What kind of Fed “put”?

This caught my eye:

The Federal Reserve has to be careful for appearing to flinch from hiking interest rates due to market volatility or investors will soon be banking on a “Powell put,” said Mohamed El-Erian, chief economist at Allianz.

The Fed’s most recent message, delivered by Fed Vice Chairman Richard Clarida, stressed the Fed is data dependent. This seems to be a shift from the earlier communication that there was a clear need to normalize policy, said El-Erian, the former deputy director of the International Monetary Fund and later the CEO of PIMCO. This shift seems to be a reaction to market volatility in October rather than any “great discovery” about the economic outlook, he said. . . .


“In the last week or so, the word data dependency has started coming back. So this is going to be a real test as to whether the Powell Fed is indeed a different Fed or whether at the first sign of market volatility they flinch like the Bernanke Fed and the Yellen Fed.”

Mohamed El-Erian 

“If they signal that they are going to be more dovish, I can tell you we will be talking about the ‘Powell put’ really soon, so they have to be really careful,” he added during an interview on CNBC.

Should there be a Fed put based on stock prices?  No.

Should there be a Fed put based on asset prices?  Yes.

It’s a mistake to put too much weight on stock prices.  While stocks do react to changes in expected growth in aggregate demand, they also react to lots of other stuff, such as corporate profits, growth in overseas economies, deregulation, tax cuts, trade wars, interest rates, etc.  Instead the Fed should put together a market forecast of expected NGDP growth.  Preferably they’d create and subsidize trading in a NGDP futures market, but at a minimum they should try to estimate the market’s forecast of NGDP growth, based on a wide range of indicators, including stock prices.

There’s nothing wrong with the Fed easing policy after a sharp setback in the stock market, but only if it’s associated with a decline in expected NGDP growth.  I’m not seeing evidence for that in the Hypermind prediction market, but that contract runs out in the first quarter of 2019, so one could argue that the slowdown is expected to occur later.  On the other hand, forecasts of slower growth in the future usually lead to slower growth in the near term as well.

FWIW,  I believe that the Fed should and will raise interest rates by less than they currently anticipate–perhaps just one or two more increases.  But my view is “data dependent”, and might change by tomorrow.

Off topic: The GOP now believes that corporate decisions about where to locate new factories should be made by the federal government, not the private sector.

Update:  The Dems appears to have picked up 40 House seats, with California’s 21st flipping to the Dems yesterday after the GOP led by 7 points on election night.  Congrats to David Levey for predicting precisely this result.  I’d like to see a story explaining why the late votes in California are so overwhelmingly Democratic.  On election night, the media missed the Democratic wave, with pundits talking about Dem House gains of about 28 and GOP Senate gains of perhaps 3 or 4.  It’s now 40 and 1, or 2 at most.  We need better election technology.  There’s no excuse for the slow pace of vote counting.



30 Responses to “What kind of Fed “put”?”

  1. Gravatar of Effem Effem
    27. November 2018 at 11:32

    If for some reason we had to transition to a structurally higher rate environment wouldn’t it be possible to have falling asset prices (higher discount rate) despite perfectly normal forward growth expectations?

  2. Gravatar of rayward rayward
    27. November 2018 at 11:59

    “Should there be a Fed put based on asset prices? Yes.” And that’s especially true in the case of housing prices. So what’s going on in the housing market? Prices are falling, and falling in markets across the country. (Prices in other markets are falling too, including energy, but that’s a differ issue.) Housing prices have an enormous influence on aggregate demand through the wealth effect (or loss). Of course, this is all part of the long-running debate on how to address asset bubbles, the conventional view is that the Fed shouldn’t burst bubbles with contractionary monetary policy. But what’s the Fed to do when prosperity has become dependent on rising asset prices. It’s a dilemma, a dilemma with few good answers. What’s Sumner’s?

  3. Gravatar of ssumner ssumner
    27. November 2018 at 12:06

    Effem, Yes, that was my point about interest rates. (Of course it depends why interest rates change.)

    Rayward, Housing prices only matter to the extent they link up with NGDP expectations.

    And we do not depend on housing. The housing market was strong in 2003 while the economy was weak, and the housing market was weak in 2007 when the economy was strong.

  4. Gravatar of Jim Jim
    27. November 2018 at 12:33

    Would love to see an “avg NGDP growth for next 5 years” prediction on hypermind or augor betting markets.

  5. Gravatar of Christian List Christian List
    27. November 2018 at 12:44

    We need better election technology. There’s no excuse for the slow pace of vote counting.

    This has nothing to do with technology at all. It’s all about laws and crazy left-wing legal regulations. I help with every German election; we count all votes by hand. We finish in one hour max. Sometimes there are complicated local elections, in which each voter has 30 votes, which he can distribute in complicated ways. Then we need two hours. Crazy California needs 30 days. 30 days for what?

  6. Gravatar of Russ Abbott Russ Abbott
    27. November 2018 at 15:55

    I heard that the late votes tend to skew more Democratic because the late votes tend to come from younger and poorer voters. Both populations tend to skew more Democratic. Younger voters tend to be late because they don’t get around to it earlier. Poorer voters tend to be late because they have so many other issues to worry about.

    In addition, early votes tend to be more Republican because they tend to come from older voters (who skew Republican). They (a) vote early because they want to make sure they get their votes in and (b) have fewer other obligations.

  7. Gravatar of Benjamin Cole Benjamin Cole
    27. November 2018 at 16:23

    Worth noting, both Richard Clarida and Mohamed El-Erian are alumni of PIMCO, the world’s largest bond manager.

    Clarida is not part of the reflexive tight-money crowd, and I suspect the Trump administration selected him for the Federal Reserve for that reason (without any notice paid even in the financial media and even in very hip monetary policy blogs).

    Trump, the vulgarian reality TV-show host who became president of United States, may have figured out monetary policy much more quickly than Obama never did.

  8. Gravatar of Marcus Nunes Marcus Nunes
    27. November 2018 at 16:28

    “There’s nothing wrong with the Fed easing policy after a sharp setback in the stock market, but only if it’s associated with a decline in expected NGDP growth. I’m not seeing evidence for that in the Hypermind prediction market, but that contract runs out in the first quarter of 2019, so one could argue that the slowdown is expected to occur later.”
    One certainly could, and has!

  9. Gravatar of Matthias Goergens Matthias Goergens
    27. November 2018 at 17:33

    Christian, thanks for the German comparison!

    It looks like the Californians use voting machines? (See https://www.sos.ca.gov/elections/voting-systems/oversight/voting-systems-used-counties/ ) Ostensibly they are there to speed up voting, but it seems like the practice does not bear that out.

    I don’t think “crazy left-wing legal regulations” is a productive way to describe that situation. Probably just say “crazy American regulation”—the whole binary politics / binary everything is a very American thing. No need to become infected.

    Fun fact about regulation: In the land of the free, even pay toilets are largely outlawed. (And that ban of course lead to less public toilets, not to an abundance of free toilets.) https://en.wikipedia.org/wiki/Committee_to_End_Pay_Toilets_in_America

    There’s a good argument to be made that voting and counting votes should stay on paper. Any village idiot can understand that system and observe it. That’s quite important for democracy. Computers are opaque and hard to understand. And I say that as someone who gets paid money to deal with large computer systems. (Compare https://xkcd.com/2030/ )

    Your comparison with the German makes that argument stronger, since one hour or two is certainly fast enough.

  10. Gravatar of Christian List Christian List
    27. November 2018 at 18:48


    I don’t think “crazy left-wing legal regulations” is a productive way to describe that situation. 

    I don’t really care if it’s productive or not. It seems to describe reality. The problem occurs in California, which is not exactly known as conservative stronghold. And what else could it be but crazy regulations???

    I’ve done a little bit of research by now and of course it’s regulations. It’s crazy, even worse than I thought:

    The most significant policy that slows down the ballot-counting process is a relatively new law that allows voters to drop their ballots in the mail later than voters in other states.

    The mail doesn’t even have to be there on election day, it can be three days late. Three whole working days late! 72 hours. So basically they can really start counting at day 4 after the election. Let there be a weekend and some holidays and it’s even more than three days.

    Or here:

    Every ballot that is mailed back has to be checked to ensure it comes from the proper voter, a laborious process that involves inspecting millions of voter signatures.

    It get’s better and better:

    In some states, low-level election workers can eliminate a ballot if they believe a signature does not match; in California, several more layers of increasingly senior officials inspect a ballot.

    And even better:

    And for the first time this year, California has allowed voters to register and vote on Election Day itself. The ballots those voters cast cannot be counted until their registration is processed.


  11. Gravatar of Michael Sandifer Michael Sandifer
    27. November 2018 at 19:09

    Scott has been correct to point out that policy is about right for pursuing a 2% inflation target. The tightening has taken the future expected path of NGDP down a little less than .5%. The problem, as it’s been for a long time, is with the regime.

  12. Gravatar of Benjamin Cole Benjamin Cole
    27. November 2018 at 19:44

    Mathias G–

    I am happy to say we agree on the need for simplicity, clarity and accountability in government, and in voting especially.

    Yes, by all means, paper ballots, and heaps of them on tables and ordinary people can monitor the process.

    There are many times when government properly sacrifices some possible efficiency in exchange for clarity and perceived fairness. KISS.

  13. Gravatar of Kevin Erdmann Kevin Erdmann
    27. November 2018 at 22:17

    “or whether at the first sign of market volatility they flinch like the Bernanke Fed and the Yellen Fed.”


  14. Gravatar of Matthew Waters Matthew Waters
    28. November 2018 at 07:34

    The slow votes in California, Arizona, etc. are because of every single vote’s signature is checked against the signature on file. There is no machine to do that and I don’t know a way around it.

    The later votes received are skewed towards more Democratic demographics.

  15. Gravatar of Tom M Tom M
    28. November 2018 at 08:00

    “The GOP now believes that corporate decisions about where to locate new factories should be made by the federal government, not the private sector.”

    This is a populist view, not a GOP view. This is the same type of argument that Bernie Sanders makes and most of the democratic leadership.

  16. Gravatar of ssumner ssumner
    28. November 2018 at 08:29

    Marcus, Doesn’t that graph still show greater than 4% NGDP growth?

    Thanks Matthew.

    Tom, You said:

    “This is a populist view, not a GOP view.”

    The lunatics have taken over the asylum. The populists now control the GOP, and the few anti-Trump figures are retiring.

  17. Gravatar of Tom Brown Tom Brown
    28. November 2018 at 10:42

    What do you make of this?

  18. Gravatar of Justin Justin
    28. November 2018 at 11:25

    Per the post Marcus linked, indeed the NGDP forecast shows 4.2% YoY NGDP growth in 19Q4, but that’s down from over 4.7% at the start of the current quarterly vintage: http://ngdp-advisers.com/ngdp-forecast-client/
    and it’s notably slower than the growth acceleration we’ve seen since mid-2017. 4.2% is a sizable disappointment, particularly in light of what markets were implying just a few months ago. We *deserve* 5% NGDP growth after all we’ve been through, but the Fed keeps playing games.

    Growth came in a lot better in 2018 than had been expected, so markets rose thinking the Fed was “ok” with this pace. Now it’s uncertain what they want, or even if they know what they want.

  19. Gravatar of rayward rayward
    28. November 2018 at 11:56

    The Fed blinked.

  20. Gravatar of bill bill
    28. November 2018 at 13:10

    Bernanke didn’t blink until months after the fuse was lit and the economy blew up. The old joke is that the market has predicted 9 of the last 5 recessions. I’d say it was because the Fed “blinked” the other 4 times. (“blinked” meaning “responded well to”)

  21. Gravatar of Christian List Christian List
    28. November 2018 at 14:32

    @Matthew Waters

    …and I don’t know a way around it.

    Don’t be so silly. There’s simply no reason for checking the signatures.

    You make much more important signatures in your life. Which bureaucrats are checking these?

    Are you guys crazy? Not even the infamous kafkaesque Eichmann-style monster bureaucracy of Germoney is checking signatures.

  22. Gravatar of Scott Sumner Scott Sumner
    28. November 2018 at 17:17

    Tom Brown, Sure, that’s bad, but then Trump’s done numerous far worse things in the past 48 hours, and hundreds of worse things since becoming president.

    Justin, I strongly disagree. A 5% NGDP growth rate over the next 12 months would likely cause overheating, leading to a recession. You want stable NGDP growth consistent with the Fed’s inflation target.

  23. Gravatar of Cliff Cliff
    28. November 2018 at 17:52

    Rayward, how are prices falling on housing, what’s your data? Latest data shows 5.5% yoy increase in housing prices nationwide.

  24. Gravatar of Matthew Waters Matthew Waters
    28. November 2018 at 17:56


    In practical terms, it may not matter. If signatures weren’t checked, then there would be allegations of people stealing ballots out of mailboxes.

  25. Gravatar of Christian List Christian List
    29. November 2018 at 03:42


    I agree, you can always make up theoretical crimes and conspiracy theories. And then you can think of many absurd bureaucratic procedures to prevent those hypothetical crimes. But why in the world would you do that?

    It’s deeply ironic that Californian politicians love to complain about “voter suppression” in other states. It’s actually California that enacts in voter suppression. California is suppressing thousands of voters because of their handwriting in every election.

    In the 2016 election alone, as many as 46,000 ballots were rejected because officials thought that the signatures weren’t good enough. Interestingly Asian Americans’ ballots were rejected at a substantially higher rate (up to 15 times higher) than the general population. And even better: Voters don’t get informed that their ballots are nullified.

    Not to mention that checking signatures does nothing to prevent your theoretical crime of stealing ballots; a crime that doesn’t even exist in the first place. What’s next? Scott demanding even more “technology” for problems that don’t exist?

  26. Gravatar of Matthias Goergens Matthias Goergens
    29. November 2018 at 18:36

    Don’t Americans still write checks? Just use whatever technology banks have for verifying that checks are genuine. I don’t think they have employed manual signature verification for decades?

  27. Gravatar of Matthew Waters Matthew Waters
    29. November 2018 at 18:56

    Checks are a big vector for fraud. Commercial accounts use Positive Pay, where the customer gives a register of checks before the bank will pay any of them. For regular accounts, it’s a big exposure of banks and many banks have accounts without checks now.

    I should be clear that I personally don’t think we have to require signatures. Any scenario for the wrong person filling out a ballot is far-fetched. It’s a federal crime to steal mail. Then the actual voters will be missing ballots and the authorities can probably put two and two together.

    But the supposed voter fraud theories would be easy to make. For example, ballots would get mailed to people who have died or moved out of state. The current residents could then vote twice.

  28. Gravatar of Alex Harvey Alex Harvey
    3. December 2018 at 17:39

    Central banks can only control short-term interest rates. However, they can influence longer-term rates as well as other asset prices as a portion of the monetary policy. Asset price movement could affect real output and inflation.

  29. Gravatar of Lita Hardy Lita Hardy
    6. December 2018 at 19:36

    Actually, Alex most standard measurements of economic growth like inflation do not account for increasing asset prices. In addition, asset prices can be misleading.

  30. Gravatar of A.C. Roberson A.C. Roberson
    6. December 2018 at 20:09

    The greater the risk, the greater the payout, right? Like slot machines… Stocks are risky business. I feel like asset prices are more likely to increase steadily and provide greater output in the long term, rather than taking the “get-rich-quick” approach with stocks. Providing a Fed put on asset prices could provide for more financial sustainability and could possibly bring the American economy back to its former glory days.

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