What should the Fed do?
What should the Fed do?
NGDP level targeting
But what should the Fed do right now?
NGDP level targeting
OK, but they won’t. So what should the Fed do to interest rates right now?
Set the target rate consistent with 4% NGDP growth
But what is the target rate consistent with 4% NGDP growth?
How should I know? They are the geniuses that think interest rate targeting is a sensible policy tool. Not me. Let them figure out how to use this supposedly effective policy tool.
Consider the following two possible scenarios:
1. The Fed sets the perfect fed funds target, like an Olympic gymnast nailing a landing. But it does poorly on forward guidance.
2. The Fed botches its interest rate setting, but issues sensible forward guidance.
I’d take the second scenario in a heartbeat.
PS. Two things to keep in mind:
1. The market is never wrong.
2. The market is always wrong.
If you can grok the sense in which both of these are true, you will be able to achieve a deeper perspective when thinking about the economy. I.e., the market is always the optimal forecast, but things never turn out exactly as forecast.
PPS. Here are two more:
1. What matters is changes in asset prices.
2. What matters is levels of asset prices.
The change matters for how we should change our view of the situation. Levels matter for how we should form our view of the situation.
PPPS. Part of today’s selloff may be an investor reaction to the BOJ moving back to its pre-2013 deflationary monetary policy, for reasons I’ll never understand.
Tags:
5. August 2024 at 12:17
“Part of today’s selloff may be an investor reaction to the BOJ moving back to its pre-2013 deflationary monetary policy, for reasons I’ll never understand.”
Two words: carry trade. Raising rates put upward pressure on the yen, which caused losses on yen-dollar carry trade investments. Investors unwinding these carry trade positions contributed to the selloff.
5. August 2024 at 14:01
John, But that doesn’t explain why they’d do this. Finance is (almost) always a symptom, macro policy is the root cause.
5. August 2024 at 14:15
1) I believe the cause is the Japanese public are not happy about a weak and weakening yen, and the ruling party has a leadership election later this year
2) maybe I’m missing something about the difference between overnight rates and rates for bonds of a duration of like two years, but I’d prefer to balance interest rate policy and quantitative easing in such a way that banks don’t pay a lower interest than government debt. Maybe that could be achieved by having rates be at like .25% (what it got changed to today) but having way more qe(unlike the announcement today which was of a taper).
5. August 2024 at 14:23
Ilverin, Maybe, but does the Japanese public like stock market crashes?
5. August 2024 at 15:50
“today’s sell off was due to BOJ moving back to its pre-2013 deflationary monetary policy.”
No. It’s the jobs report, massive debt, and global geopolitical environment.
A lot of people were long; those longs were triggered, which means their positions were liquidated by exchanges. This caused a sharp decrease in price, which led to panic selling.
For Cryptocurrencies, it was the same problem. Many long posiitons on BTC, and collateralized btc loans were liquidated, and day traders panicked.
The panic was made worse by the fact that everyone knows the economy is shit.
One of these days economists will learn what traders have known since the beginning of time, which is that artificially printing money doesn’t lead to “real growth”. It’s like spending a bunch of money on a credit card, then saying “look, guys, I created jobs”. Sure, traders will ride the wave but, like buffett, they’re preparing for the inevitable. Most have large cash positions, waiting for the correction, and those who play the wave are looking for any reason to get out.
5. August 2024 at 15:59
It’s not just Japan in crisis right now. South Korea has seen similar stock market declines. Their market closed down more than 8%, and then futures were down another 8% in after market trading. Japan had a similar situation in the futures market after closing down more than 12%. Obviously, these results flirt with economic catastrophes.
There are also rising tensions in the Middle East, which might otherwise lead to higher oil prices, ceteris paribus, but much of the world is experiencing nominal shocks related to the situations in the two crisis countries.
None of this changes the fact that the US economy is still running too hot. It may just mean action may be required to slow the downward trend in NGDP growth
5. August 2024 at 16:01
The US needn’t take action now, if the BOJ and BOK correct their mistakes.
5. August 2024 at 16:26
I don’t understand the size of the recent sell off or it’s rapidity.
However, the three largest economies in the planet, China, Japan and U.S, are all perceived as sluggish, or becoming so, and burdened with debts.
Perhaps the solution is coordinated central bank quantitative easing, with forward guidance that the balance sheet addition will be permanent and not reversed.
5. August 2024 at 18:59
Sara writes,
“One of these days economists will learn what traders have known since the beginning of time, which is that artificially printing money doesn’t lead to “real growth”.”
It depends on whether there is slack in the economy. As Scott Sumner says:
“I’m surprised by how many people struggle with the fact that you can’t print your way to prosperity, but you can print your way back to prosperity.”
source: https://www.econlib.org/money-neutrality-super-neutrality-and-non-neutrality/
5. August 2024 at 19:32
They are trying to get inflation down, it’s 2.8%
5. August 2024 at 21:45
As a compromise, because they don’t have an NGDP futures market, the Fed could also do whatever it takes to make the TIPS spread predict their inflation target.
5. August 2024 at 21:47
Solon,
You write:
> However, the three largest economies in the planet, China, Japan and U.S, are all perceived as sluggish, or becoming so, and burdened with debts.
Small correction: from what I’ve heard Germany has recently overtaken Japan. See eg https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)
> Perhaps the solution is coordinated central bank quantitative easing, with forward guidance that the balance sheet addition will be permanent and not reversed.
Why the need for coordination? The individual central banks can just do their own thing, can’t they?
5. August 2024 at 21:50
Matthias, With the big rise in the yen, I wonder if Japan just retook 3rd place.
6. August 2024 at 00:06
Matthias:
Yes, thanks for pointing that out, it is neck and neck between Germany and Japan.
However, Germany’s economy is also squishy.
Thailand’s economy is smaller, but its central bank is apparently targeting 0% inflation.
India is growing great guns. The RBI has an inflation target of 4% +/- 2%.
I am not advocating 4% inflation. But it is interesting to note how other central bankers think.
6. August 2024 at 01:42
Scott,
“..e., the market is always the optimal forecast, but things never turn out exactly as forecast…”
which market? and what forecast?
There is no NGDP market. There are forecasts by researchers, but this is hardly a market…
6. August 2024 at 01:49
OK, Nikkei 225 up 10.2% today.
6. August 2024 at 07:42
Viennacapitalist, Different markets for different forecasts.
7. August 2024 at 04:21
One thing to note: the recent drawdown in equities corresponded nearly perfectly with a decrease in *real yield*. Just a classic case of market re-adjusting future growth assumptions. Need supply side fix.
7. August 2024 at 07:14
sd0000, Yes, and the recent sharp drop in illegal immigration might have contributed to that perception.
7. August 2024 at 07:36
I said:
“today’s sell off was due to BOJ moving back to its pre-2013 deflationary monetary policy.”
Sara, You responded:
“No. It’s the jobs report, massive debt, and global geopolitical environment.”
LOL, it took only 48 hours for you to look like a complete fool. Here’s Bloomberg:
“Stocks climbed around the globe and bonds fell after the Bank of Japan moved to reassure markets in the wake of historic volatility sparked in part by the Asian nation’s unexpected rate hike last week.”
https://www.bloomberg.com/news/articles/2024-08-06/stock-market-today-dow-s-p-live-updates?srnd=homepage-americas
8. August 2024 at 08:22
There is something about Germany in the 1920s, that reminds me of today. I don’t feel like writing a thousand words explaining it. Let’s just say it feels similar
8. August 2024 at 08:35
Our Fed Chair is simply repeating what he did several years ago. What’s wrong with him?
8. August 2024 at 08:38
I am willing to accept that Trump is a goofball—-what I don’t get is how anyone can think Harris not a moron.
8. August 2024 at 08:50
To tell the truth, the only thing I really about is the UConn women’s basketball team. I cannot wait for pre season to start. I plan on seeing as many games in Storrs and Mohegan sun as possible . I am not being sarcastic but quite serious.
I have been a super fan since Taurasi. I fear injuries/-/that would be horrible.
8. August 2024 at 12:14
https://www.bloomberg.com/news/articles/2024-08-08/trump-wants-presidents-to-have-some-say-over-fed-policy?srnd=homepage-americas
Yikes
9. August 2024 at 11:55
Atlanta’s gdpnow is currently at 2.9%. There are short-term money flows that are a proxy for R-gDp. There are long-term money flows that are a proxy for inflation.
Short-term flows have been up since 2023. Long-term flows have been down since 2023.
N-gDp will fall in August because both short- and long-term flows will be falling. July was an inflection point. When the US sneezes, the world catches a cold.
The FED should hold the money supply constant. Dropping policy rates may not affect a change in the money stock.
9. August 2024 at 14:30
Cameron, With Trump there are so many “yikes” I now just tune him out. If you took him seriously you’d go crazy.
20. August 2024 at 18:22
Scott,
I have been thinking about monetary policy alternatives to negative rates and quantitative easing once you hit 0% overnight rates. What do you think about allowing the Fed to pay subsidies in proportion to the inverse of a bank’s reserve ratio?
So every month they might pay a subsidy = (1-reserve ratio)*(total par liabilities)*(arbitrary scale factor) = (total par liabilities – reserves)*(arbitrary scale factor)
“Reserves” could be based on the average reserve holdings over the past 30 days, and the “total par liabilities” could be taken from the banks’ disclosure reports (which I believe are monthly). The goal would be to increase the *velocity* of bank reserves, and the easiest way for a bank to do this would be to expand their balance sheet — make loans or buy assets.
There’s also no reason household deposit rates would need to go below zero*, which is the main political problem for deep negative rates.
*because they are being subsidized to not hold reserves, not taxed for holding reserves. Also losing deposits without corresponding asset accumulation (ex: just cutting your deposit rates) will lead you to lose both liabilities and reserves