The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.
- BLS Handbook of Methods
- Bureau of Economic Analysis
- Bureau of Labor Statistics
- Congressional Budget Office
- Economic Data - FRED® II, St. Louis Fed
- Office of Management and Budget
- Statistics: Releases and Historical Data, Board of Governors
- U.S. Census Bureau Economic Programs
- White House Economic Statistics Briefing Room
June 16, 2005
What's The Fed Up To?
If you are a reader of this weblog, I suspect that you have already taken a good look at the most recent edition of Econblog from the Wall Street Journal Online, wherein two of my favorite bloggers, Mark Thoma and Barry Ritholz share their praise (there, I think, in Mark's comments), criticisms (definitely there in Barry's comments), and advice for Alan Greenspan and company. The whole conversation is worthwhile, but what caught my attention (as a commentator) was this assertion from Mr. Ritholz: (in response to Dr. Thoma's support of formal inflation targeting):
Inflation targeting is a nice idea in theory, but in practice, the Fed has been much more active, undertaking a far broader set of policy initiatives. Indeed, many of the Fed's actions, as well as the policy pronouncements of its members, can be viewed as the central bank careening from one Fed-created problem ("mess" might not be too strong a word) to the next.
Maybe, just maybe, the behavior of the Federal Open Market Committee is a little less complicated than people make it out to be. In a post several months back, I noted this in discussing a speech by Ben Bernanke:
[Bernanke] suggests that monetary policy is more productively thought of as a framework that guides the central bank in its decision-making process, and offers two alternatives for consideration. The first:
Under a simple feedback policy, the central bank's policy instrument--the federal funds rate in the United States--is closely linked to the behavior of a relatively small number of macroeconomic variables, variables that either are directly observable (such as employment or inflation) or can be estimated from current information (such as the economy's full-employment level of output)...
A classic example of a simple feedback policy is the famous Taylor rule (Taylor, 1993). In its most basic version the Taylor rule is an equation that relates the current setting of the federal funds rate to two variables: the level of the output gap (the deviation of output from its full-employment level) and the difference between the inflation rate and the policy committee's preferred inflation rate.
OK, then, what would a Taylor-rule formulation, estimated to fit Greenspan-era federal funds rate choices, tell us about the recent behavior of the FOMC? Here's a picture:
A couple of interesting things emerge from this picture.
-- Given the path of inflation and GDP (relative to estimated potential), and the average response to those variables embodied in the Taylor rule, monetary policy does indeed appear to have been relatively tight in the period from late 1994 through 1995.
-- The extraordinary reductions in the federal funds rate target in 2001 just don't look that extraordinary (again, given the "output gap" and realized rates of inflation).
-- It appears that the Committee was doing exactly what it said it was doing in the period from mid-2003 through mid-2004: Maintaining a federal funds rate target that was lower than they might have normally chosen based on the economic statistics alone. Over that period, the funds rate target was lower than what one would predict on the basis of past FOMC behavior and the levels of GDP and inflation.
-- The 200 basis point increase in the federal funds rate target that commenced last summer appears to have put policy back on track with the Taylor rule.
More to follow...
TrackBack URL for this entry:
Listed below are links to blogs that reference What's The Fed Up To? :
Is Everything Really Getting More Expensive, Or Is It Just Clever Manipulation?
Investment Advice, Personal and Individual Insurance, Investment
The Government has no income, except taxes paid by the producers of this country. However, because of unrealistic promises made to its citizens, it initiates a con game of sorts; borrowing money from you today, which is to be repaid out of money it wil... [Read More]
Tracked on May 22, 2008 7:00:26 PM
- GDPNow's Second Quarter Forecast: Is It Too High?
- Are Small Loans Hard to Find? Evidence from the Federal Reserve Banks' Small Business Survey
- Slide into the Economic Driver's Seat with the Labor Market Sliders
- The Fed’s Inflation Goal: What Does the Public Know?
- Going to School on Labor Force Participation
- Bad Debt Is Bad for Your Health
- Working for Yourself, Some of the Time
- Gauging Firm Optimism in a Time of Transition
- Can Tight Labor Markets Inhibit Investment Growth?
- More Ways to Watch Wages
- May 2017
- April 2017
- March 2017
- February 2017
- January 2017
- December 2016
- November 2016
- October 2016
- September 2016
- August 2016
- Business Cycles
- Business Inflation Expectations
- Capital and Investment
- Capital Markets
- Data Releases
- Economic conditions
- Economic Growth and Development
- Exchange Rates and the Dollar
- Fed Funds Futures
- Federal Debt and Deficits
- Federal Reserve and Monetary Policy
- Financial System
- Fiscal Policy
- Health Care
- Inflation Expectations
- Interest Rates
- Labor Markets
- Latin America/South America
- Monetary Policy
- Money Markets
- Real Estate
- Saving, Capital, and Investment
- Small Business
- Social Security
- This, That, and the Other
- Trade Deficit
- Wage Growth