The Atlanta Fed's macroblog provides commentary on economic topics including monetary policy, macroeconomic developments, financial issues and Southeast regional trends.
- 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
March 07, 2011
One chasm that really isn't one
Floyd Norris, writing last Friday in the The New York Times, fretted about "The Chasm Between Consumers and the Fed." We here at the Atlanta Fed share some of that concern, and indeed the Times article quotes from a speech by our president Dennis Lockhart on just that subject from last month. But then Norris takes a turn I didn't expect. Norris's Times article includes the following chart…
…and the article proceeds:
"The Fed's goal is to keep the inflation rate at or near 2 percent, and it does not expect a significant increase for at least a few years. … The stock market is generally thought to do better when inflation is falling, but Martin Fridson, the global credit strategist for BNP Paribas Investment Partners, points out that is not always the case. There is, he says, a time when inflation is too low.
"The accompanying chart, based on a report by Mr. Fridson, shows that from the 1940s through the 1990s, there generally was a relationship. The more inflation declined in a decade from inflation in the previous decade, the better the stock market did.
"But in two decades, the 1930s and the first decade of this century, inflation fell from already low levels and the stock market suffered. 'Below a certain level of inflation,' Mr. Fridson said, 'a further decline reflects economic weakness more than it reflects a salutary reining in of excessive monetary creation.'
"If that is correct, then it could be that both investors and those simply concerned with promoting economic growth should, as Mr. Fridson wrote, hope that Mr. Bernanke 'fails in his stated goal of holding inflation to 2 percent or less.' "
It was all good, up to that last paragraph. As President Lockhart reiterated in a speech today (emphasis added):
"I'll explain the technical rationale of my Reserve Bank in supporting the scope of LSAP2 [the second round of large-scale asset purchases] last November.
"Through the summer and into the fall of last year, our internal forecasts at the Atlanta Fed were calling into question whether the policy stance at the time assured progress toward the committee's growth and price stability objectives. In more normal times, these circumstances would have prompted a cut in the FOMC's [Federal Open Market Committee] target for the federal funds rate. This approach would be (would have been) the prescription of the so-called Taylor rule which relates policy rate moves to forecast 'misses' on the Fed's sustainable growth and stable inflation objectives."
As we've argued in macroblog before, keeping inflation from falling below that "certain level of inflation" reflecting "economic weakness more than it reflects a salutary reining in of excessive monetary creation" was exactly what President Lockhart has offered in defense of implementing LSAP2, and in support of claims to its success.
There remain plenty of policy questions on which intelligent well-intentioned folk can disagree, but on the assertion that it is wise to guard against too much disinflation, we are in agreement. No need to find disagreements that aren't really there.
By Dave Altig
Senior vice president and research director at the Atlanta Fed
TrackBack URL for this entry:
Listed below are links to blogs that reference One chasm that really isn't one:
- Signs of Improvement in Prime-Age Labor Force Participation
- Could Reduced Drilling Also Reduce GDP Growth?
- Are Shifts in Industry Composition Holding Back Wage Growth?
- Are Oil Prices "Passing Through"?
- Business as Usual?
- What's (Not) Up with Wage Growth?
- Are We Becoming a Part-Time Economy?
- Contrasting the Financing Needs of Different Types of Firms: Evidence From a New Small Business Survey
- Gauging Inflation Expectations with Surveys, Part 3: Do Firms Know What They Don’t Know?
- Gauging Inflation Expectations with Surveys, Part 2: The Question You Ask MattersA Lot
- March 2015
- February 2015
- January 2015
- December 2014
- November 2014
- October 2014
- September 2014
- August 2014
- July 2014
- June 2014
- 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