What should we expect from Fed officials?
I occasionally see comments from people who have an unrealistic set of expectations for Fed officials.
An institution like the Fed will tend to reflect the consensus view of economists. Back in late 2008, I was among perhaps a few dozen people in the entire world who blamed the Great Recession on a tight money policy of the Fed. Even today, that view is only slightly more popular, mostly due to the effort of market monetarist bloggers. It’s entirely unrealistic to expect Fed officials to reflect the views of market monetarists—that’s now how our system works. Nor will they reflect the views of other obscure groups, like MMTers or fans of the fiscal theory of the price level. That’s why I favor NGDP level targeting, it’s a regime that will lead to pretty good results under almost any competent leadership.
I’m not saying the people appointed to the Fed don’t matter at all. Bernanke did better than Volcker or Greenspan would have done (based on their public comments during the Great Recession), and better than the average economist would have done. Mario Draghi did better than Trichet. But for the most part, Fed policy merely reflects the consensus view of economists and financial market pundits. Don’t expect anything more than that.
David Beckworth recently interviewed Neil Irwin, who pointed out that Bernanke was under a lot of pressure to adopt a more contractionary policy. He also noted that while Trump has criticized the Fed for raising rates, he has also appointed Marvin Goodfriend to the Fed, a relatively hawkish economist. Obama also appointed several people who were more hawkish than Bernanke. If Trump wants dovish policies then he might try appointing doves.
Over at Econlog, I have a “Ted talk” on the future of money.
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6. January 2019 at 11:24
This is why what is happening now feels like progress. To see MESTER of all people calling for the Fed to get more dovish — and so quickly after the recent downturn — tells you everyone is much more cognizant of the role of the 5-year CPI breakeven and the 10-year UST yield as critical indicators to guide policy by. They are much more important than that backward-looking teal book Powell was flogging at his disastrous news conference.
6. January 2019 at 17:08
Back in late 2008, I was among perhaps a few dozen people in the entire world who blamed the Great Recession on a tight money policy of the Fed.–Scott Sumner
Once again Sumner engages in rank hyperbole.
I think there were many dozens of us back in 2008 who thought the Fed was too tight and perhaps even more than 100, globally.
6. January 2019 at 17:14
O/T You might find this interesting: fits with your observation about the parties changing positions: https://twitter.com/Noahpinion/status/1082059979689873408?s=19
6. January 2019 at 17:23
I think that’s the theory one might come up with, when realizing that, unfortunately, teaching them something new is extremely hard.
I think that’s also the theory one might come up with when there’s not much information available how the FED is really ticking inside.
And what’s the “consensus view” amongst economists anyhow? My impression is that you guys can’t even agree on the most basic things.
6. January 2019 at 18:20
Scott,
It has little to do with the regime. Accountability means exercising the tools at your disposal to hit the targets you have publicly announced.
The problem is that you and fellow economists will not excoriate the Fed when they fail to do this.
It has nothing to do with being a hawk or a dove. Is 2% inflation a different number if you are a hawk or a dove?
If the economy is below targets and the Fed is not buying more bonds they should be fired.
Quit making excuses for these incompetent nincompoops.
6. January 2019 at 18:24
dtoh, You said:
“The problem is that you and fellow economists will not excoriate the Fed when they fail to do this.”
Yes, except for about 500 previous posts here at MoneyIllusion where I have exoriated the Fed.
I excoriate the Fed when inflation is zero and unemployment is 10%, not when inflation is 2% and unemployment is 3.9%.
6. January 2019 at 18:34
Scott,
So you think when you’re on target you should be raising rates and selling $50 billion a month in Treasuries.
6. January 2019 at 18:37
Scott,
An BTW – with jobs up 320k and U6 simultaneously up from 3.7 to 3.9, Trump’s 18% unemployment is beginning to look pretty prescient huh?
6. January 2019 at 18:54
Yeah this not real-time, this is the past. We all know that it’s all about the future. But how interested is the FED in the future? Does it use the proper tools for that? They are so focused on the past.
From an outside position, it looks like they are driving a car by looking in the rear-view mirror.
6. January 2019 at 21:14
Another thought;
What a great employment report.Labor shortages?
There are 5 million college students in the US. A huge labor pool. Some of them work already, of course.
There was a time when many jobs paid so well that many American youths happily forwent college and went straight into employment. The 1960s.
After decades of soft labor markets in the US (due to demographics and wage suppression by the Fed), getting the BA degree and trying grab a foothold somewhere in the economy became more of the norm. A lot of wasted youth.
I hope for drum-tight labor markets in the US for as far as the eye can see. We might see beneficial social and employment changes.
Maybe OTJ training will replace college. Two-year practical-training in software colleges.
Could there be a 4-year AB in law, and then students can pass the bar to get experience as apprentices? Really, to get into law one needs seven years of post high-school education? This make sense?
I have always wondered by Silicon Valley, which says it has labor shortages, never started a up a two-year “college” where people trained in software, and then had to pass rigorous industry-designed and monitored exams.
Or simply hired smarties for paid, OTJ apprenticeships, with an enforceable contract at the end of apprenticeship.
With some beneficial adjustments, I think any “labor shortages” can be batted aside, on the way to higher living standards.
6. January 2019 at 22:55
Benjamin
> A lot of wasted youth.
Getting rid of government subsidized student loans would largely solve the problem.
> I have always wondered by Silicon Valley, which says it has labor shortages, never started a up a two-year “college” where people trained in software, and then had to pass rigorous industry-designed and monitored exams.
There is a ton of this going on. Take a look at https://generalassemb.ly/
Students pay $15k out of their own pocket for a 10 week course. Very hard core.
7. January 2019 at 02:23
dtoh:
I am with you on student loans.
That is great about the private schools generating the kind of skills needed in Silicon Valley. But why Silicon Valley “labor shortages” if all it takes is 10 weeks of training?
Something doesn’t add up.
Should Silicon Valley pay be even higher to attract more people into the trade schools?
7. January 2019 at 03:52
Software companies, including in Silicon valley are also one of the few branches of industry left that is willing to give you a high paying job without a degree, as long as you can pass interviews and tests.
(Scott Alexander has a quip about how that’s why certain people hate them.)
7. January 2019 at 06:33
I’m curious, do any other readers actually expect more from the Fed than we’re getting? Personally, I’m hedged to prepare for the worst.
7. January 2019 at 08:46
I agree that Bernanke, like Yogi Bear, was “smarter than the average economist”, but still not good enough to avoid the Great Recession. We should expect Fed officials to show evidence of having learned from this. Also, ‘lean in’ to the Borg and its bogus probity.
7. January 2019 at 11:09
The FED seems to be worse staffed today than under Bernanke and Yellen. And that seems to be mainly Trump’s fault. Trump even admitted that he had dismissed Yellen just because she was not a Republican.
Maybe that’s what the GOP should have done in the first place: Dismissing Trump, because he was not a Republican.
7. January 2019 at 15:12
dtoh, You said:
“So you think when you’re on target you should be raising rates and selling $50 billion a month in Treasuries.”
Only if those changes are needed to keep on course. But yes, I do believe that rate increases this year were appropriate. I doubt they’ll be needed next year, as growth will likely slow.
As far as Trump’s claim that the unemployment rate suddenly fell from 30% or 40% in 2016 to only 4% in 2017, that claim is just as idiotic as everything else he says.
And no, the fact that official unemployment fell from 4.6% on election day to 3.9% today doesn’t make Trump correct, it had been falling for many years. But of course Trump insists the official unemployment rate is meaningless, so obviously it can’t be used to support his arguments. If the official rate is not meaningless, then Trump is wrong.
You said:
“Getting rid of government subsidized student loans would largely solve the problem.”
Yup. And after reading Bryan Cap[lan’s new book, I’d go further and get government almost entirely out of education.
8. January 2019 at 16:38
With this low unemployment, is it really so wrong to assume that the education system also seems to do something right?
8. January 2019 at 22:48
Scott,
Why do you keep deliberately misrepresenting what Trump said about the unemployment rate.
And…I’m not using the unemployment rate to support his arguments. I cited the increased employment together with increased U6 (“with jobs up 320k and U6 simultaneously up from 3.7 to 3.9”) to show that LFPR continues to climb, which is the argument that Trump was making.
10. January 2019 at 15:56
Christian, Yes, it’s wrong.
dtoh, I don’t recall Trump even mentioning the LFPR, but maybe I missed that. Here’s what I do recall:
1. Before the election Trump said the true unemployment rate is as high as 30% or 40%.
2. Immediately after the election, Trump officials took credit for a 4% unemployment rate. When his press secretary was asked to explain the discrepancy, he just laughed it off.
Which of those two statements I just made is false?
Trump’s statements on unemployment were just idiotic, and I refuse to take that stuff seriously. If you want to argue his policies have boosted employment, that’s an entirely different question, and a much more defensible argument. But even there, the 2 million plus jobs added each year is very similar to what occurred under Obama.
10. January 2019 at 20:02
Scott,
Trump said,
“Our labor participation rate was the worst since 1978…. Our real unemployment is anywhere from 18 to 20%. Don’t believe the 5.6. Don’t believe it. That’s right. A lot of people out there can’t get jobs.”
He also later said, “The number [unemployment] is not reflective. I have seen numbers of 24 percent. I saw a number of 42 percent unemployment,”
He never said he agreed with those numbers. He’s only ever definitely said he thought the number was between 18 to 20%. If you are factoring in LFPR those numbers are not far off.
Adding 2 million jobs year when you’re in recession is not the same thing as adding 2 million jobs when you’re at “full employment.”