Monetary Policy: Some Fairly-Recent Should- and Must-Reads
Two and a half years after Jared wrote this, and there is still no sign that the economy has reached "full employment", or that the pace of wage and price growth is even beginning to spiral upwards. Thus he Federal Reserve continues to work with a model of the economy in which we should have very little confidence, if any: Jared Bernstein (2016): Important new findings on inflation and unemployment from the new ERP: "The 'Phillips curve'... negative correlation between inflation and unemployment...
Martin Sandbu: The devastating cost of central banks’ caution: "Timidity on monetary policy since 2008 has been as costly as the financial crisis...
But are we sure that our debts are in dollars? Would we know it if the big New York banks had been trying to boost their earnings by selling unhedged dollar puts, in the (probably correct) belief that if they all do this together they do not have a problem, the rest of us have a problem?: Paul Krugman: Opinion | Partying Like It’s 1998 - The New York Times: "Those of us who devoted a lot of time to understanding the Asian financial crisis two decades ago were wondering whether Turkey was going to stage a re-enactment. Sure enough...
See: here is another study that finds a lot of hysteresis—an ungodly amount: Christina D. Romer and David H. Romer: Why Some Times Are Different: Macroeconomic Policy and the Aftermath of Financial Crises: "Analysis based on a new measure of financial distress for 24 advanced economies in the postwar period shows substantial variation in the aftermath of financial crises...
Very much worth reading from Nick Bunker: Nick Bunker: Puzzling over U.S. wage growth: "Hiring has not been particularly strong during this recovery...
Larry plumps for nominal GDP targeting: Lawrence Summers: Why the Fed needs a new monetary policy framework: "A monetary framework... should... [have] enough room to respond to a recession... nominal interest rates in the range of 5 percent in normal times...
Mark Thoma sends us to: P.J. Glandon, Ken Kuttner, Sandeep Mazumder, and Caleb Stroup: Macroeconomic Research, Present and Past: "Macroeconomics journals have published an increasing share of theory papers over the past 38 years, with theory-based papers now comprising the majority of published macroeconomics research...
The Ahistorical Federal Reserve: The most effective–and thus the most credible–monetary policy is one that reflects not only the lessons of history, but also a willingness to reconsider long-held assumptions. Unfortunately, neither attribute is much in evidence at today's Federal Reserve: BERKELEY–Economic developments over the past 20 years have taught–or ought to have taught–the US Federal Reserve four lessons. Yet the Fed’s current policy posture raises the question of whether it has internalized any of them...
Marti Sandbu: EuroTragedy: A Drama in Nine Acts, by Ashoka Mody: "Writing about the euro... doing justice to the technicalities threatens to kill any narrative, while simplified storytelling risks misguided analysis. Ashoka Mody’s... is an ambitious attempt to avoid this trap...
Event studies are very dangerous tools if you truly seek robust identification for policies that operate through expectational channels: Joseph Gagnon: QE Skeptics Overstate Their Case: "David Greenlaw, James Hamilton, Ethan Harris, and Kenneth West... argued that the consensus of previous studies overstates the effects of quantitative easing (QE) on long-term interest rates...
I would say: "policy was fantastic between Lehman and the trough, grossly subpar after the trough, and —if you believe the Fed—criminally negligent before Lehman": Niccola Gennaioli and Andrei Shleifer: A Crisis of Beliefs: Investor Psychology and Financial Fragility: "Instability from Beliefs...
The Argument for Lots of Remaining Labor-Market Slack, Graphically...
If real wages are not growing faster than productivity, we are not yet at full employment. We aren't: Matthew Yglesias: "I think it [a labor shortage] would be a good thing, but it’s also mostly fake. We had a labor shortage in 1999 and it was glorious. I think we’ll get there again. But not yet..." Josh Barro: 'Labor shortage' is good news for workers: "For now, the coming "labor shortage" is good news for workers. We should root for it to continue. It's undoubtedly a headache for some owners and managers. But it's one they should, hopefully, be made to live with for a few years..."
If you take the appropriate measure of labor market tightness to be the prime-age employment rate, there is no wage growth puzzle. So why does the Federal Reserve take the unemployment rate as the relevant labor market tightness variable and wring its hands about the wage-growth puzzle, rather than taking the prime-age employment rate as its relevant labor market tightness variable? It is a mystery: Adam Ozimek: Wage growth is right on target folks!
Robin Wigglesworth: Flat yield curve sends a grim message for investors in 2019: "investors are now starting quietly to fret that the US central bank may be on the brink of making a mistake, tightening monetary policy too aggressively in the face of a vulnerable global economy and still-quiescent inflationary forces. The Fed might get away with two hikes this year, but markets should worry about what might come in 2019..."
The argument against Nouriel is that asset markets are still placing high valuations on everything. The argument against taking that as a sign of optimism is that true apocalypse scenarios are not priced: there is no place to hide, so fear of them produces no pressure to sell anything: Nouriel Roubini: Trump May Kill the Global Recovery: "How does the current global economic outlook compare to that of a year ago?..
I think that this is a very important thing to remember. The Fed View—and the zero-marginal-product workers view—and a lot of other pessimistic views about the economy's non-inflationary speed limit for recovery and growth were totally, catastrophically wrong over the past decade. The people who strongly advocated for such views thus had a badly-flawed Vision of the Cosmic All. Thus I think there is no reason to put a weight higher than zero on their current views of how the world works—unless they have publicly and substantially done the work to mark their beliefs to market. Certainly the Federal Reserve has not yet done so: Timothy B. Lee: "Every additional month of strong employment growth and weak wage growth makes people who said we were near full employment in 2014, 2015, 2016, and 2017 look wronger..."
Given the magnitude of the shocks that have hit the world economy since 2005, Alan Greenspan's decision in the mid-1990s to set the Federal Reserve's inflation target at 2% per year rather than 3% or 4% per year looks like a bad mistake. Given what they learned and what we are still learning since 2005, Ben Bernanke, Janet Yellen, and now Jay Powell's refusal to revisit Greenspan's decision is more likely than not to prove a worse mistake. So I go further out on this limb than does the very sharp Karl Smith: Karl Smith: Hey Fed, Don’t Be Scared of a Little More Inflation: "Even if the economy is at full employment, there’s benefit to letting it run hot for a while...
Tim Duy: Powell Wants to Create Some Mystery Around Fed Meetings: "A slower or faster pace of rate hikes, an extended pause, or even a cut are all possibilities at this point...
Ryan Avent: Bond yields reliably predict recessions. Why?: "An inverted yield curve may mean a few things, none of them cheering...
I badly need to find a usable mental model of how employer-side monopsony in labor markets interacts with downward nominal wage rigidity and search and involuntary unemployment. Analyzing just one of these market failures at a time is just not cutting it for me as I try to understand what is going on: Heidi Shierholz and Elise Gould: Why is real wage growth anemic? It’s not because of a skills shortage: "Despite an unemployment rate at 4.1 percent or less since last October, wage growth has been anemic...
A very nice article from the very sharp Justin Lenhart on one of the three things the Federal Reserve is missing right now. The first thing the Fed misses is that, at least as long as the current interest rate configuration holds, they need an inflation rate of 4% per year not 2% per year, in order to have enough running room to fight next recession. The second thing the Fed misses is that the slope of the Phillips curve has changed, and so going for faster growth and higher employment right now is not risky but, rather, harvesting low-hanging fruit. The third thing the Fed misses is that a near-inverted yield curve is a danger sign—and yet the Fed is, as in 2006, finding reasons to pretend that "this time is different". I confess that fed thought—the governors, the bank presidents, and the staff—is quite opaque to me right now: I do not understand why they are making the analytical judgments that they are making: Justin Lahart: What the Fed Is Missing, Again: "The Federal Reserve isn’t worried about the yield curve, and it has reason why. The problem: It is pretty much the same reason it wasn’t worried about the yield curve before the financial crisis...
Marco Cipriani and Gabriele La Spada: The Premium for Money-Like Assets: "We estimate such premium using a quasi-natural experiment, the recent reform of the money market fund (MMF) industry...
The extremely sharp Tim Duy provides us with not a recession signal but rather with a signal that current Fed policy is going to provide us with a recession signal: Tim Duy: Fed Pushing Ahead Toward Inversion: "I fully expect the Fed will continue hiking rates if the yield curve inverts unless there is a clear financial meltdown at that time...
Blaming the Pollyannaish fecklessness of the Bank of England on the feckless indolence of Britain's reporters: Simon Wren-Lewis: How UK deficit hysteria began: "Monetary policy ran out of reliable levers to manage the economy. However, journalists wouldn’t know that from the Bank of England, who tended to talk as if Quantitative Easing was a close substitute to interest rates as a monetary policy instrument...
Stefan Gerlach and Rebecca Stuart: The Term Structure and Recessions Before the Fed: "The results... (1) A flattening of the term spread increases the risk of recession...
Paul Krugman: Monopsony, Rigidity, and the Wage Puzzle: "(1) The wage puzzle:F rom the mid-1990s until the 2008 financial crisis, it looked as if there was a fairly stable Phillips curve...
It is not clear to me that this is right. It is not clear to me that this is wrong. I need to think about this more: a lot more: Narayana Kocherlakota: Practical Policy Evaluation: "How should a policymaker, who is making but one in a long sequence of choices over time, use the available data to arrive at a decision?...
Since the mid-1990s we have been, once again, living in a world in which John Maynard Keynes is the most relevant economist to understanding our situation. Robert Skidelsky knows Keynes better than Keynes knew himself. Thus this is likely to be the most valuable economics book you read this year: Robert Skidelsky (2018): Money and Government: The Past and Future of Economics (New Haven: Yale University Press: 0300240325) https://books.google.com/books?isbn=0300240325
Tim Duy: The Fed Has Enough Room to Combat the Next Crisis: "The Fed has more than enough room to replicate the responses to the 1987 stock market crash or the 1997 Asian financial crisis...
2008-2012 was, apparently, not enough for the Great and Good of Germany to decide to repair the Eurozone and European Union's structural economic flaws: Wolfgang Münchau: Eurozone downturn and lack of reform presage existential crisis: "A slowdown mixed with a monetary union unwilling to repair itself would be a risk to the global economy...
Paul Krugman attempts to summarize the state-of-play on the slack-and-wages puzzle: Paul Krugman: Opinion | Monopsony, Rigidity, and the Wage Puzzle: "The unemployment rate... suggest[s] an economy pretty much at full employment...
Ernie Tedeschi: "Jason... 3 points https://twitter.com/ernietedeschi/status/994244992045547520: The 1st is: if... prime-age... EPOP... better... than the headline unemployment rate, then why haven't wages accelerated more, given those measures have improved faster than U3?...
Very much worth reading from Nick Bunker: Nick Bunker: Puzzling over U.S. wage growth: "Hiring has not been particularly strong during this recovery...
Interesting and, I think, correct on the costs, benefits, risks, and opportunities from the keen-witted President of the Federal Reserve Bank of Minneapolis: Neel Kashkari: The Fed should not move too quickly to raise rates: "The US recovery took place after the Federal Reserve undertook extraordinary monetary policies... S
Will the Trump Fed be "normal"? I will give Ken Randy Quarles. I grant Rich Clarida. But Marvin Goodfriend does not seem to me to be a particularly normal Federal Reserve appointment. He's one of the "debasement" crowd who had no respect for Ben Bernanke's judgment and tried as hard as they could to limit his freedom of action. If that's "normal", "normal" is not a good thing. And otherwise... a lot of unfilled seats. I told Jason Furman he needed to fill up the Fed Board on January 4, 2017. He did not do so: Ken Rogoff: Donald Trump’s Normal Fed : "Unfortunately, the battle for the Fed’s independence is far from over...
The behavior of the Federal Reserve remains a puzzle. They seem to be reacting month-to-month, and to be happy with their current policy stance of gradual raising until and unless something goes wrong. They do not seem to be thinking down the game tree very far—not taking account of how their current policy stance exposes them to huge downside risks should low r-star continue, should "secular stagnation" be the correct diagnosis, and should there be any kind of significant adverse demand shock to the economy: Tim Duy: Set To Stay On Current Path: "When is the economy at or beyond full employment?...
Federal Reserve Bank of San Francisco: Leadership and Membership Announcements: "Tamara Lundgren, president and CEO, Schnitzer Steel Industries, Inc., Portland, OR, has been elected as a class B director...
Janet Yellen: Statement on the Appointment of John Williams as President of the Federal Reserve Bank of New York: "I strongly support the appointment of John Williams as President of the Federal Reserve Bank of New York...<
Lawrence Summers: “A strong, fully employed economy—where firms looking for workers is a larger issue than workers looking for firms...
Charles Plosser (2008): Meeting of the Federal Open Market Committee on March 18, 2008
Belle Sawhill: Inflation? Bring It On. Workers Could Actually Benefit: "Even if inflation does creep up above 2 percent, we shouldn’t be too worried...
Nick Bunker: Just how tight is the U.S. labor market?: "Spoiler: There’s room for the job market to improve...
