The wrong regime

This FT article caught my eye:

Vincent Reinhart, who worked at the US central bank for more than 20 years, expects the Fed to proceed “gradually” this year in light of geopolitical uncertainties and the dovish composition of the its monetary policy setting committee. He also worries that will amount to a policy error.

“They’re not going to be able to tighten enough in 2022,” he predicted. “They’ll have to go a bit more in 2023 and inflation is going to be well above their goal this year and next.”

I think that’s right, but I’d like to make one small change, using my strikethrough function:

“They’re not going to be able to tighten enough in 2022,” he predicted. “They’ll have to go a bit more in 2023 and inflation is going to be well above their goal this year and next.”

So where do Reinhart and I differ? I cannot be sure, but I suspect Reinhart has in mind something like the following:

Given the Fed’s commitment to interest rate targeting, as well as their commitment to avoiding the sort of dramatic adjustments in the target interest rate that might spook the markets, they will not “be able to” tighten enough in 2022.

If that’s what Reinhart had in mind, then I agree. The real problem is the policy regime. The Fed needs to take seriously its commitment to average inflation targeting, and do whatever it takes to achieve that commitment. They need to “be able to” do the right thing.



Tags:

 
 
 

60 Responses to “The wrong regime”

  1. Gravatar of Jeff Jeff
    6. March 2022 at 19:08

    Seems this so-called cautious approach only works in one direction. Even in March 2020 banks were downplaying the actual size of the economic impact of Covid. That didn’t stop the Fed from calling emergency meetings and deploying trillions to fund PPP and prop up risk assets.

    Once that was done it would seem that yet another lost decade of anemic growth and negative real interest rates is baked in. I have never understood the claim on this blog that low interest rates indicate that inadequate stimulus was applied. I think the natural reaction when one receives a bailout or free money is to as thank one’s lucky stars and save rather than invest the money. Beneficiaries are reluctant to take for granted that the government will be there to rescue them a second time.

  2. Gravatar of Michael Rulle Michael Rulle
    7. March 2022 at 05:17

    Except Powell seemed to disavow that policy—didn’t he? And we are back to the same old problem—-do whatever it takes—but over what time frame?

    First Covid comes in to rearrange ways of thinking, then massive spending and various mandates —-and just as we are seeming escaping the Covid black hole along come Putin, sanctions, and the usual possibility of a gradual compounding war.

    A serious question here—-does this prevent the Fed from being able to target and implement objectives?——Does it “just” make it more difficult?

    I would love the answer to be “no”.

  3. Gravatar of Sven Sven
    7. March 2022 at 05:22

    Do you think the real dilemma is that the high bar (full employment with high wages at a low inflation rate) that is set by the society in recent times make the FED indeterminate to execute its policy tools?

    I think a lot of confusion comes from abstaining to get a backlash from the society. I think the FED afraids that if it tightens too much and if it causes unemployment even if it’s little bit people will react a lot compared to past.

  4. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    7. March 2022 at 06:00

    O/N RRPs should be a subtraction in the money stock. So, the FED has already surreptitiously tightened monetary policy. Because the FED’s monetary policy won’t be validating the surge in inelastic oil prices, there will be a deflationary impact generated in other alternative sectors of the economy. The prospect is for stagflation, business stagnation accompanied by inflation.

    Interest is the price of credit. The price of money is the reciprocal of the price level.

    To reverse the deceleration in R-gDp (FOMC schizophrenia: Do I stop because inflation is increasing? Or do I go because R-gDp is falling?), Congress needs to drive the banks out of the savings business (which won’t reduce their size).

    Lending by the Reserve and commercial banks is inflationary (increases both the volume and turnover of money), whereas lending by the nonbanks is noninflationary (other things equal), activating the matching of savings with investments (strictly a velocity relationship).

    “Incomes are generated by production and the economic system is said to be in equilibrium when all the incomes earned are returned to the income flow through spending.”

    Unless savings are expeditiously activated and put back to work, a dampening economic impact is fostered. And all bank-held savings are frozen until their owners spend/invest them. The banks can’t use them. It’s stock vs. flow. Banks don’t lend deposits. Deposits are the result of lending.

  5. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    7. March 2022 at 06:40

    Chairman Powell: “The connection between monetary aggregates and either growth or inflation was very strong for a long, long time, which ended about 40 years ago”

    That’s heresy. Nothing’s changed in > 100 years. The 24-month rate-of-change in monetary flows (the volume and velocity of money), or the proxy for inflation, peaked in January, and so should the roc in the Fed’s preferred annual inflation measure which reached 6.1% in January and the consumer price index, which was at 7.5%, the highest in 40 years (the recent surge in oil notwithstanding).

    But income velocity is a contrived metric. Income velocity has moved in the opposite direction as the transaction’s velocity of money. Income velocity falls as the proportion and volume of savings increases in the payment’s system.

    Link: “Ml or M2: Which Is the Better – Monetary Target?”
    DALLAS S. BATTEN and DANIEL L. THORNTON
    https://files.stlouisfed.org/files/htdocs/publications/review/83/06/Target_Jun_Jul1983.pdf

    Money doesn’t have an impact unless it is turning over. So, savings accounts, which is the largest part of M2 (c. 15 trillion), is predominately stagnant money.

    Before Powell removed the distinction, “the limit was six withdrawals per month if the funds remained within the same institution (e.g., transfer to checking), but was only three drafts where the funds left the institution (e.g., check, ACH Network, or card-based purchases).”

    If Powell had a brain, he would know that the turnover ratio of savings to total checkable deposits is 1:99, of OCDs to DDs 5:99. Powell intentionally blurred the distinction between means-of-payment money and savings/investment type bank accounts. That is absolute incompetence at the highest level.

  6. Gravatar of Lizard Man Lizard Man
    7. March 2022 at 07:26

    I am a bit surprised that Sumner is advocating for the AIT here. A NGDP target would seem to be a lot better, so why not point out that AIT has failed and then call for the Fed to move on to something better? The Fed clearly doesn’t like the implications of AIT enough to stick with it. Honestly, I suspect that any average target, or level target, is probably too restrictive for the Fed to ever fully embrace. But an annual GDP target would at least, I think, make it easier for them to stick to the target because it is a target that better balances inflation and full employment. At the very least if they adopted and stuck with it, they could point to the real economy as the source of disappointing inflation or employment numbers.

  7. Gravatar of Michael Sandifer Michael Sandifer
    7. March 2022 at 07:30

    Not surprisingly, I very much disagree, particularly in the midst of a new real shock. This is no time for inflation targeting, not that there is ever a time for it. It simply makes no sense to have lower inflation in the future, simply because there’s high inflation today. We should not tighten policy further.

    Also, again, the Fed’s FAIT with full employment commitment is sufficiently vague such that speaking of monetary policy within that framework is mostly useless. Just keep NGDP on a constant growth path in outer years.

    Remember, Powell explicitly said that the Fed’s commitment does not entail lower than 2% inflation in the future to make up for above 2% inflation now.

    We can’t afford a recession, particularly in the context of our politics. The Fed should stop tightening policy.

  8. Gravatar of ssumner ssumner
    7. March 2022 at 09:12

    Lizard, You asked:

    “so why not point out that AIT has failed and then call for the Fed to move on to something better?”

    Because it was never tried. Sure, NGDPLT would be better. But if they announce a commitment to AIT, then they should do it.

    Michael, You said:

    “Just keep NGDP on a constant growth path in outer years.”

    It isn’t just inflation that is too high, NGDP growth is also too high.

    And high inflation is making a recession more likely.

  9. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    7. March 2022 at 11:09

    re: “NGDP growth is also too high”

    N-gDp level targeting caps R-gDp while maximizing inflation. That’s the wrong recipe. You target a roc in money flows 2-3 percentage points greater than the roc in R-gDp.

    In American Yale Professor Irving Fisher’s truistic: “equation of exchange”, R-gDp is both a subset and proxy. Based on the distributed lag effect of money flows, the volume and velocity of money, R-gDp is given by a 10-month roc.

    You stimulate R-gDp by putting monetary savings, income not spent, back to work in targeted real investment outlets.

    Contrariwise, the utilization of bank credit to finance real investment or gov’t deficits does not constitute a utilization of savings since bank financing is accomplished by the creation of new money.

    The activation of monetary savings, $15 trillion in commercial bank-held savings (income held beyond the income period in which received), of finite savings products (near money substitutes), increases the real-rate of interest (+ R *), produces higher and firmer nominal rates for saver-holders, and has a positive economic multiplier.

    The “Taper Tantrum’ is prima facie evidence.

  10. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    7. March 2022 at 11:18

    Atlanta’s GDPnow Latest estimate: 0.0 percent — March 1, 2022. What do you propose Sumner, filling the gap with more inflation?

  11. Gravatar of Effem Effem
    7. March 2022 at 12:27

    The Fed increasingly looks like a deer in headlights. They are so swift, creative and aggressive when it comes time to stimulate and bailout. They so lost and timid when it comes time to remove overstimulus.

    Many of us have said for many years that the risk of stimulating so aggressively is that you go too far one time and lack the will or perceived ability to do anything about it.

    I think time will show that any central bank target is essentially an asymmetric one, with errors on the side of above-target inflation.

  12. Gravatar of Michael Sandifer Michael Sandifer
    7. March 2022 at 13:01

    Scott,

    The expected NGDP growth rate was, at most, about 5.1% going out 5 years, coming into today. I know that’s above your preferred ~4%, but if we were to simply maintain that, would you consider it a big deal? That’s my point.

    Now, is the Fed likely to maintain it? I’d guess not, which is likely the problem. Today, stocks are down sharply, while the Treasury yields are up. I interpret that as markets expecting higher inflation today, due to higher commodity prices, and hence further ex[ected tightening by the Fed. That makes sense, since the Fed has an inflation target, however fuzzy.

  13. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    7. March 2022 at 13:52

    Sandifer: The market’s down because of what Zoltan Pozsar said, fra/ois spread, and counterparty risk. To wit: “If a bank closes a $200 billion balance sheet on Friday and doesn’t open on Monday, someone’s $200 billion wasn’t hedged by definition. The same with exclusions from SWIFT – the payments messaging system banks use to send and receive payments.”

  14. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    7. March 2022 at 14:00

    Inflation is the Ill-defined economic bogeyman. There is no such thing as the “wage-price spiral”; the “price-wage spiral”; or the “cost-push spiral”; in the sense that increases in wages, prices, or costs are causes of inflation.

    Unless effective demands (money times transactions’ velocity) are adequate to prevent a cutback in sales, or a diversion of purchasing power to the price raisers, any administered increase in prices will result in less sales, smaller outputs, less employment, lower payrolls and less demand for products—in other words, depression and deflation in due course.

  15. Gravatar of Michael Sandifer Michael Sandifer
    7. March 2022 at 14:17

    Spencer Bradley Hall,

    I disagree. I think the stock market is down, because NGDP growth expectations dropped today, as inflation expectations presumably rose(I’ll check the breakevens when available to make sure), and Treasury yields rose. Markets expect the Fed to raise rates to counter the raised inflation expectations, which I think is a mistake.

  16. Gravatar of Sarah Sarah
    7. March 2022 at 14:22

    If the market decided the interest rates, and we returned to the gold standard, instead of trusting the opaque and unaudited Fed, then we wouldn’t have big government, foreign interventionism, supranationals, inflation, or soon to be stagflation.

    Nobody should have a monopoly over money, especially spendthrift politicians. Like most central planners, the Fed has succeeded at transfering wealth from the poor to the rich. They have failed at everything else.

    The Fed is also the root cause of foreign problems. We could not engage in nation building, or spend billons in dark money trying to overthrow regimes, if the Fed didn’t exist because the central government wouldn’t be able to pay for those expenses. The government would be smaller, and Americans would be safer.

    Foreign interventionism isolates America. It also weakens America economically. RU, South America, and India are all moving towards UnionPay and CISP. This will create a bipolar world, deevalue the dollar, weaken our markets, embolden the CCP, and lead to either economic collapse or war (probably both).

    Madison probably said it best:

    “She has, in the lapse of nearly half a century, without a single exception, respected the independence of other nations while asserting and maintaining her own. Wherever the standard of freedom and Independence has been or shall be unfurled, there will her heart, her benedictions and her prayers be. But she goes not abroad, in search of monsters to destroy. She is the well-wisher to the freedom and independence of all. She is the champion and vindicator only of her own.”

    America wouldn’t need to worry about “terrorists” if it didn’t meddle in Kuwait in 91, Somalia in 95, Boznia between 92 and 95, Vietnam in the 60s and 70s, and Iraq for twenty years. This type of “policing” only creates global animosity and hatred towards our country and people.

    Putin didn’t wake up one day, have a cup of coffee, and say “I’m bored, why don’t we attack Ukraine”.

    Remember: “there are always two sides to a story”, and, “you reap what you sow”.

    People who say NATO keeps us safe, and who say the Fed stablizes the economy, are people who don’t bother to look at the facts.

    Delusion is not patriotism.

  17. Gravatar of Effem Effem
    7. March 2022 at 14:57

    The stock market is down of late because we are experiencing a significant decline in the real global productive capacity. We’ve lost labor force, lost energy output, and are now diverting resources towards war.

    Real wealth is your productive capacity. All the Fed can do is play nominal games around that reality. If they want to fill the void with inflation they can do that. But there is a legitimate possibility that the ensuing inflation most hurts the weakest among us and becomes a highly destabilizing political force.

  18. Gravatar of Michael Sandifer Michael Sandifer
    7. March 2022 at 15:23

    Effem,

    The point of filling the void with deflation is to counter sticky wages, to prevent unnecessary unemployment and hence, unncessary lost output.

  19. Gravatar of Michael Sandifer Michael Sandifer
    7. March 2022 at 15:23

    “inflation”, not “deflation”

  20. Gravatar of Effem Effem
    7. March 2022 at 17:26

    Michael,
    Sure I understand and that may be right, but let’s not pretend we know that with any certainty. Unemployment is negative; but so are falling real wages, the deadweight loss of volatile prices, and the regressive incidence of inflation.

    Once you have a fall in real productive capacity you are left choosing between bad and worse. The narrative that people will prefer inflation to unemployment is popular among economists but I’m not quite sure that’ll be true in the real world. And the ability to pursue any given strategy is only as good as the ability to keep the electorate from overruling it. So far the electorate does not seem pleased.

    As an asset owner who consumes a small-Ish percentage of my income, I prefer inflation. I can see why many others would not. This is not straightforward.

  21. Gravatar of Ray Lopez Ray Lopez
    7. March 2022 at 17:57

    Sumner likes to put words into people’s mouths. “They’re not going to be able to tighten enough in 2022” – could simply mean, given the resources of the Fed, they cannot really affect the money supply in any meaningful way.

    It’s well known, outside of this little group reading this crummy blog, that central banks “lean” into which way the market is going but really cannot affect the entire market. Even the famous Plaza Accord of 1985 was reinforcing a USD/Yen trend started a few months earlier, likewise, the famous Volcker pivot of the early 1980s to supposedly stop inflation had periods where the Fed both tightened and loosened, and inflation fell and rose, respectively (yes, the opposite of conventional theory).

    Sumner knows this yet clings to the fantasy that money is non-neutral, in order to give him a sense of control. What a fool.

  22. Gravatar of Ray Lopez Ray Lopez
    7. March 2022 at 18:00

    Correction: look at the Volcker pivot and note there are periods where the Fed is tightening and inflation is rising, and vice versa. Unless you incorporate “variable lags and leads” you cannot justify this with conventional theory, is my observation.

  23. Gravatar of Nick S Nick S
    7. March 2022 at 19:43

    Dare I say that the fed’s QE policies do not have the ability to affect inflation at all? Nor does the Fed even have a grasp on what the definition of money is anymore, an idea that was reiterated by Alan Greenspan himself. The fed’s insight into the scope and size of the shadow Eurodollar system (repo, reverse repo, securities lending markets, etc), which is “money” but not properly included in any official money supply measure, is elementary at best. The Fed has the power to create bank reserves, which are not a true form of money. I can’t purchase a good with a “bank reserve.” Instead, federal reserve member banks need to transform bank reserves into real “money” via loan growth, something that simply hasn’t happened post GFC or post covid (just look at excess reserve levels). QE simply swapped bank owned government bond assets for bank reserves. The inflation we are seeing currently is a result of ….

    1.) Legitimate negative supply shocks from supply chain disruptions due to Covid
    2.) Direct monetary injections from government to the public via PPP loans, rent/foreclosure moratoriums, extended unemployment benefits, etc.

    This explains the difference in inflation now vs the lack of inflation seen during the post GFC QE programs.

  24. Gravatar of Michael Sandifer Michael Sandifer
    7. March 2022 at 22:49

    Yes, not surprisingly, 5 year inflation expectations were up today, and just the at the level I would expect.

  25. Gravatar of Jeff Jeff
    8. March 2022 at 00:54

    >The narrative that people will prefer inflation to unemployment is popular among economists but I’m not quite sure that’ll be true in the real world.

    Yes. Everyone knows that inflation is at best just a silly mind trick like Daylight Savings Time. Listening to Mary Daly talk about all the “great benefits!” feels exactly like listening to some shopping mall owner tell the evening news how “great!” it is that everyone is setting their clocks forward. (“Another hour of daylight for people to spend money!”)

    Meanwhile children are getting run over by sleep-deprived zombie drivers as they walk to school in the dark…

  26. Gravatar of steve steve
    8. March 2022 at 08:15

    How does the price of oil factor in? It seems pretty inelastic and we clearly get big demand/supply shocks. (If too basic for you to answer ignore.)

    Steve

  27. Gravatar of Stephen Stephen
    8. March 2022 at 08:30

    I know you want level targeting, but with inflationary pressures almost everywhere, and rising energy prices which might cause a recession, what should the fed do at the next meeting? 25/50 bp increase in rates? more/less?

  28. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    8. March 2022 at 09:11

    @Michael Sandifer

    “I think the stock market is down, because NGDP growth expectations dropped today”

    To quote economist John Gurley, “Money is a veil, but when the veil flutters, real-output sputters.”

    The O/N RRP turns inside money into outside money. Therefore, I agree, the FED doesn’t have to tighten.

    A Ph.D. in economics isn’t worth the paper it’s printed on. The economics profession doesn’t know a credit from a debit, money from mud pie. Bank credit is a good example.

    The DIDMCA of March 31st 1980 turned 38,000 nonbanks into banks. The FED added the deposit liabilities of the nonbanks to the money stock (as a result of allowing demand drafts), but didn’t include CU, S&L, and MSB credit to bank credit. The FED’s accountants also have miscounted, double-counted, CU and S&L correspondent balances in the money stock. And the MMMF’s deposits are also double counted.

    The FED also doesn’t include large CDs in the money stock, as it previously did.

    As Hamlet said “There is something in this more than natural”

    When DFIs grant loans to, or purchase securities from, the non-bank public, they acquire title to earning assets by initially, the simultaneous creation of an equal volume of new money (demand deposits) – somewhere in the payment’s system.

    We are entering the dark ages, where money doesn’t matter. The prospect is that we will know less and less about money, the economy, and inflation.

  29. Gravatar of ssumner ssumner
    8. March 2022 at 09:56

    Michael, You are still missing the point. We need a stable monetary policy, which means setting a target and hitting the target. I would have had no problem with a 5% NGDP target, but that’s not the Fed policy. So hit the target.

    Sarah, You said:

    “Putin didn’t wake up one day, have a cup of coffee, and say “I’m bored, why don’t we attack Ukraine”.
    Remember: “there are always two sides to a story”, and, “you reap what you sow”.”

    So now you are a Putin apologist? Or are you saying that Putin will reap what he sows?

    Ray, Your time would be better spent searching for that lab leak. And also helping OJ Simpson find the real killer.

    Stephen, 50 basis points. The problem is not just inflation (you are right about supply shocks) but also excessive NGDP growth.

  30. Gravatar of MIchael Sandifer MIchael Sandifer
    8. March 2022 at 10:36

    Scott,

    No, I understand that you want a stable, rule-based monetary policy. I just don’t think AIT is a good rule, and I think FAIT + full employment is too ill-defined to be very useful.

    I’m happy with something approximating roughly 5% NGDLPT, implicitly. The Fed had periods where it essentially did this, though with too much volatility.

  31. Gravatar of MIchael Sandifer MIchael Sandifer
    8. March 2022 at 10:42

    To be more explicit, you’re concerned that the Fed will cause a recession, either via wage adjustment after overheating, or the Fed recognizing they’re behind the curve and causing a recession by slamming on the brakes.

    I just don’t see much cause for concern yet, unless the Fed keeps tightening.

  32. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    8. March 2022 at 10:55

    The rate-of-change in long-term monetary flows, volume times transaction’s velocity, is already decelerating – not accelerating. The FED should do what Paul Volcker did in April 1981 (when N-gNp blew out with a 20.1% reading)- and reimpose reserve requirements on total checkable deposits – as well as on vault cash. Volcker back then imposed reserve requirements on NOW and SuperNow accounts.

  33. Gravatar of Effem Effem
    8. March 2022 at 11:05

    Michael,
    You act as though recession is the world’s greatest risk. I can think of far worse scenarios. Pretty sure you would’ve told Volcker to take it easy for fear of recession.

  34. Gravatar of Ray Lopez Ray Lopez
    8. March 2022 at 11:26

    @SS- Please address Nick S’s point, “Dare I say that the fed’s QE policies do not have the ability to affect inflation at all?” which is essentially the same as mine.

    It goes to the central point whether the Fed can even do a helicopter drop, the point of your original post.

    As I told you years ago, I am a patent guy and my firm belief is that the rate of innovation would go higher with a better patent system. However, not unlike your theory of NGDPLT, the evidence to date refutes this hypothesis, namely, a certain group of people (“altruistic nerds”) will invent regardless of the incentives (or with very weak incentives like societal praise, which Tyler Cowen has also remarked on). This undercuts my firmly held belief. I’m still of the opinion innovation can be incentivized for ordinary people who would not otherwise invent, by using money. But it’s hard to prove. To date nearly every Nobel Prize and quite a few ordinary inventions were created without a big monetary incentive, which even inventors at the time realized, that is, they were not fooled into thinking they would get rich but nevertheless invented out of charity and just for the challenge.

    So please do a post: what if I, Scott Sumner, am wrong about the Fed and money non-neutrality? It would be a good way to achieve closure and fade away into the obscurity which you deserve in your golden years.

  35. Gravatar of Effem Effem
    8. March 2022 at 12:21

    Scott, inflation expectations rise every day (5y now 3.5%) and the Fed is basically in hiding. What do you make of this? If the Fed wants to ignore any inflation overshoot during an overseas war shouldn’t they just say so? I don’t think they have any framework at this point other than to avoid mean headlines for themselves.

  36. Gravatar of MIchael Sandifer MIchael Sandifer
    8. March 2022 at 13:37

    Effem,

    Of course Volker didn’t have to crash the economy to bring down inflation. Particularly if software is used, much subtler adjustments in outer years could credibly be made to bring inflation expectations down gently.

  37. Gravatar of Effem Effem
    8. March 2022 at 14:14

    Michael,
    That’s pure speculation. I can just as easily say: if Volcker hadn’t been so firm, inflation would’ve continued to spiral upwards. And if we bring inflation down gently, how long does it take and how big is your cumulative overshoot at that point?

    The Fed can test this hypothesis right now (as they probably should). Commit to tighten policy a bit every week until 10y inflation expectations are back ~2% but no lower. They have 6 months to accomplish this – do you predict a recession in this scenario?

    So far they’ve been doing the opposite: they lead us to believe they are tightening while inflation expectations actually rise further above target.

  38. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    8. March 2022 at 15:14

    re: “if Volcker hadn’t been so firm, inflation would’ve continued to spiral upwards”

    Volcker’s reign was a myth. Monetarism involves controlling total reserves, not non-borrowed reserves. Volcker targeted non-borrowed reserves (@$18.174b 4/1/1980) when total reserves were (@$44.88b).

  39. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    8. March 2022 at 15:22

    Who actually believes that the FED doesn’t target gDp?

    There are three District Reserve Banks that publish gDp forecasts:
    #1 The St. Louis Fed Economic News Index: Real GDP Nowcast (STLENI)
    #2 Atlanta’s GDPNow.
    #3 New York Fed Staff Nowcast

  40. Gravatar of Tacticus Tacticus
    9. March 2022 at 09:23

    @ Sarah: ‘If the market decided the interest rates, and we returned to the gold standard, instead of trusting the opaque and unaudited Fed, then we wouldn’t have big government, foreign interventionism, supranationals, inflation, or soon to be stagflation.’

    Right, because there were no big governments, foreign interventions, supranationals, or episodes of inflation under the gold standard! LOL. Do you know anything about the world pre-1971??

  41. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    9. March 2022 at 12:20

    If N-gDp futures deviate from the N-gDp target, the FED doesn’t have the operational tools to adjust to that gap in any given quarter.

  42. Gravatar of ssumner ssumner
    9. March 2022 at 14:42

    Everyone, Stop asking me the same questions over and over again. Especially ones I’ve answered 100 times.

    I’ve made my views quite clear.

  43. Gravatar of Michael Sandifer Michael Sandifer
    9. March 2022 at 21:14

    Effem,

    Plenty of central banks have reduced inflation without causing a recession. It probably would have required a big, explicit change in regime, rather than the shock and awe approach that the Fed took at the time.

    And I don’t see a reason for the Fed to try to bring down inflation rates that are primarily due to supply shocks. Inflation rates can climb, as long as expected NGDP growth is stable. I’m comfortable with stable NGDP growth at 5-to-5.5%

    As for bringing 10 year inflation expectations back down to 2% over a six month period, ceteris paribus, yes it would cause a recession.

    That doesn’t mean the Fed can’t achieve a soft landing if they want to reduce inflation.

    This is a very tough situation right now, as on the one hand a recession would be disastrous for the US politically, given the rise of fascism on the right and the know-nothing extremists on the left. On the other, it doesn’t seem to take much extra inflation to also seriously hurt political prospects for the center.

  44. Gravatar of Michael Sandifer Michael Sandifer
    9. March 2022 at 21:15

    Scott,

    If people keep asking you what your views are, maybe you haven’t made them clear, though they may be clear in your mind.

    Just a thought.

  45. Gravatar of Michael Sandifer Michael Sandifer
    9. March 2022 at 21:25

    One very risky option for bringing down inflation due to the Russia situation is to attack Russia in Ukraine. At the very least, use air power to obliterate their air force there and their compromised, incompetent ground forces.

    If, and it may be a big if, we can end the war quickly, we might be able to reduce sanctions more quickly. “Might” is the operative word.

    This would have the additional benefit of being able to brand the fascists in the US and West generally as traitors, or, at the very least, put them in a much more negative light and it may box Trump out politically. The latter may alone be worth the risk.

  46. Gravatar of Michael Sandifer Michael Sandifer
    9. March 2022 at 22:09

    On the other hand, here are two Indian defense analyst who seem to give very plausible reasons why direct NATO intervention will not, and should not occur, including a lack of NATO readiness:

    https://www.youtube.com/watch?v=pNHUDDqTgdI

  47. Gravatar of ssumner ssumner
    10. March 2022 at 09:16

    Michael, I haven’t made clear that policy is too expansionary right now? Really? And yet I’m still being asked.

  48. Gravatar of Michael Sandifer Michael Sandifer
    10. March 2022 at 11:05

    Scott,

    What confuses me, is when you say that 2019 was a “boom” year. By what measure? The S&P 500 was rising, but from a lower base after two drops that year alone, after the big 18% drop in Q4 of 2018; inflation was well below the Fed’s 2% target; inflation expecations were falling; the yield curve fell into negative terriritory… I could go on.

  49. Gravatar of Jeff Jeff
    10. March 2022 at 11:14

    >I don’t see a reason for the Fed to try to bring down inflation rates that are primarily due to supply shocks

    This is a complete canard — nearly all of the so-called “supply shocks” over the past 2 years were directly caused by the Fed’s own flamboyant recklessness with the money supply, their deliberate ignition of a worldwide inflation panic, and their stubborn refusal to admit any responsibility or take any action when the gravity of the situation they created became apparent.

    Why would anyone sell anything of value in exchange for a dollar when the authority controlling the supply of that dollar shows no concern whatsoever that its value is depreciating rapidly and unpredictably. Got oil? Leave it in the ground. Got real estate? You’d be crazy to sell. Why even bother to get out of bed to work a job for something as worthless as a US dollar?

    There were never any real “supply shocks”. This all happened because a bunch of elitist FOMC members–most of whom had been silently fuming for years that the hoi polloi had the nerve to disregard their sacred 2% target and bid inflation up to only 1.7%–thought it would be fun to use a health crisis as an excuse to run a mass psychological experiment to see how high they could drive up inflation expectations.

  50. Gravatar of Michael Sandifer Michael Sandifer
    10. March 2022 at 11:58

    Jeff,

    The Fed is not responsible for the pandemic, and now the Ukraine invasion with related sanctions, which are responsible for most of the current inflation. In fact, prior to the pandemic, between the financial crisis and the pre-pandemic period, inflation averaged well-below the Fed’s explicit 2% target.

  51. Gravatar of Jeff Jeff
    10. March 2022 at 12:13

    I stand by everything in my comment. Deliberate, even flamboyant, policy recklessness beginning in March 2020 had far more detrimental effects on economic stability than the events you mentioned, which ultimately amount to nothing but excuses.

  52. Gravatar of Michael Sandifer Michael Sandifer
    10. March 2022 at 14:24

    Well Jeff, there are beliefs, and then there are explicit models and evidence.

  53. Gravatar of ssumner ssumner
    12. March 2022 at 09:35

    Michael, I don’t look at the S&P500 to decide if the economy is booming. I’d say 99% of economists agree with me, so it’s not like I have some sort of weird opinion. Unemployment was 3.5%, the lowest since the 1960s

  54. Gravatar of Michael Sandifer Michael Sandifer
    12. March 2022 at 11:15

    Scott,

    Yes, the vast majority of economists seemed to think 2019 was a boom year. But, as you’ve pointed out many times, the vast majority also once thought money was loose in 2008 and 2009. You helped disabuse many of that notion, as a market monetarist. Now, you’re sometimes arguing against market monetarism, though you always deny doing so.

    I didn’t just point to the S&P 500 when arguing money was tight in 2019. I also pointed to a falling yield curve, which became negative, falling inflation expectations, expectations for falling real interest rates, etc. Those things don’t generally happen in booming economies, unless it’s a boom expected to be temporary in a country like Japan, which has negative real GDP growth expectations.

    You’ve forgotten more about economics than I’ll ever know, but I know more about the relationship between stock prices and economic growth expectations. If you’ll take off your blinders and actually look at the numbers, you might agree that:

    1. Percent changes in the S&P 500 index reflect percent changes in the mean expected NGDP growth path, one-for-one(from an NPV perspective of course, since we’re talking about prices).

    2. The discount rate for the SP 500 reflects this mean expected NGDP growth path, and is also the forward-looking earnings yield (e/p). In the short-run, e/p varies with respect to NGDP growth, when the economy is out of equilibrium. In the longer run, the means are equal.

    You often state that you cannot judge the stance of monetary policy based on interest rates, inflation rates, etc., which is true. But, you can judge the stance of policy based on a combination of interest rate changes, expected inflation rate changes, and stock prices changes.

    Over many years, I’ve now come to accept the above as facts, and one day, this will become the conventional view. Even John Cochrane has moved toward this view over time, increasingly recognizing the importance of the discount rate in stock prices. He still hasn’t realized what the discount rate actually represents.

    Of course, there are many interesting macro implications to the above that I’m not currently qualified to properly examine.

  55. Gravatar of Michael Sandifer Michael Sandifer
    12. March 2022 at 11:34

    This is not just about monetary policy. You regularly make a comment almost all economists make, which is that low interest rates lead to higher stock prices, ceteris paribus implied. This is simply wrong. One need only look at the case of Japan to see how wrong this is. Starting in the late 80s, interest rates and stock prices fell in tandem in Japan.

    Why? Because expected economic growth was falling, and would eventually become negative. Lower interest rates, when caused by what is expected to be temporarily lower economic growth, will lead to temporarily higher relative stock valuations.

    And of course, stock price volatility is then higher, simply because changes in economic growth expectations versus current relatively low growth expectations are relatively larger.

  56. Gravatar of Michael Sandifer Michael Sandifer
    13. March 2022 at 21:08

    After examining last week’s numbers, monetary policy has actually loosened since the Ukraine crisis began a couple of weeks ago, as inflation has soared, while RGDP growth expectations are a bit down.

    This means that now, since January 3rd when the last tightening cycle began, the rise in 5 year Treasury yields, for example, nearly exactly offset the rise in 5 year inflation expectations over this period. This is while the imputed mean expected RGDP growth path has fallen 0.5-0.6%, with the implied forward mean NGDP growth path now at roughly 4.5%, going out 5 years. This suggests a very anemic expected mean RGDP growth rate of roughly 1% out to 5 years.

    We don’t have a lot of room for policy mistakes or much in the way of additional negative real shocks before we’re in recession.

  57. Gravatar of ssumner ssumner
    14. March 2022 at 10:41

    Michael, You said:

    “You regularly make a comment almost all economists make, which is that low interest rates lead to higher stock prices, ceteris paribus implied.”

    You are accusing me of reasoning from a price change? Really?

    “One need only look at the case of Japan to see how wrong this is. Starting in the late 80s, interest rates and stock prices fell in tandem in Japan.
    Why? Because expected economic growth was falling, and would eventually become negative”

    A point I’ve made dozens of times.

  58. Gravatar of Michael Sandifer Michael Sandifer
    15. March 2022 at 04:02

    Scott,

    I would say you’ve publically warned against reasoning from a price change hundreds, if not thousands of times. Yet, there was this recent post from you:

    https://www.econlib.org/kevin-erdmann-was-right/

    And here’s the relevant quote where you throw real rates out as an explanation for rising house prices:

    “I’d add permanently low real interest rates.”

    On the other hand, you make it extremely clear that you understand that interest rates don’t determine stock or house price changes in this other recent detailed post on the subject:

    https://www.econlib.org/selgin-is-right-but-its-an-endless-battle/

    I’m pretty sure I got the concept from you originally anyway, that interest rates are, but an “epiphenomenon”, yet there are times when you seem inconsistent. Perhaps these are just some combination of communication mistakes and poor interpretation on my part, but it seems to fit q broader pattern of inconsistency.

    Also a part of that broader pattern of inconsistency seems to be your judgement on the stance of monetary policy at various times, which certainly confuses me.

    On the one hand, you correctly point out that monetary policy was not too loose in the early 2000s, for example, since NGDP growth fell below trend, but then, you say you don’t think monetary policy was already tight by. 2006, when NGDP was falling, along with proxies for NGDP growth expectations. Likeswise, you’ve claimed 2019 was a boom year, despite every indication of low and falling NGDP growth expectations.

  59. Gravatar of ssumner ssumner
    15. March 2022 at 15:42

    Permanently low real interest rates lead to permanently high price/rent ratios for property. That’s what I was referring to.

  60. Gravatar of Michael Sandifer Michael Sandifer
    15. March 2022 at 21:10

    Ah, yes, okay. Obviously cap rates and stock earnings yields fall

Leave a Reply