Time for the Fed to join the computer age
When I was young, you’d still see stock prices such as 47 1/4 and 38 5/8. That was a throwback to the pre-computer age, when prices were calculated as a fraction of a dollar. Now everything from stock prices to T-bill yields is expressed in decimals, aka basis points.
I’ve been arguing that the Fed should join the computer age, setting the fed funds target once a day at the median vote of the FOMC. Every working day, each FOMC voting member would email in their preferred policy rate, to the nearest basis point, and that day’s policy rate would be set at the median vote. No more agonizing between quarter point and half point changes.
Under this system we would not see the sort of clown show experienced yesterday at the New York Fed.
When will the Fed join the 21st century?
PS. Market monetarism, market environmentalism, it’s all good.
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19. July 2019 at 04:26
A bit OT but maybe interesting. ECB discusses symmetric inflation target, according to Bloomberg:
https://www.bloomberg.com/news/articles/2019-07-18/ecb-studies-revamping-inflation-goal-in-twilight-of-draghi-era
19. July 2019 at 04:46
Of course, it never really made sense to quote stocks on the base-eight system, and decimals always made more sense.
But, for reasons that perhaps a scholar can explain, when stocks started trading under Buttonwood, the Spanish system of doubloons was used. In days of yore, doubloons might be cut in half, and half again and then again. So the 1/8th became the smallest unit. Why stocks chose the Spanish system is obscure.
Later, Wall Street made piles of money on “the spread” or arbitraging between the a price of say, 10 5/8ths and 10 3/4ths. So, your broker (and you had to use a licensed broker) would buy and sell to you with the spread intact—which went into the brokers’ pocket.
As Lucky Luciano said when he was informed how Wall Street worked, “I went into the wrong business.”
You can never be too cynical about Washington DC…and Wall Street.
19. July 2019 at 04:53
This makes me wonder why it was set up like this in the first place. Was there no need to adjust more frequently than once a quarter, give that markets didn’t move as fast? It also begs the question as to whether the fed should lead or chase the market. A daily adjustment would thrust the fed more into a leadership role I think, and given the orthodoxy around centralized market planning, I don’t know how much of a buy in market players would give.
19. July 2019 at 06:15
Scott,
I’m not a subscriber to FT. I understand if you don’t have time to answer this, but what was the “clown show” at the New York Fed.
19. July 2019 at 07:30
@Christian:
Doesn’t the ECB have to get inflation up to 2% before they can even think about going above for a while? They were a hair above last fall, but for the most part they can’t even get there (even worse than the US Fed)
19. July 2019 at 07:44
@David R. Henderson,
I believe this is an un-gated version of the same story.
https://www.google.com/amp/s/www.cnbc.com/amp/2019/07/18/fed-clarifies-williams-speech-that-market-took-as-signal-of-a-rate-cut.html
19. July 2019 at 09:02
David, See the link proved by Jeff.
19. July 2019 at 10:13
Government bonds still trade in 1/32.
I miss the fractional method of stock quotes. They have a certain charm to them. Of course, decimalization allowed for the flash traders to enter the picture.
19. July 2019 at 10:19
Under your proposal wouldn’t FOMC members have an incentive to misrepresent their preferred policy rate in order to bring the average closer to their real preferred rate? Some interesting game theory to work out there.
19. July 2019 at 12:37
Doug, Even 1/32 would be a big improvement.
Policy, No, I’d use the median vote, not average.
19. July 2019 at 16:52
I believe that until 40 years ago, the Fed didn’t even announce changes in the target rate.
Basis point changes should be good from Fed perspective. Constant changes would help get rid of the “Fed reverses course” narrative.
I wonder how often the median voter would be the same person day after day? Maybe even months at a time.
19. July 2019 at 20:50
msgkings,
I agree that it doesn’t sound very convincing. Perhaps it would be better to simply increase the inflation target? (I also used the wrong term, what would be the correct term for the discussed reform? Let’ call it “catch-up inflation target” for now.)
Even if they ever increase inflation (which I doubt), in the reform under discussion, they might overshoot if they have to undershoot and undershoot if they have to overshoot. And that’s supposed to be good?
I suspect that a higher inflation target cannot be achieved with the Germans, and that is why they are discussing this reform now. However, the Fed seems to have similar plans, I think Scott talked about it just a few weeks ago, but I can’t find the text right now.
Reforms in mini-steps, they might believe that more is not possible, and probably they are right. German media outlets have already reported this reform and they are furious. It is interesting that in Germany most media outlets write like this, from the far left to the middle to the right, it doesn’t really matter. There seems to be no relevant difference between them in terms of monetary policy.
The Euro now has less inflation than the Deutsche Mark ever had. And someone like Draghi has caused less inflation than Duisenberg and even less than Trichet. (Of course, Duisenberg and especially Trichet would have achieved less inflation these days than Draghi, but still.)
Perhaps the announcement of the reform and the new objectives would already be of some use. If it were only convincing and credible enough, it might work. So in other words: No.
20. July 2019 at 06:27
Thanks, Jeff G and Scott.
21. July 2019 at 18:37
Facsimile is enough? > Every working day, each FOMC voting member would email in their preferred policy rate,
31. July 2019 at 12:00
Interestingly, the system of 1/8ths or 32nds was actually easier to represent on a computer than the decimal system. Fractional powers of 2 are representable exactly in binary whereas 0.01 is not.