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August 22, 2012

The (Unfortunately?) Consistent Record of the Recovery: Duy and Thoma Respond

Mark Thoma, always generous in linking and reposting our musings here at macroblog, took a look at my last post and read a sense of helpless resignation:

David Altig of the Atlanta Fed argues that "the majority of FOMC participants don't seem to think that the unemployment rate will improve that quickly, but "it is not at all obvious that the pace of the recovery is inconsistent with the FOMC's view of achieving its dual mandate." It sounds as though the Fed has given up -- we've done all that we can, there's nothing more we can do, so we won't even try -- and we're not about to risk even the tiniest bit of inflation to find out if we are wrong (and this is despite assurances from Bernanke and others that the Fed is not out of bullets)...

Tim Duy, whose observations in fact motivated my post, had his own response to my comments:

Altig's calculations make the important assumption that the labor force participation rate holds at 63.7%. This effectively assumes that none of the decline in the labor force participation is cyclical. Instead, it is all structural...

There are really two separate thoughts in these comments. So let me take them in turn, but first recap what I said in the previous post (or at least what I meant to say):

  • Stepping back and looking at the data, I am drawn to the conclusion that the U.S. economy looks like it has settled into a pattern of something like 2 percent GDP growth with net job creation somewhere around 150,000 payroll jobs per month.

  • The unemployment projections published in the FOMC participants.' June Summary of Economic Projections (SEP) would, under certain assumptions, be consistent with annual job growth averaging the 150,000 per month pace we have seen over the past year and a half.

The under certain assumptions caveat is obviously important. To Duy's point, my mapping of the apparent employment trend to the SEP unemployment forecasts does assume a constant labor force participation rate. Multiple macroblog posts this year have offered skepticism about exactly that assumption (here and here, for example), and any rise in the labor force participation rate will require faster job growth to get the same unemployment rate outcomes. But as far as I know—I think as far as anyone knows—participation will rise only if we get that faster job growth in the first place. My only point was that the SEP unemployment rate submissions in June are not obviously out of line with what appears to be the current trend in job creation.

In fact, I cannot tell you what assumptions underlie the unemployment rate (and growth) projections in the SEP. I can tell you only that these are the outcomes the individual participants view as consistent with "appropriate monetary policy." And that brings us to Mark Thoma's concern that the very slow progress toward higher growth and lower unemployment in the SEP implies that the Fed has "given up, "done all that we can," and "won't even try."

I definitively do not want to leave an impression that this view is implied by the SEP. As I noted in my original post (and duly noted in both the Thoma and Duy responses), the definitions of appropriate monetary policy that condition the individual SEP contributions are not spelled out. Lacking that information, one should not infer that monetary policy is assumed by any one individual as fixed or without influence.

Could it possibly be that an unemployment rate at 7.5 percent and GDP growth of 2.8 percent in 2013 (the more optimistic forecasts in the majority, or the "central tendency" range in the June SEP) are consistent with monetary policy having a nontrivial positive impact on the economy?

Of course monetary policy does not operate in a vacuum. As our boss, Atlanta Fed President Dennis Lockhart, said in a speech yesterday:

Monetary policy can exert a powerful positive influence on an economy, but as Chairman Bernanke has pointed out, monetary policy is not a panacea.

I'm not really aware of any models matched to real-world data that suggest monetary policy actions can (at acceptable cost) quickly and completely overcome all of the shocks and headwinds that may present themselves.

You may believe otherwise—that is, you may believe that, for current circumstances, monetary policy is a panacea. Or, less dramatically, you may believe that more monetary stimulus would surely yield something better than what was implied in the June SEP. Fair enough. But you should not believe that lackluster numbers in the SEP tell you anything about individual FOMC participant's views on the efficacy, desirability, or likelihood of further monetary actions, one way or the other.

David AltigBy Dave Altig, executive vice president and research director at the Atlanta Fed

August 22, 2012 in Federal Reserve and Monetary Policy, Monetary Policy | Permalink


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Tim Duy has done a great job of getting himself noticed as a Fed observer. However, as is commonly the case in the pundit game, he is not being judged by the quality of his views, but seems instead to have done what is necessary to get noticed, and doesn't have to earn his grades.

Duy has sunk into the habit of personalizing his monetary policy commentary, featuring his own likes and dislikes as if his preferences are the important issue. He has also personalized his commentary in another way - basing his views of monetary policy on an implicit ability to see deeply into Bernanke's motivations.

Yesterday's FOMC minutes suggest Duy's recent analysis has been wrong. He has been big enough to admit that, to his credit. However, being wrong and getting to the wrong answer by way of bad analytics ought to be reason to give Duy's views less credence.

Of course, I've been banned from Thoma's place for pointing out that his expertise is in economics, not politics or psychology. The ban coincides with Thoma's arrival as a paid pundit, in which position he wanders into politics and psychology pretty frequently. Were that not the case, I'd make my point about Duy's critical abilities there rather than here...

Posted by: kharris | August 23, 2012 at 08:21 AM

Really liked the last part about not inferring policy views from the SEP figures. I agree that the current recovery can be consistent with the Fed's mandate and monetary policy, to date. (

Posted by: Joshua Wojnilower | August 23, 2012 at 11:36 AM

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