“We should want to do more”

Grammar is not my strong suit, so you guys will have to help me here.  Does the title of the post mean:

1.  We want to do more, and can.

2.  We want to do more, but cannot.

3.  We should want to do more, but don’t want to.

4.  I want to do more, but the others that make up my group don’t want to.

Perhaps if I gave you the article, we could figure this out from the context:

July 1 (Bloomberg) “” Federal Reserve Bank of San Francisco President Janet Yellen said the prospect that policy makers will leave the benchmark U.S. interest rate near zero for the next several years is “not outside the realm of possibility.”

“We have a very serious recession, we have a 9.4 percent unemployment rate,” and inflation possibly falling over time below the Fed’s preferred level, she told reporters yesterday after a speech to the Commonwealth Club of California in San Francisco. Given the recession’s severity, “we should want to do more. If we were not at zero, we would be lowering the funds rate.”

Yellen’s comments go beyond those made by other policy makers after a June 23-24 meeting, when they said the federal funds rate will likely stay at “exceptionally low levels” for “an extended period.” They have held the rate, also known as the overnight lending rate between banks, at between zero and 0.25 percent since December.

The Fed “did succeed in averting a full-blown meltdown,” Yellen said in the speech. Nevertheless, the threat of another financial shock, such as one from falling commercial real-estate prices, is “high on my worry list.”

Yellen said the U.S. economy may be about to “turn the corner” and reiterated her expectation that the recession will end later this year.

“Right now, we’re like a patient in intensive care whose condition has stabilized and whose fever is just starting to come down,” Yellen said in the speech. “We’re just completing the sixth quarter of recession, but the pace of decline has slowed markedly” and “confidence in the financial system is slowly returning.”

. . .

As for inflation, the “predominant risk” is that it will “be too low, not too high, over the next several years,” Yellen said. Inflation excluding food and energy may fall to about 1 percent over the next year and remain below 2 percent, with an unlikely possibility of turning into deflation if the economy fails to recover soon, she said.

.  .  .
The Fed “won’t hesitate” to withdraw the record stimulus it has put in place, when necessary, Yellen said. “If anything, I’m more concerned that we will be tempted to tighten policy too soon, thereby aborting recovery.”

My initial reactions:

1.  Just shoot me.

2.  It reminded me of statements by Bernanke.  You might recall my earlier comments about Bernanke, when he spoke of the economy as if he were just a bystander like you and me, not the head of an institution whose job it is to steer the nominal economy at roughly a 5% rate of growth.

3.  Does she think that the markets would regard her “years of zero rates” comment as good news?  I only know of two countries that had the good fortune of zero interest rates for year after year.  The US in the 1930s and Japan in the late 1990s and early 2000s.  I would just as soon avoid that sort of “easy money.”

4.  Yes, I know that it appears she meant the Fed wants to do more, but cannot.  But isn’t the proper way to express that thought “we want to do more?”  Is it possible that she is not allowed to speak for others, because the others do not in fact want to do more?  I am currently debating a prominent economist who is at the Minneapolis Fed.  He suggests that the Fed has done an “admirable” job in controlling inflation, and that no more stimulus is needed.

5.  I wonder what percentage of economists in the US right now understand that year after year of zero interest rates is not really easy money, it is really, really tight money.  And in the last few weeks it has been getting even tighter, as five-year inflation expectations, which were already low, have fallen further.  If Fed officials really think things are this bad, what do we have to lose by trying one of the many “foolproof” liquidity trap escapes that were hatched up over the past 10 years by famous Princeton economists like Michael Woodford, Lars Svensson, Paul Krugman, and  . . . Ben Bernanke.  Maybe it’s time for the Fed to consider an explicit inflation target—or better yet a NGDP target.



10 Responses to ““We should want to do more””

  1. Gravatar of Libfree Libfree
    2. July 2009 at 16:52

    I’m not a professional economist, but I wish you would discuss the fed target rate in more detail. I had the pleasure of having George selgin as an teacher in school and though my memory is hazy (too much alcohol I suspect). I seem to remember him telling us that fed target rates are meaningless except as a clue to their open market operations. Love the blog, even if I struggle to follow sometimes.

  2. Gravatar of ssumner ssumner
    2. July 2009 at 17:21

    Libfree, There are basically two types of indicators, meaningless and very meaningless. The fed funds rate, which is the rate on overnight bank loans (of cash fro mone bank to another) is one of the very meaningless indicators. An example of a merely meaningless indicator is the monetary base. Right now both seem to be signaling “easy money” according to conventional interpretations (low interest rates and a big monetary base.) The only meaningful indicator of monetary policy is the market forecast of the goal variable. The goal variable might be inflation, but I prefer nominal GDP growth as a policy goal. In either case that indicator shows tight money—there is not enough money in circulation to generate the sort of nominal growth the Fed is looking for. Hence we have very tight money right now.

  3. Gravatar of Leigh Caldwell Leigh Caldwell
    3. July 2009 at 02:49

    My clumsy translation is the following: “If there was anything left to do, I would want to do it; but there isn’t, so my colleagues and I have avoided the conversation. Therefore I can only use auxiliary verbs to speculate on what we might want in a counterfactual world.”

    Of course some would disagree that there is nothing left to do, but the Fed does seem to regard its tools as fully expended.

  4. Gravatar of ssumner ssumner
    3. July 2009 at 04:07

    Leigh, I thought QE was supposed to be the next step? It was announced with great fanfare in March. Tune in later today or tomorrow when I get my next post up, I think you will be shocked.

  5. Gravatar of Gregor Bush Gregor Bush
    3. July 2009 at 05:13

    I agree that the Fed can and should be much more stimulative and that halting interest payments on excess reserves would be a good start (the market response to such an announcement would be very interesting).

    I’m sympathetic to you NGDP futures targeting idea but I’m not entirely convinced about it working in practice. Futures markets on economic indicators have historically not done well. I’m always surprised that the Fed fund futures market trades with so little volume at the one year horizon. And the Case-Shiller home price futures market, which I would have thought would be very popular, fell flat on its face.

    There is also the issue of simplicity. If I’m planning to expand a business in Australia, it’s easier for me if I know that I can expect inflation to be 2% over the medium term, rather than trying to figure out what the RBA’s target level nominal GDP means for my business. Does not inflation targeting essentially achieve the same ends (if the Fed were credibly committed to an inflation target we couldn’t have had the Great Depression and the 1990s in Japan would have been much better if they were committed to 2% inflation) while having the advantage of being easy to understand?

    That said, shouldn’t we take some solace from the fact that, at present, most major central banks have inflation targets, and the Fed has a quassi inflation target? Doesn’t that tell us that the global monetary authorities will, though somewhat belatedly, get things right? For example, if core PCE inflation moves below 1% later this year and TIPS spreads move substantially lower, I think most of the Fed hawks will capitulate and policy will become more stimulative: zero or negative interest payments on reserves, an expansion of Treasury purchases, and clearer communication to the market that the Fed has the means and the will to achieve 2% inflation.

    Finally, do you think that the crisis will bolster the case of Bernanke and others who want the Fed to move to an explicit target?

    Thanks and keep up the good work,


  6. Gravatar of ssumner ssumner
    3. July 2009 at 11:27

    Gregor, Thoughtful post. You are right that the 2% inflation target makes long run stagnation much less likely than in Japan, where the target is officially zero, but implicitly minus 1%. I just hate to wait so long, it is making the budget deficit much worse.

    My futures idea would be subsidized, so volume won’t be a problem. Actually this is essentially a prediction market, and artificially created prediction markets have an excellent record out-forecasting experts. When I started on futures targeting years ago I thought the key question was who can forecast better. No longer. The main problem today isn’t that the Fed is a bad forecaster, they know they are off target, but that they don’t equate the target and the forecast—futures markets would do that automatically. I.e. the futures targeting approach would have more credibility, which is the key issue in liquidity traps. In a liquidity trap futures targeting is better than Fed discretion, even if the Fed is a slightly better forecaster.

    If the Fed is going to make a zero (or better yet negative) interest on reserves announcement, they need to combine it with a clearly spelled out strategy, so the market knows what they are trying to do.

  7. Gravatar of TomB TomB
    3. July 2009 at 13:27

    I believe she addressing her comment to all the commentators that are worried about inflation. Here is an excerpt from her remarks:

    “Let me now turn to an issue that has lately garnered a great deal of attention””inflation. Just a short time ago, most economists were casting a wary eye on the risk of deflation . . . Now, though, all I hear about is the danger of an outbreak of high inflation. I’ll put my cards on the table right away. I think the predominant risk is that inflation will be too low, not too high, over the next several years.”

    Although we do not have the context of the press question that spurred the comment, I believe she is saying that “we should want to do more to prevent deflation rather than less like all those crazy people who are concerned about inflation want.” She didn’t say crazy, but I think she was thinking it.

    Whether by “we” she means the Fed or “we” the economists or “we” meaning herself the people she is talking to, I don’t know. But I am not sure if it matters if my interpretation is correct.

  8. Gravatar of TomB TomB
    3. July 2009 at 13:31

    The comment I was referring to in the third paragraph above, was the comment “we should want to do more” that you discussed in your post. I was not referring to her remarks that I had quoted.

  9. Gravatar of ssumner ssumner
    5. July 2009 at 06:49

    TomB, I agree with your interpretation, but don’t you think her very odd wording is revealing? It hints at something. I’m interested in what that something is–is it an implied criticism of other FOMC members? You may not think the answer is important, but I’d like to know if she is saying, “we should do more to fight deflation, but those other idiots on the FOMC don’t want to, even if we could, which we can’t.”

  10. Gravatar of TheMoneyIllusion » Annus horribilis (1932, pt. 1 of 5) TheMoneyIllusion » Annus horribilis (1932, pt. 1 of 5)
    12. March 2010 at 07:09

    […] think it is was possible to use monetary stimulus once rates hit zero.  Last year I had this post on Yellen.  In another post (I can’t find) I argued that her failure to understand that […]

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