When you fall short, do more.

For a while I though I was going crazy.  The Fed set some inflation and growth targets for 2013.  The Fed is falling short on both counts.  So the Fed should push harder on the accelerator.  Right?  Apparently not. But it’s good to know that at least one person at the Fed sees “logic” the way I do:

Here’s Narayana Kocherlakota:

But current monetary policy is typically thought to affect the macroeconomy with a one- to two-year lag. This means that we should always judge the appropriateness of current monetary policy in terms of what it implies for the future evolution of inflation and employment. Along those lines, after its most recent meeting, the FOMC announced that it expects that inflation will remain below 2 percent over the medium term and that unemployment will decline only gradually. These forecasts imply that the Committee is failing to provide sufficient stimulus to the economy.

. . .

To achieve its goals, the FOMC has taken some historically unprecedented monetary policy actions in recent years. But the U.S. economy is recovering from the largest adverse shock in 80 years””and a historically unprecedented shock should lead to a historically unprecedented monetary policy response. Indeed, the FOMC’s own forecasts suggest that it should be providing more stimulus to the economy, not less.

The commenter Vaidas called this statement “Svenssonian,” and he is right.

This is from a WSJ article on the talk:

“We’re not applying enough stimulus,” he said during the discussion. . . .

Mr. Kocherlakota, long a fan of clarity in Fed communication, acknowledged that economists have their own language, which can be complex with its ample mathematical equations. The event’s moderator quipped that economists should still be able to explain their theories in plain enough language so their mothers can understand.

Mr. Kocherlakota said, simply: “Well, my mother was a statistician.”

My mother was not, so I’d tell her:  “The Fed set (nominal) growth goals for the economy.  We are falling a bit short.  So to meet the goals we will apply a bit more stimulus.”  What would Bernanke tell his mother?

HT:  Clare Zempel, Vaidas

PS.  Comments will be answered with a delay.


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25 Responses to “When you fall short, do more.”

  1. Gravatar of Brian Donohue Brian Donohue
    5. September 2013 at 05:30

    Sir, you have convinced me. NGDP growth has been flagging for a year now and is currently hovering around 3%. Put the taper down, Ben.

  2. Gravatar of jknarr jknarr
    5. September 2013 at 05:56

    Mom, yes, ok, I know that our growth forecasts are falling short. Yes, I’d like to ease up, but you don’t know what I’m up against. These guys want less money and lower yields. If we really ease up policy, then the bond market dies fast and the dollar dies faster.

    I mean, look at what they did in Japan. if we did that, we’d be toast. No more petrodollar recycling, no more global bank tax and regulation powers, no more cheap imports. I’d have Washington howling about interest expenses, and they’d try to get me to buy their crappy paper anyway. I stimulate, and the value of your savings in stocks and bonds goes way, way down, mom. Did you buy gold like I said?

    Still, I’ve got time – nobody has a clue aside from that Sumner guy – can you believe that they still think low rates means easy policy? Thank god for that, or I’d also be out of a job, too. Ok, mom, gotta run. Yellen’s here. No, she’s not crying this time. Gotta run, bye.

  3. Gravatar of Michael Michael
    5. September 2013 at 05:59

    Steve Randy Waldman poses the question of what market monetarisk would have looked like in the 70s:

    http://www.interfluidity.com/v2/4561.html

  4. Gravatar of Vaidas Urba Vaidas Urba
    5. September 2013 at 06:06

    Some FOMC members might be against Svenssonian policy due to financial stability considerations, here is an excerpt from latest FOMC minutes:
    “Some participants also stated that financial developments during the intermeeting period might have helped put the financial system on a more sustainable footing, insofar as those developments were associated with an unwinding of unsustainable speculative positions or an increase in term premiums from extraordinarily low levels.”

    Interestingly, Kocherlakota is concerned about financial instability too:
    “These financial market phenomena could pose macroeconomic risks. In my view, these potentialities are best addressed through effective supervision and regulation of the financial sector. It is possible, though, that these tools may only partially mitigate the relevant macroeconomic risks. How, if at all, should the FOMC adapt monetary policy in response to any residual risk?
    To answer this question, the Committee will need to confront an ongoing probabilistic cost-benefit calculation. On the one hand, raising the real interest rate will definitely lead to lower employment and prices. On the other hand, raising the real interest rate may reduce the risk of a financial crisis””a crisis which could give rise to a much larger fall in employment and prices. Thus, the Committee has to weigh the certainty of a costly deviation from its dual mandate objectives against the benefit of reducing the probability of an even larger deviation from those objectives.”
    (April 18, 2013 “Low Real Interest Rates”)

  5. Gravatar of jknarr jknarr
    5. September 2013 at 08:11

    re: http://www.interfluidity.com/v2/4561.html

    This only works if you “look under the lamppost” with FRED’s 1952 data population set. If you use the full data set, you find that the baby boom was a reversion back to pre-depression/WWII population growth. In short, population growth returned to LR trend (just like NGDP should and will) after people stopped having- and killing- kids in the 1930s and 1940s.

    The population baby boom was a corrective to the abnormalcy of the 1930s/40s. Real growth per capita was strong in the 1970s, not weak. The inflation of the 1970s was monetary, and rooted in international factors — the end of Bretton Woods, oil, and the USD, rather than pure domestic factors.

    LR population, NGDP, RGDP, CPI data http://www.measuringworth.com/usgdp/

  6. Gravatar of J.V. Dubois J.V. Dubois
    5. September 2013 at 08:18

    Narayana Kocherlakota really went a long way during the last few years from defending structural story to defending monetary easing. Kudos to him for having courage to do that and for being able to make arguments for his case.

    Just one random thought – I just wonder, if views in Fed reflect views of broader economic profession, may this be a sign of how we will finally see the discussion conducted even outside of the Fed?

  7. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    5. September 2013 at 09:34

    It’s the zeitgeist, no one can be held responsible for anything. Not politicians running for office, even;

    https://www.youtube.com/watch?feature=player_embedded&v=gEH1HiTo8AA#t=12

  8. Gravatar of ChargerCarl ChargerCarl
    5. September 2013 at 12:20

    Cochrane:

    “By the way, I think when the dust has settled, history will be kind to Ben Bernanke. He fits most of my job description. Inflation is stuck at 2%, the world did not melt down, and we’re all gradually coming to the realization that if $2 trillion bucks of stimulus and zero interest rates didn’t bring our economy out of the doldrums, there really is nothing more that a central bank could do. The Phillips curve has been screaming “this is supply, not demand” for a few years now. Like any great general, we can argue with specific decisions, and much of the direction of Fed policy, and I have. But we have not lost the war.”

    http://johnhcochrane.blogspot.com/2013/09/fed-chair.html

  9. Gravatar of Joe C Joe C
    5. September 2013 at 15:45

    I would just tell my Mom that the economy is about to get a taper worm.

  10. Gravatar of lxdr1f7 lxdr1f7
    5. September 2013 at 18:19

    The main problem with monetary policy IMO is the mechanism. Its too bank oriented and dependant. I think policy needs to be conducted with a broader spectrum of the economy to be more balanced.

  11. Gravatar of Full Employment Hawk Full Employment Hawk
    5. September 2013 at 18:52

    “Cochrane… The Phillips curve has been screaming “this is supply, not demand” for a few years now”

    Cochrane really is totally clueless. If it were supply, the massive monetary expansion would be causing a huge inflation. The fact that this has not happened clearly shows that the problem is lack of demand.

    ” and we’re all gradually coming to the realization that if $2 trillion bucks of stimulus and zero interest rates didn’t bring our economy out of the doldrums, there really is nothing more that a central bank could do.” Cochrane is arguing that we are in a liquidity trap without realizing that this is what he is doing.

  12. Gravatar of Full Employment Hawk Full Employment Hawk
    5. September 2013 at 19:08

    “On the one hand, raising the real interest rate will definitely lead to lower employment and prices. On the other hand, raising the real interest rate may reduce the risk of a financial crisis” So the REALITY that the economy is still mired in a little depression that needs to be ended is being sacrificed for the PHANTOM MEANACE of a remote risk of another financial crisis.

    The reality is that the Fed continues to make monetary policy for the benefit of Wall Street and not Main Street. This raises some interesting questions. All of the members of the BOG have now been appointed by a Democratic president, and the Democrats are SUPPOSED TO represent the interests of working people, which the Fed is clearly not doing.

    President Obama has made the mistake of surrounding himself with economic advisors who are in tune with Wall street, and out of touch with Main street: The Robert Rubin gang. And one should not be surprised that they are using all their influence to make sure they can mislead President Obama into putting one of their own, Larry Summers, in charge of the Fed to prevent the danger that Yellen might make monetary policy for the benefit of Main Street.

  13. Gravatar of Full Employment Hawk Full Employment Hawk
    5. September 2013 at 19:12

    “And one should not be surprised that they are using all their influence to make sure they can mislead President Obama into putting one of their own, Larry Summers, in charge of the Fed”

    Progressive Democrats need to save President Obama from making such a serious mistake by putting their feet down and making it clear that they will vote against the confirmation of Summers. Obama could still get a majorty to confirm with Republican votes, but the risk of such a rebuke should deter his being nominated.

  14. Gravatar of Benjamin Cole Benjamin Cole
    5. September 2013 at 19:14

    Excellent blogging.

    Yes, the USA economy is below inflation and growth targets, wimpy though they are—so it is time to taper down, right?

    Is there any doubt that the Fed has become cloistered, insular, self-reverential?

    By any simple logic, the Fed should be consistently tapering up until targets are approached or hit.

    Lags? If you want to play the guessing game, then anyone can argue for anything. The economy will be roaring next year or in a deep recession.

    Or those “unquantifiable financial risks” will have destroyed us.

  15. Gravatar of Full Employment Hawk Full Employment Hawk
    5. September 2013 at 19:18

    “but the risk of such a rebuke should deter his being nominated.”

    After all the pressure Obama has been under from progressives to nominate Yellen, he may not want to do this because giving in to the pressure would make him look weak. The solution to this is to nominate Christina Romer, who would be an even better choice than Yellen. And that breaks the glass ceiling too.

  16. Gravatar of Full Employment Hawk Full Employment Hawk
    5. September 2013 at 19:22

    “Yes, the USA economy is below inflation and growth targets, wimpy though they are””so it is time to taper down, right?”

    RIGHT! Tapering up would be the rational, logical thing to do and central banks have a well established tradition of behaving in an irrational, illogical manner.

  17. Gravatar of Edward Edward
    5. September 2013 at 19:47

    FEH,
    Indeed they do!

    I just read John cochrane. He really, really, really pisses me off!!!
    He is a classic example of a VSP. What’s worse is that he doesn’t even seem aware of us!

    I vote we go troll his blog. Anybody up for it?

  18. Gravatar of ChargerCarl ChargerCarl
    5. September 2013 at 20:00

    ^cochrane doesn’t really respond to comments criticizing his macro

  19. Gravatar of Edward Edward
    5. September 2013 at 20:18

    Yeah I know,
    It really annoying its like he pretends we don’t exist

    But Scott could tear him apart in a debate or on his blog

  20. Gravatar of Lorenzo from Oz Lorenzo from Oz
    5. September 2013 at 23:29

    Charger Carl: I read comments like Cochrane’s and they make no sense to me. But I am in Australia and the notion that our economy is just magically much less supply-blockaged than the US’s seems just silly.

    Michael: Taking the point made by jknarr, the flood of workers into late C19th US with much lower levels of per capita capital should have led to massive inflation under Waldman’s argument.

    Demographic arguments about sustained inflation make no sense. All bidding up prices with magically acquired income to do so. How does that work? Yes, if labour supply increases faster than capital, then the value of capital is pushed up compared to labour, but that is a shift in relative prices, not the price level for goods and services. Say’s Law may have the problem that people run to safe assets when stressed, but that is (income from) supply going into assets rather than goods and services demand. Where is this demographically driven income coming from to continually drive up the price level?

  21. Gravatar of TravisV TravisV
    6. September 2013 at 04:57

    Stock market is up on this news:

    http://www.businessinsider.com/the-august-jobs-report-2013-9

    No more September taper?

  22. Gravatar of Full Employment Hawk Full Employment Hawk
    6. September 2013 at 09:03

    “The unemployment rate did, however, drop to 7.3%, but that’s basically just due to continued exodus from the workforce.”

    Maybe the FED’s strategy for getting the unemployment rate down to the 6% range is to drive enough workers out of the labor force to achieve this objective.

    Once again we see that the FED’s economic forecasts for this time had its usual bias of underestimating the unemployment rate and overestimating output.

    The FED’s forecasts have been consistently off in the same direction since the beginning of the recession. Somebody who is in a position to do so should use these sytematic errors to forecast the forecating errors of the FED.

  23. Gravatar of Lorenzo from Oz Lorenzo from Oz
    6. September 2013 at 15:03

    I should add that there is a theory that the Price Revolution (i.e. previous Great Inflation) of the C16th and C17th was due to demographic pressure.

    The various attempts to not have the simple explanation of much more silver (the dominant medium of account and exchange) in the Atlantic economy due to increased silver production in Central Europe and then the waves of silver from the American mines being the prime cause of the sustained upward tendency in the price level until the silver surge petered out in the 1640s or so is striking.

  24. Gravatar of ssumner ssumner
    6. September 2013 at 16:23

    Edward, Please don’t troll Cochrane.

    Lorenzo, I also wonder why people deny the obvious.

  25. Gravatar of Gör mer | Rättvist och balanserat Gör mer | Rättvist och balanserat
    9. September 2013 at 03:36

    […] Sumner pÃ¥ The Money Illusion verkar vara frustrerad över Fed pÃ¥ liknande grunder som Lars E.O. Svensson över […]

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