    Philippe, They were on the gold standard (or was it silver?), which anchors the price level. Obviously that was not a market clearing interest rate.

  45. Gravatar of Major.Freedom Major.Freedom
    4. October 2015 at 09:07

    “Philippe, They were on the gold standard (or was it silver?), which anchors the price level. Obviously that was not a market clearing interest rate.”

    The Fed has been on a “survival” mode, which has “anchored” runaway inflation, hence the periodic increases in interest rates, deflation, and correction.

    Obviously any forced NGDP by non-market forces would not be a market coordinating NGDP.

  46. Gravatar of Philippe Philippe
    4. October 2015 at 13:02

    Scott,

    “They were on the gold standard (or was it silver?), which anchors the price level.”

    John Cochrane: a gold standard is a fiscal commitment.

    “The gold standard seems like a pure monetary policy, but it is not. Since no government ever backed 100% of its nominal debt with gold, the gold standard was a way to communicate and commit the government to raise the appropriate surpluses to pay off its nominal debt. If people wanted to redeem notes for gold, the government would raise the gold with current or, via borrowing, future taxation. The gold standard is impractical, of course, since we want to stabilize the CPI not the price of gold. And its history is full of crashes, when the essentially fiscal commitments fell flat. Foreign exchange pegs are similar fiscal commitments.”

    http://faculty.chicagobooth.edu/john.cochrane/research/papers/cochrane_policy.pdf

  47. Gravatar of ssumner ssumner
    5. October 2015 at 10:16

    Philippe, I agree with that, but it doesn’t affect anything I said.

  48. Gravatar of TravisV TravisV
    6. October 2015 at 06:36

    Arnold Kling linked to this post and wrote “Did Scott Sumner Stumble?”

Leave a Reply