Wise comments from the ECB

Yes, you read that correctly.  Here’s a recent news story:

FRANKFURT (Reuters) – U.S. rate hikes could have greater global repercussions than in the past and affect the euro zone more in some respects than the domestic market, European Central Bank Vice President Vitor Constancio said on Thursday.

A Federal Reserve rate rise would have a bigger impact because emerging markets, particularly China, are more integrated into the global economy than before, countries are more interlinked in production, cross-border capital flows have increased, and forward guidance has become a crucial monetary policy instrument, Constancio said.

China’s economy is now as big as the US economy, and with its currency loosely fixed to the dollar, it is directly impacted by Fed policy. And forward guidance is much more important than the current rate setting.

An additional hurdle is that central banks do not have experience in raising interest rates from an extended period at zero, so they will have to learn through practice, without a full understanding of how economies and markets may respond, Constancio told a conference in Hong Kong.

The biggest global impact of a Fed hike will be through capital markets, not international trade, and German yields already follow the change of U.S. yields in response to Fed tightening by more than one third, Constancio said.

“Overall, the evidence even suggests that spillovers from U.S. monetary policy might be larger (on the euro area) than the domestic effects in the U.S.,” Constancio said.

I think the effect is still stronger in the US, but the need for monetary stimulus is much greater in Europe, so I can see how Constancio would have that perception.  The global economy is particularly sensitive to a slowdown in Chinese investment. Less Chinese investment means reduced commodity exports from Brazil, and lower capital goods exports from Germany. The problem is not just that Chinese growth is slowing, but also that it’s shifting toward consumer goods and services, which are mostly produced within China.

On another topic, I was criticized last month for saying that the market response to the recent Fed meeting was muddled, and hard to interpret.  Some felt that it clearly showed the markets did not oppose a rate increase, or perhaps even favored one.  That’s possible, but I remain skeptical.  Hardly a day goes by without stories like this:

German Bund yields rose on Friday, with investors preferring stocks after minutes of the Federal Reserve meeting suggested that the U.S. central bank was not in a hurry to raise interest rates.

I’ve closely follow market responses to Fed policy for decades, and seen hundreds of similar stories. Any single story can be questioned, but is it likely they are all incorrect?  I’ll keep an open mind on the question, but I am reluctant to change my views based on one confusing market response.

PS.  Over at Econlog I have a reply to Kevin Drum

 


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32 Responses to “Wise comments from the ECB”

  1. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    15. October 2015 at 05:46

    ‘An additional hurdle is that central banks do not have experience in raising interest rates from an extended period at zero….’

    How is it possible to be so confused? Want higher interest rates? Raise GDP.

    Or lower the ‘price of money’ (i.e., what people have to give up in order to buy it). Markets will then raise interest rates (i.e., the price of renting money) without any ‘setting’ by the Fed.

  2. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    15. October 2015 at 05:54

    Shouldn’t Chinese central bankers take care of their own monetary policy ?

  3. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    15. October 2015 at 06:22

    Congrats to the Equitablog’s Nick Bunker for getting something right, about interest rates;

    http://equitablegrowth.org/the-importance-of-low-u-s-interest-rates-in-the-long-run/

    ———-quote———
    A few months ago, the President’s Council of Economic Advisers released a report looking through potential reasons why the long-term rates have declined so much. The council notes that some of the forces currently pushing down long-term rates are fleeting and should dissipate. They include the fiscal and monetary policies taken to fight the Great Recession, and the private-sector pull back on debt in the wake of that sharp 2007-2009 downturn.

    But there are also forces that appear to be more permanent””forces that all result in the supply of savings growing faster than the demand for investment. (The interest rate, remember, is the “price” of loanable funds that balances the amount of funds that savers supply and that investors demand.) These forces include declining long-run productivity growth, slower population growth across the globe, and increasing savings rates by developing and now developed countries””the so-called “global savings glut.”

    As University of Chicago economist John Cochrane points out, economics has a good grasp on how these different factors can push down long-term interest rates. What the field isn’t good at, however, is understanding just how much each factor contributes to the decline. Cochrane notes that the Council of Economic Advisers report cites many estimates of the different effects, and they can differ by quite a bit. While there’s strong evidence for the importance of these different effects, the precision just isn’t there. There’s a reason why the report notes that the question of why rates are so low is “one of the most difficult questions facing macroeconomists today.”
    ——-endquote———

    My bold above.

  4. Gravatar of Vivian Darkbloom Vivian Darkbloom
    15. October 2015 at 06:29

    “On another topic, I was criticized last month for saying that the market response to the recent Fed meeting was muddled, and hard to interpret. Some felt that it clearly showed the markets did not oppose a rate increase, or perhaps even favored one.”

    Hmmm. I was one of those who criticized you last month, but certainly not for the reason you state—in fact, it was the opposite– (and, I’m pretty sure this was not the objection of Henderson or Murphy). The criticism was that you claimed this was “as if there were no experiment”, and then, in the face of such objections, the revised position that the evidence from such experiment was dropped on the floor, etc, before we could read the results. This, against the background of your own earlier position that the markets are indeed a clear indicator. Lest you claim that this is “just about semantics”, well, in a sense it is. It is an objection to *your* semantics which have more than just “semantic” implications.

    As for those “some” “who felt it clearly showed the markets did not oppose a rate increase or perhaps even favored one”, it is unclear to me who those persons are. Would you be so kind as to name names, Scott?

    And, as for the markets “preferring raising rates or not”, in the context of the German Bund yields versus stocks, this would not necessarily be a question not of the preference of “markets”, but the relative preference for one asset class over another.

  5. Gravatar of Vivian Darkbloom Vivian Darkbloom
    15. October 2015 at 06:31

    *a question of the preference of “markets”….”

  6. Gravatar of Dan W. Dan W.
    15. October 2015 at 06:32

    If one wanted to find inflation it is there – in rents & health care. For many people these two goods consume 30 – 40% of income. The cost of government, another 20 – 30% of income, is not going down – does it ever? So two-thirds of most people’s consumption is in goods that are increasing in price! Glory be it that temporary discounts in food & energy are enough to justify ZIRP and further bolstering of failing, over-levered, balance sheets.

  7. Gravatar of collin collin
    15. October 2015 at 06:43

    My simple take is the Fed is looking at 5.1% US unemployment and wondering why everybody, Fed included, thinks the economy sucks so much. From all past experience, it seems like a good time to raise rates but inflation and wages are not growing. The US dollar appears to strengthening because we are the ‘cleanest shirt’ in the dirty laundry.

  8. Gravatar of TravisV TravisV
    15. October 2015 at 07:24

    It appears investors care more about the ECB’s Nowotny than Vitor Constancio……

    http://uk.reuters.com/article/2015/10/15/uk-ecb-inflation-nowotny-idUKKCN0S90MD20151015

    http://www.reuters.com/article/2015/10/15/global-forex-idUSL8N12F2U520151015

    “ECB’s Nowotny calls for new instruments to boost growth, inflation”

    “Nowotny easing talk nudges euro lower”

  9. Gravatar of TravisV TravisV
    15. October 2015 at 07:33

    “ECB’s Nowotny has gotten all dovish overnight, a quick reversal from 3weeks ago”

    http://www.businessinsider.com/trader-chat-october-15-2015-10

  10. Gravatar of TravisV TravisV
    15. October 2015 at 07:59

    Hmmmm.

    ECB’s Nowotny calls for new instruments to boost growth, inflation……”Prescriptive rules will wind up being behind the curve,” said Dudley, who did not comment on the outlook for the economy or monetary policy.

    http://www.reuters.com/article/2015/10/15/usa-fed-dudley-idUSW1N11201U20151015

  11. Gravatar of TallDave TallDave
    15. October 2015 at 10:28

    Well, when you have dollarization and pegs, that’s going to happen.

    China in finding out it can’t have it’s own monetary policy and a peg at the same time. Given that various measures suggest China may be in recession right now, they probably want a different monetary policy than the United States. So when they inflate domestically, that requires them to support the peg, because there are more yuan and the same amount of dollars. Oops, we had to buy those new yuan back to support the peg.

    When they were growing they could print more yuan and stay on the peg, because the purchasing power of yuan was increasing with their economic growth. Now…

  12. Gravatar of ssumner ssumner
    15. October 2015 at 12:09

    Jose, Yes, but they need a floating yuan to do that.

    TravisA and Patrick, Thanks for the links.

    Vivian, You said:

    “As for those “some” “who felt it clearly showed the markets did not oppose a rate increase or perhaps even favored one”, it is unclear to me who those persons are. Would you be so kind as to name names, Scott?”

    Evan Soltas is one name, from the same comment thread that you didn’t even bother to check out before writing your silly comment.

    https://www.themoneyillusion.com/?p=30645#comment-401179

    And here’s Fortune:

    http://fortune.com/2015/09/18/stock-market-dow-drops-fed/

    And the WSJ:

    http://www.wsj.com/articles/shares-fall-after-fed-reserve-keeps-rates-on-hold-1442563519?mg=id-wsj

    And here’s the Guardian:

    http://www.theguardian.com/business/live/2015/sep/18/asian-stock-markets-mixed-as-us-federal-reserve-keeps-rates-on-hold-live

    And the Financial Times:

    http://www.ft.com/intl/cms/s/0/9662eb92-5dad-11e5-9846-de406ccb37f2.html#axzz3oad1cwX3

    And here’s CNBC:

    http://www.cnbc.com/2015/09/18/stocks-open-sharply-lower-on-fed-uncertainty.html

    And here’s America’s Markets:

    http://americasmarkets.usatoday.com/2015/09/18/stock-futures-rise-in-wake-of-fed-call/

    Next time you can do your own googling.

    As far as the rest of your rambling comment, I’m with Dustin:

    https://www.themoneyillusion.com/?p=30645#comment-401465

  13. Gravatar of Vivian Darkbloom Vivian Darkbloom
    15. October 2015 at 12:14

    Scott, so you didn’t actually mean to suggest that the list of people above were criticising you?

  14. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    15. October 2015 at 12:40

    Too bad Robert Z. Lawrence wasn’t around to ask questions at the Democrat’s debate;

    http://www.voxeu.org/article/explaining-recent-declines-labour-s-share-us-income

    ———–quote————
    Using regressions that produce estimates of both the elasticity of substitution between capital and labour and the magnitude of capital and labour augmenting technical change, I find that the elasticity of substitution is generally less than one in many US industries as well as the US economy as a whole. The estimates also imply the effective capital-ratio has actually fallen in many industries because the measured rise in the (physical) capital-labour has been more than offset by an acceleration in the pace of labour augmenting technical change.

    In combination, these estimates of low substitution elasticities and declines in the effective capital-labour allow me to account for much of the decline in labour’s share in the US sectors and industries (such as manufacturing, mining, and information technology) that are responsible for most of the decline in labour’s share in income.
    ….

    The policy implications of this alternative explanation are profoundly different from those advocated by Piketty. Piketty advocates taxing capital. But if σ is < 1, increasing taxes on capital could lead to further reductions in labour’s share! Paradoxically, with σ < 1, policies that increase investment and the supply of capital could achieve more equal distributions of income. Accordingly lower taxes on capital and a progressive consumption tax could be the most effective approach to boosting investment and reducing US income inequality.
    ———–endquote————–

  15. Gravatar of Vivian Darkbloom Vivian Darkbloom
    15. October 2015 at 13:11

    Just to be even more clear, Scott, I think it has been more than adequately established that neither I, Murphy or Henderson criticized you for asserting that the results of that “experiment” were muddled or unclear. You were “criticized” a term to use only if you want to take disagreement as personal and perjorative, for something else. So, to identify those who actually did “criticize” you for asserting that the results of the experiment were muddled or unclear, I assumed, based on grammar and logic, that those “some” of whom you have now kindly provided a list, must be those critics. If they are not, those critics are either still unidentified or they don’t exist.

  16. Gravatar of Ray Lopez Ray Lopez
    15. October 2015 at 18:01

    Sumner: “China’s economy is now as big as the US economy” – bogus, unless you (1) believe the stats (inflated) and (2) use the speculative PPP method of computing value, using an ‘international unit of currency’ which is wrong. A good pizza in Beijing does not taste the same as a good pizza in New Jersey, the quality is much different and you can taste it.

  17. Gravatar of Scott Sumner Scott Sumner
    16. October 2015 at 07:01

    Vivian, You said:

    “Scott, so you didn’t actually mean to suggest that the list of people above were criticising you?”

    Here’s a general rule. If I don’t say a list of people are criticizing me, then I am not suggesting they are criticizing me. I try to say what I mean.

    You are a very strange person.

    Ray, Beijing has far better food than New Jersey.

  18. Gravatar of Vivian Darkbloom Vivian Darkbloom
    16. October 2015 at 08:50

    Scott,

    I’m not going to respond in kind with an ad hominem attack. The question is simple:

    Who are those people you claimed ” criticized (you) last month for saying that the market response to the recent Fed meeting was muddled, and hard to interpret”?

  19. Gravatar of DF DF
    16. October 2015 at 09:19

    Scott,

    What monetary tools does Texas have at its disposal? Or perhaps you meant other “economic policies” like minimum wage? Thanks.

  20. Gravatar of pmsap pmsap
    16. October 2015 at 14:45

    The funny part is when the market investment department suggests (among many other possibilities) ngdplt but the research (mostly academic) department has no clue what ngdplt means.

  21. Gravatar of Christian List Christian List
    16. October 2015 at 18:36

    @Ray Lopez
    “A good pizza in Beijing does not taste the same as a good pizza in New Jersey, the quality is much different and you can taste it.”

    If you want to eat a good pizza in New Jersey you really need to know the very few restaurants that are serving real pizza. Even most “Italian” restaurants in the US don’t serve real pizza. If you want a pizza in Beijing you must be crazy because there is too much other great food.

    You seem to be the kind of guy that orders Chinese food when he’s in Napoli and pizza when he’s in Beijing.

  22. Gravatar of ssumner ssumner
    17. October 2015 at 07:11

    Vivian, You are upset by “ad hominem attacks”? Perhaps you’ve forgotten about your many past ad hominem attacks on me.

    DF, Clearly they don’t have any.

  23. Gravatar of Vivian Darkbloom Vivian Darkbloom
    17. October 2015 at 07:22

    Thanks for answering the question, Scott. That’s all I need to know.

  24. Gravatar of ssumner ssumner
    17. October 2015 at 08:35

    Vivian, OK, You criticized me.

    Go back and read Dustin’s comment in the original thread, it nice captures my view as to what sort of a crank you are. I have no idea what point you were even trying to make, other than pick a trivial fight over terms like “experiment”, for no apparent reason at all. There’s nothing at stake here—as far as I can see.

    And thanks for not responding to my claim that you engage in ad hominem attacks, that’s all I need to know.

  25. Gravatar of Vivian Darkbloom Vivian Darkbloom
    17. October 2015 at 09:00

    Scott,

    I’d ask you to point out the many times I’ve made ad hominem attacks on you, but, you’d likely respond (if you do at all) that I could google it myself. I’m not aware of any such instances, but if there were any, I apologize.

    As for my “criticism” of you, if I’m the one you were pointing at in the original post, I’ve responded already—I disagreed (along with others) to what you wrote, but, once again, clearly not for the reason you now claim. And, I’m not the one that picked the fight—two other commenters made quite similar objections and I detected in your responses to them that you were perhaps trying to respond to those objections (or crticism’s if you will) in a manner that did not adequately respond to the objection. It’s hard to imagine after all this that you have, at this late stage, finally come out with who that critic was. Why was that so hard?

    As for Dustin, he’s entitled to his own opinion, but it was only that. I intentionally left him out of the “debate” because my disagreement was with you. I don’t need anyone else to play my cards for me and I’m not into choosing up sides.

    And, if think you are taking the high road here Scott, it’s a mystery to me why you still insist on name-calling, even in that last comment.

  26. Gravatar of Vivian Darkbloom Vivian Darkbloom
    17. October 2015 at 09:16

    One other point Scott. In that last exchange we had over that issue, you proposed a little deal. I answer your question and you answer mine. I let you off the hook there and I didn’t have to. I could easily have done so—or worse, started name calling. What do you expect me to conclude from that? That I’m “strange”, a “crank”, “etc”? Or, as you are sometimes fond of calling other commenters here, that I’m an imbecile or an idiot—or worse?

    Time for some reflection, Scott.

  27. Gravatar of Ray Lopez Ray Lopez
    17. October 2015 at 10:10

    @Vivian Darkbloom–ah, so who is trolling now? You sound like a jilted teen lover. I concluded long ago Sumner is a polemicist, something you just figured out now and are having a hissy fit online.

  28. Gravatar of Vivian Darkbloom Vivian Darkbloom
    17. October 2015 at 10:38

    Ray,

    I’ll give you this. You are efficient. You managed to insult two people in one paragraph.

  29. Gravatar of ssumner ssumner
    18. October 2015 at 06:22

    Vivian, You said:

    “I’m not aware of any such instances, but if there were any, I apologize.”

    I treat commenters well as long as they treat me well. If you don’t even know that you frequently insulted me in past comment sections then I feel sorry for you.

  30. Gravatar of Vivian Darkbloom Vivian Darkbloom
    18. October 2015 at 06:45

    OK Scott. Give me some examples of my ad hominem attacks on you. Have I ever called you “strange”, a “crank”, etc?

    Don’t confuse people disagreeing with you and challenging you for some of the things you write here as insulting or ad hominem.

  31. Gravatar of ssumner ssumner
    19. October 2015 at 08:26

    You have repeatedly accused me of being intentionally dishonest when we differed in how to interpret a specific point. I don’t have time to dig them all up (or even know how to search comments–my search command seems to work for posts not comments.) In any case, it makes no difference to me if you don’t accept my claim.

  32. Gravatar of Vivian Darkbloom Vivian Darkbloom
    19. October 2015 at 11:24

    Thanks, Scott. That’s very helpful.

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