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July 05, 2013

A Quick Independence Day Weekend, Post-Employment Report Update

From what I gather, a lot of people took notice of this statement, from Chairman Bernanke’s June 19 press conference:

If the incoming data are broadly consistent with this forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year. And if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around midyear. In this scenario, when asset purchases ultimately come to an end, the unemployment rate would likely be in the vicinity of 7 percent, with solid economic growth supporting further job gains, a substantial improvement from the 8.1 percent unemployment rate that prevailed when the Committee announced this program.

That 7 percent assessment to which the Chairman was referring comes, of course, from the outlook summarized in the Summary of Economic Projections, published following the June 18–19 meeting of the Federal Open Market Committee.

Here are the unemployment forecasts specifically:

Macroblog_2013-07-05A

The highlighted numbers represent the “central tendency” projections for the average fourth quarter unemployment rate in 2013, 2014, and 2015 (in blue) and the “longer run” (in green). Naturally enough, getting to a 6.5 percent to 6.8 percent unemployment rate in the fourth quarter of 2014 is pretty likely to imply the unemployment rate crossing 7 percent sometime around roughly the middle of next year.

So, how do things look after the June employment report? As is our wont, we turn to our Jobs Calculator to answer such questions, and come up with the following. If the U.S. economy creates 191,000 jobs per month (the average for the past 12 months), and the labor force participation rate stays at 63.5 percent (its June level), and all the other important assumptions (such as the ratio of establishment survey to household survey employment) remain the same, then the economy’s schedule looks like this:

Macroblog_2013-07-05B

Note also the implication of this statement...

[T]he Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent , inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.

...which certainly aids in understanding this information, from the last Summary of Economic Projections:

Macroblog_2013-07-05C

I will leave it to the principals to articulate whether today’s report materially changes anything contained in last month’s projections. In the meantime, enjoy your weekend.

Photo of Dave AltigBy Dave Altig, executive vice president and research director of the Atlanta Fed


July 5, 2013 in Economics, Employment, Federal Reserve and Monetary Policy, Forecasts, Labor Markets | Permalink

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The analysis describing the decline in the unemployment rate to 6.25-percent in July 2015 assumes that "the labor force participation rate stays at 63.5 percent."

Other than spring 2013, the last time the LFPR was lower than 63.5-percent was in May 1979 ... 34 years ago.  So I don't challenge your arithmetic, but find it highly improbable that the LFPR will stabilize at current levels as the economy expands. People flood into the labor market when jobs become easier to find.

The last time the unemployment rate was at (about) 6.25-percent was in October 2008, at which time the LFPR stood at 66-percent.  In the previous business cycle, the LFPR remained above 67-percent for an extended period between 1997 and 2001.

According to the Jobs Calculator, monthly job growth of 190,000 and a LFPR of 66% would bring the unemployment rate down to 6.25-percent about 94 months from now ... in mid-2021.

Posted by: Thomas Wyrick | July 08, 2013 at 09:33 PM

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June 25, 2013

Getting Back to Normal?

Central to any discussion about monetary policy is the degree to which the economy is underperforming relative to its potential, or in more ordinary language, how much slack exists. OK, so how much slack is there, and how long will it take to be absorbed? Well, if you ask the Congressional Budget Office (and a lot of people do), they would have told you last February (their latest estimate) that the economy was underperforming just a shade more than 4 percent relative to its potential last summer, and that slack was likely to increase a little by this summer (to around 4.7 percent). Go to the International Monetary Fund (IMF), and they tell a very similar story in their April World Economic Outlook. The IMF estimates that the amount of slack in the U.S. economy was about 4.2 percent last year, and they expected it would rise a little to about 4.4 percent this year.

As devotees of our Business Inflation Expectations survey know (and you know who you are), the Atlanta Fed has a quarterly, subjective measure of economic slack in the economy as seen by business leaders. This month, businesses told us something pretty interesting—the amount of slack they think they have narrowed pretty sharply between March and June.

Last March, the panel told us that their unit sales were 7.7 percent below "normal"—similar to their assessments in December and September. This month, however, the group cut their estimate of slack to 4.3 percent below normal, on average (see the table).

130625a

What we find most encouraging about this assessment (well, besides the speed at which the slack was being taken up) is that the improvement was most prominent among small and medium-sized firms. These are firms that, according to our survey and other reports (like this one from the National Federation of Independent Business), have been lagging behind in the recovery. Indeed, in June, mid-sized firms indicated that unit sales were only 1.5 percent below normal, a shade better than the big firms in our panel (see the table).

130625b

A look at the industry composition of our survey reveals that the pickup of slack was relatively broadly based too. Only the firms in the mining and utilities, and the professional and business services areas reported more slack relative to March (and the amounts were pretty small at that). Elsewhere, the amount of slack appears to have narrowed quite a bit.

OK, so slack is shrinking, and according to these estimates, it shrank quite a bit between March and June. Does that mean we should be anticipating growing price pressure? Well, we can turn to our panelists again for an answer, and they say no. Projecting over the year ahead, our panelists report little change in either their inflationary sentiment or their inflation uncertainty (see the table).

130625c

Last Wednesday, at the conclusion of its June meeting, the Federal Open Market Committee said that the recovery is proceeding and the labor market is improving, but inflation expectations remain stable. Our June poll of business leaders appears to have also endorsed this view of the economy.

Photo of Mike BryanBy Mike Bryan, vice president and senior economist,

Photo of Brent MeyerBrent Meyer, economist, and

Photo of Nicholas ParkerNicholas Parker, senior economic research analyst, all in the Atlanta Fed's research department

 

June 25, 2013 in Business Inflation Expectations, Federal Reserve and Monetary Policy, GDP, Inflation, Inflation Expectations | Permalink

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June 05, 2013

The Semantics of Monetary Policy

Tim Duy has some questions for the head man at the Atlanta Fed:

...Atlanta Federal Reserve President Dennis Lockhart...was on the speaking circuit today. Via the Wall Street Journal...

If the Fed does slow the pace of its bond buying, "this is not a decisive removal of accommodation. This is a calibration to the state of the economy and the outlook. It is not a big policy shift, and I would hope the markets understand that," Mr. Lockhart said.

I know that the Fed does not want market participants to associate a slowing of asset purchases with tighter policy. I am not sure, however, that it will be easy to persuade Wall Street otherwise. After all, if the Fed wanted looser policy, they would increase the pace of asset purchases. If more is "looser," then why isn't less "tighter?" Alternatively, is "less accommodative" really different from "tighter"?

I'm reminded of one of my favorite exchanges from the Greenspan years, with the Chairman responding to Senator Jim Bunning about the motivation for rate increases in 1999:

We did raise interest rates in 1999, and the reason is real long-term interest rates were beginning to accelerate. Had we not raised the federal funds rate during that particular period, we could have held it in check only by expanding the money supply at an inordinately rapid rate.

My interpretation has always been that Mr. Greenspan was saying something like the following: A set federal funds rate target means that the Fed stands ready to supply as much money as demanded at that rate. (More precisely, the Fed stands ready to supply the quantity of bank reserves demanded at that rate.)

If the structure of market interest rates changes and the demand for bank reserves accelerates—say, because economic growth picks up—maintaining a set target means that monetary policy will become increasingly expansionary. In other words, in such circumstances, standing pat on a federal funds rate target does not mean that the stance of monetary policy stays the same. Quite the opposite.

Jerry Jordan, my former boss at the Federal Reserve Bank of Cleveland and an avid sailor, used to explain it this way: When a person sets out to sail across a body of water, you will notice that he will often adjust the position of the sails, the orientation of the boat, and so on. If you know something of sailing, you will realize that he is very likely reacting to changes in the currents, the winds, and other environmental factors. And if that is indeed what he's doing, you would not infer that he has changed anything about where he's headed and why he's heading there. In fact, you would infer that without such adjustments he must have fundamentally changed his intentions.

Of course, we are in the current context referring not to federal funds rate adjustments but to the pace and ultimate quantity of asset purchases. But I think the principle is the same: A given pace or total quantity of purchases does not mean the same thing in all economic circumstances. If circumstances change, so does the degree of "accommodation" associated with any particular course of asset purchases.

Semantics? I don't think so, and perhaps this is instructive: In the April survey of primary dealers conducted by the New York Fed, the median response to question of when asset purchases will end was the first quarter of next year. At the same time, the median view on what the unemployment rate would be at that time was 7.1 percent. That view would not be out of line with what you might guess on the basis of the Summary of Economic Projections that the Federal Open Market Committee published following its March meeting.

But, as we noted here following the April employment report, the facts on the ground seem to be shifting. We will, as you know, get an update on the employment situation on Friday, and perhaps today's ADP report (for what it's worth) wasn't encouraging. In any event, in our shop we will process these reports by considering exactly what it means to keep policy about where it is.

Photo of Dave AltigBy Dave Altig, executive vice president and research director of the Atlanta Fed

 

June 5, 2013 in Federal Reserve and Monetary Policy, Monetary Policy | Permalink

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May 30, 2013

At Least One Reason Why People Shouldn't Hate QE

You might not expect me to endorse an article titled "The 7 Reasons Why People Hate QE." I won't disappoint that expectation, but I will say that I do endorse, and appreciate, the civil spirit in which the author of the piece, Eric Parnell, offers his criticism. We here at macroblog, like our colleagues in the Federal Reserve System more generally, pride ourselves on striving for unfailing civility, and it is a pleasure to engage skeptics who share (and exhibit) the same disposition. What the world needs now is...well, maybe I'm getting carried away.

Let me instead appropriate some of Mr. Parnell's language. It is worthwhile to explore some of the reasons that people do not like QE from someone who does not share this opposing sentiment. In particular, let me focus on the first of seven reasons offered in the Parnell post:

First, a primary objection I have with QE is that it results in a government policy making and regulatory institution in the U.S. Federal Reserve directly determining how private sector capital is being allocated... in recent years, the Fed has dramatically expanded its policy scope into areas that are normally the territory of fiscal policy. This has included specifically targeting selected areas of the economy such as the U.S. housing market including the aggressive purchase of mortgage backed securities (MBS) since the outbreak of the financial crisis.

This statement seems to presume that monetary policy does not normally have differential impacts across distinct sectors of the economy. I think this presumption is erroneous.

The Federal Open Market Committee's (FOMC) asset purchase programs have long been seen as operating through traditional portfolio-balance channels. As explained by Fed Chairman Ben Bernanke in an August 2010 speech that set up the "QE2" program:

The channels through which the Fed's purchases affect longer-term interest rates and financial conditions more generally have been subject to debate. I see the evidence as most favorable to the view that such purchases work primarily through the so-called portfolio balance channel, which holds that once short-term interest rates have reached zero, the Federal Reserve's purchases of longer-term securities affect financial conditions by changing the quantity and mix of financial assets held by the public. Specifically, the Fed's strategy relies on the presumption that different financial assets are not perfect substitutes in investors' portfolios, so that changes in the net supply of an asset available to investors affect its yield and those of broadly similar assets. Thus, our purchases of Treasury, agency debt, and agency MBS likely both reduced the yields on those securities and also pushed investors into holding other assets with similar characteristics, such as credit risk and duration. For example, some investors who sold MBS to the Fed may have replaced them in their portfolios with longer-term, high-quality corporate bonds, depressing the yields on those assets as well.

I think this is a pretty standard way of thinking about the way monetary policy works. But you need not buy the portfolio-balance story in full to conclude that even traditional monetary policy operates on "selected areas of the economy such as the U.S. housing market." All you need to concede is that policy works by altering the path of real interest rates and that not all sectors share the same sensitivity to changes in interest rates.

Parnell goes on to discuss other problems with QE: stress put on individuals living on fixed incomes, the promotion of (presumably excessive) risk-taking, and the general distortion of market forces. All topics worthy of discussion, and if you read the minutes of almost any recent FOMC meeting you will note that they are indeed key considerations in ongoing deliberations.

These issues, however, are not about QE per se, but about monetary stimulus generally and the FOMC's interest rate policies specifically. As the conversation turns to if, when, and how Fed policymakers will adjust the current asset purchase program, it will be important to clarify the distinction between QE and the broader stance of policy.

Photo of Dave AltigBy Dave Altig, executive vice president and research director of the Atlanta Fed

 

May 30, 2013 in Federal Reserve and Monetary Policy, Monetary Policy | Permalink

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Sorry, but I think that there is an important difference between conventional monetary policy and current QE. When the Fed buys treasuries only, it is essentially dealing in state assets on both sides of its balance sheet, so any difference in the effects of monetary policy on different sectors of the economy are accidental. When the Fed buys mortgage securities, however, that deliberately, though the asset side of the Fed's balance sheet, favours housing activity. And I have little doubt that, if the US economy did not strengthen as fast as required, the Fed would end up, like the Bank of Japan, buying stocks. In my view (as a former central banker), the Fed has done too little to resist being drawn, by ill-informed politicians, into unsustainable stimulation of popular real economic activity.

Posted by: RebelEconomist | June 06, 2013 at 05:43 PM

I appreciate and agree with your narrow response to the column, "The 7 reasons why people hate QE."  However, it appears that people still have several more (unanswered) reasons for hating QE.  

It is an old debating tactic to take issue with the 1-2 weakest points of an opponent's otherwise strong argument to create the impression that the opponent is altogether wrong.  But debating tactics don't do anything to 'fix' monetary policy or the economy, so ultimately that is not a wise approach for the Fed (its officers) to take.  Unlike high school debates or courtroom arguments designed to persuade an uninformed jury, the 'judges' are monetary economists and money managers who recognize the difference between debating tactics and a response that goes to the core of the issue.

For example, your response to the article's criticism #1 was "even traditional monetary policy operates on "selected areas of the economy such as the U.S. housing market."  That is absolutely true.  But that neither recognizes nor explains why half of the Fed's current open market operations are conducted in mortgage backed securities and related debt instruments.  Aren't those particular bond purchases PURPOSELY geared toward the housing market to the exclusion of other sectors of the economy?

Of course.  That's why your (correct as far as it goes) comment about monetary policy doesn't really address the first complaint of the columnist.  You leave the impression that QE is little different than standard open market operations, though of course differing in magnitude.

I hadn't read the "7 Reasons" column before you cited it in your piece, but after having read it, I was most persuaded by reason #2:

     #2 - Helping Some Market Participants At The Expense Of Others.
     By effectively locking interest rates at 0% since December 2008,
     the Federal Reserve has elected to provide direct and generous support
     to financial institutions and risk takers, some of which directly
     contributed to the cause of the crisis.

I believe that's an accurate description of how things have worked out, though I don't believe it portrays the Fed's motives or reasoning.  Nevertheless, it is incumbent upon Fed officials to consider this criticism to avoid future crises, economic downturns and taxpayer bailouts.

I've recently been reading (and learning from) Nicholas Dunbar's book "The Devil's Derivatives."  For at least the past 50 years, a pattern has emerged whereby well-compensated (highly motivated) bankers develop/discover ways of avoiding and evading the Fed's regulations, followed by the Fed's efforts to regulate the new activities, followed by further work-arounds by bankers.  This is a natural process, but the Fed is playing with both hands behind its back because a) top Fed officials are typically free-market economists with a philosophical appreciation for innovation and a general skepticism of policies which have unintended negative consequences, and b) bankers spend vast amounts of money to hire PhD economists and other smart, experienced people --- then their teams work night and day for months to develop innovative products that Fed officials don't understand and cannot effectively regulate.

This is part of the Regular Business Plans of big banks, not something that has inadvertently happened a time or two.  The not-infrequent outcome of these innovations is to create bubbles which eventually burst, placing major economic sectors at risk.  The next act in the play is a Fed rescue/bailout to "save the economy" --- but then Fed officials explain (with sad faces and shrugging shoulders) that the bad actors had to be saved to avoid another Great Depression.

The bailouts, too, are part of the long-term business plans of the big banks.  The problem is that the Fed doesn't get the joke, and continues playing the same role over and over.  As a historical fact, the Fed DOES provide aid and comfort to the major financial institutions at the expense of taxpayers, households and small business.  (How many times has the Fed saved Citi over the past 50 years?) 

As I said earlier, I do not for a minute believe this is the Fed's intentions: it occurs because the innovative bankers know how draw Fed officials into a game they are ill-equipped to play.  Fed officials aren't in the hip pockets of the big financial institutions because they're corrupt, but because they're ignorant: uninformed and inexperienced.

Now, the Fed can continue down this path ... or its officials could reflect on the pattern that has emerged over the decades and ask whether their appreciation for innovation is well-founded, whether the Fed has been an effective regulator when it has always been behind the curve of innovation, and where all of this is leading: too much leverage, moral hazard, huge risks to America's future economic prosperity, etc.

The strongest argument that bankers make for justifying their innovative activities is that "if we aren't allowed to do it, financial markets will move offshore ... but then same practices will occur anyway." 

That is a nonsense argument.  If America reigns in the profligate bankers, so will most of our closest trading partners.  Second, even if the big US banks became the US branches of foreign banks, the US economy would still receive financing and Americans would still have jobs working in those branches.  Third, future bailouts would fall to a far greater extent on the backs of foreign taxpayers rather than US taxpayers.  Fourth, if the Fed calls the bluff of big banks, the ability of bankers to extract future handouts would be far less (less moral hazard).

Fed officials have done a pretty good job over the past century perfecting its monetary policy tools. At the same time, however, they have been so focused on shorter-term issues that they have failed to appreciate the longer-term game the Fed has been drawn into, where it has become the enabler and protecter of institutions whose prosperity is not essential to the functioning of a modern economy.  The necessity of an efficient banking system does not prove (or even imply) that specific banks are must survive.  The only too-big-to-fail institution is the Fed.

The Fed's original job was to protect the economy by PREVENTING financial crises and panics.  We now know that despite the best of intentions the Fed has failed in that responsibility.  It has unwittingly become a tool of the banking sector, facilitating astronomically high compensation and the accumulation of great wealth --- for bankers --- just #2 of the "7 Reasons" essay claims.

Either the Fed can stay on the merry-go-round or get off of it ... but it can't stay on the merry-go-round and expect to arrive in a new destination one or two cycles hence.  Anyone who has been paying attention knows that. 

The failure of the economy to recover despite the Fed adding $2 trillion in reserves to the banking system means that people do not trust the Fed's current policies to protect their jobs and wealth in the future --- so rather than taking risk and contributing to the economy, they're paying off debt and building up reserves for the next collapse.

Posted by: Thomas Wyrick | June 10, 2013 at 01:57 PM

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May 23, 2013

A Subtle View of Labor Market Improvement

In a speech delivered Tuesday to the Japan Society in New York City, Federal Reserve Bank of New York President William Dudley offered his view on how he might assess the appropriate pace of the Federal Open Market Committee's (FOMC) current $85 billion per month asset purchase program:

Let me give a few examples of how my own thinking may evolve. In terms of our asset purchase program, I believe we should be prepared to adjust the total amount of purchases to that needed to deliver a substantial improvement in the labor market outlook in the context of price stability. In doing this, we might adjust the pace of purchases up or down as the labor market and inflation outlook changes in a material way. For me, the base case forecast is not the sole consideration—how confident we are about that outcome is also important.

Because the outlook is uncertain, I cannot be sure which way—up or down—the next change will be. But at some point, I expect to see sufficient evidence to make me more confident about the prospect for substantial improvement in the labor market outlook. At that time, in my view, it will be appropriate to reduce the pace at which we are adding accommodation through asset purchases. Over the coming months, how well the economy fights its way through the significant fiscal drag currently in force will be an important aspect of this judgment.

My own boss, Atlanta Fed President Dennis Lockhart, expressed a similar view in a speech to the Birmingham, Alabama, Kiwanis Club last month:

The key word in the phrase "substantial improvement in the outlook for the labor market" is outlook. For my part, a critical consideration in judging how much longer asset purchases should continue will be confidence in the positive outlook. Confidence that is solidly grounded in improving economic data, accumulated over a sufficient span of time, will help me conclude that the work of the large-scale asset purchase program, as a temporary supplement to conventional interest-rate policy, is complete.

And there is this, from the minutes of the latest meeting of the FOMC (emphasis added):

Participants also touched on the conditions under which it might be appropriate to change the pace of asset purchases. Most observed that the outlook for the labor market had shown progress since the program was started in September, but many of these participants indicated that continued progress, more confidence in the outlook, or diminished downside risks would be required before slowing the pace of purchases would become appropriate.

Neither President Dudley nor President Lockhart (nor the minutes) indicates where we are on the confidence scale at the moment. But at least outside the Fed, there is some evidence confidence in the labor market forecast is increasing. The following chart shows year-over-year averages of the interquartile range of four-quarter-ahead unemployment rate forecasts from the Federal Reserve Bank of Philadelphia's Survey of Professional Forecasters:

130523

The interquartile range is essentially the difference between the most optimistic one-fourth of the forecasts in the Philadelphia Fed's panel and the most pessimistic one-fourth of forecasts. It is thus a measure of dispersion, or forecast disagreement.

The trend in this measure of forecast disagreement is clearly—very clearly—downward. That doesn't exactly say that each individual forecaster is becoming more confident about his or her individual outlook (though this type of dispersion measure is often used as a proxy for overall uncertainty). Even less does it mean that forecast uncertainty has fallen to the level President Dudley, President Lockhart, or any other Fed official would deem sufficient to alter policy in any way. The FOMC minutes, for example, include this...

A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth; however, views differed about what evidence would be necessary and the likelihood of that outcome.

... and following his congressional testimony Wednesday, Chairman Bernanke engaged in a Q&A, and ABC News summed up the state of the policy discussion this way:

When asked by Kevin Brady, the Panel's chairman, whether the Federal Reserve could start winding it back before before September's Labour Day holiday, Mr Bernanke responded, "I don't know. It's going to depend on the data."

It really need not be emphasized that I don't know either. But the narrowing of opinions of where things are headed must signify some sort of progress.

Photo of Dave AltigBy Dave Altig, executive vice president and research director of the Atlanta Fed

 

May 23, 2013 in Employment, Federal Reserve and Monetary Policy, Labor Markets, Monetary Policy | Permalink

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The units in your chart are not displayed correctly. The "10" should be "1.0"

Posted by: glenn | May 24, 2013 at 10:52 AM

Thanks Glenn. Actually this is a case of not labeling/explaining things precisely. I used the Philadelphia Fed's D3 measure of dispersion, which is the log difference of the levels. So the units are the percent differences between the 75th percentile and the 25th percentile.

Posted by: Dave | May 30, 2013 at 03:19 PM

thanks..

Posted by: Aldex | July 01, 2014 at 07:23 AM

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March 08, 2013

Will the Next Exit from Monetary Stimulus Really Be Different from the Last?

Suppose you run a manufacturing business—let's say, for example, widgets. Your customers are loyal and steady, but you are never completely certain when they are going to show up asking you to satisfy their widget desires.

Given this uncertainty, you consider two different strategies to meet the needs of your customers. One option is to produce a large quantity of widgets at once, store the product in your warehouse, and when a customer calls, pull the widgets out of inventory as required.

A second option is to simply wait until buyers arrive at your door and produce widgets on demand, which you can do instantaneously and in as large a quantity as you like.

Thinking only about whether you can meet customer demand when it presents itself, these two options are basically identical. In the first case you have a large inventory to support your sales. In the second case you have a large—in fact, infinitely large—"shadow" inventory that you can bring into existence in lockstep with demand.

I invite you to think about this example as you contemplate this familiar graph of the Federal Reserve's balance sheet:

130307

I gather that a good measure of concern about the size of the Fed's (still growing) balance sheet comes from the notion that there is more inherent inflation risk with bank reserves that exceed $1.5 trillion than there would be with reserves somewhere in the neighborhood of $10 billion (which would be the ballpark value for the pre-crisis level of reserves).

I understand this concern, but I don't believe that it is entirely warranted. My argument is as follows: The policy strategy for tightening policy (or exiting stimulus) when the banking system is flush with reserves is equivalent to the strategy when the banking system has low (or even zero) reserves in the same way that the two strategies for meeting customer demand that I offered at the outset of this post are equivalent.

Here's why. Suppose, just for example, that bank reserves are literally zero and the Federal Open Market Committee (FOMC) has set a federal funds rate target of, say, 3 percent. Despite the fact that bank reserves are zero there is a real sense in which the potential size of the balance sheet—the shadow balance sheet, if you will—is very large.

The reason is that when the FOMC sets a target for the federal funds rate, it is sending very specific instructions to the folks from the Open Market Desk at the New York Fed, who run monetary policy operations on behalf of the FOMC. Those instructions are really pretty simple: If you have to inject more bank reserves (and hence expand the size of the Fed's balance sheet) to maintain the FOMC's funds rate target, do it.

To make sense of that statement, it is helpful to remember that the federal funds rate is an overnight interest rate that is determined by the supply and demand for bank reserves. Simplifying just a bit, the demand for reserves comes from the banking system, and the supply comes from the Fed. As in any supply and demand story, if demand goes up, so does the "price"—in this case, the federal funds rate.

In our hypothetical example, the Open Market Desk has been instructed not to let the federal funds rate deviate from 3 percent—at least not for very long. With such instructions, there is really only one thing to do in the case that demand from the banking system increases—create more reserves.

To put it in the terms of the business example I started out with, in setting a funds rate target the FOMC is giving the Open Market Desk the following marching orders: If customers show up, step up the production and meet the demand. The Fed's balance sheet in this case will automatically expand to meet bank reserve demand, just as the businessperson's inventory would expand to support the demand for widgets. As with the businessperson in my example, there is little difference between holding a large tangible inventory and standing ready to supply on demand from a shadow inventory.

Though the analogy is not completely perfect—in the case of the Fed's balance sheet, for example it is the banks and not the business (i.e., the Fed) that hold the inventory—I think the story provides an intuitive way to process the following comments (courtesy of Bloomberg) from Fed Chairman Ben Bernanke, from last week's congressional testimony:

"Raising interest rate on reserves" when the balance sheet is large is the functional equivalent to raising the federal funds rate when the actual balance sheet is not so large, but the potential or shadow balance sheet is. In both cases, the strategy is to induce banks to resist deploying available reserves to expand deposit liabilities and credit. The only difference is that, in the former case, the available reserves are explicit, and in the latter case they are implicit.

The Monetary Policy Report that accompanied the Chairman's testimony contained a fairly thorough summary of costs that might be associated with continued monetary stimulus. Some of these in fact pertain to the size of the Fed's balance sheet. But, as the Chairman notes in the video clip above, when it comes to the mechanics of exiting from policy stimulus, the real challenge is the familiar one of knowing when it is time to alter course.

Photo of Dave AltigBy Dave Altig, executive vice president and research director of the Atlanta Fed

 

March 8, 2013 in Banking, Fed Funds Futures, Federal Reserve and Monetary Policy, Monetary Policy | Permalink

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One potential risk this time is that the Fed has been buying lots of assets that aren't treasuries, and some of the riskier assets can no longer be sold for the same price at which it was bought. In theory that situation could leave the Fed unable to recall all the money it put into circulation.

That said, you are right that interest on reserves could still be raised to have the same effects.

Posted by: Matthew Martin | March 08, 2013 at 03:30 PM

"In both cases, the strategy is to induce banks to resist deploying available reserves to expand deposit liabilities and credit."

Banks cannot lend their reserves. In fact, there is no balance sheet transaction that will allow a central bank liability to be loaned to a "non-bank" entity. Banks make loans by issuing a demand deposit and not by issuing reserves. Bank lending is never constrained by a reserve position.

The IoER policy implemented in 2008 moved the Federal Reserve out of a "corridor system" and into a "floor system". Under a floor system the level of reserves and the overnight interest rate are divorced. The IoER or "floor level" also becomes the deposit level. This disconnect works as long as there are sufficient excess reserves within the system, which in the case of the US, there are adequate excess reserves.

It should also be noted that future increases in the overnight rate are simply announced with the lending and deposit rates changing in tandem. Traditional models of draining reserves via FOMO are no longer required. Reserves are not the dual of overnight interest rates. Thus, when the Fed would like to "tighten" policy it will not be required to reduce the size of it's balance sheet as draining operations are no longer required to hit the overnight target.

Posted by: JJTV | March 08, 2013 at 05:58 PM

How about changing how monetary policy is conducted? Instead of using the blocked and saturated credit markets for monetary policy just bypass them and modify the fed so it deals directly with the public.

www.internationalmonetary.wordpress.com

Posted by: Daniel | March 09, 2013 at 12:55 AM

If the fed marks up its long position and passes the gain to the treasury wont it have to pass the loss when it hikes the fed rate? and what will be the impact to treasurys when it hikes the fed rate? wont it raise the cost to the government budget when rates go up and it has to finance the debt at 110% debt to gdp and a duration of less than 5 thanks to the fed? Aren't we underestimating the potential damage to hiking rates?

Posted by: Emilio Lamar | May 01, 2013 at 02:33 PM

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March 01, 2013

What the Dual Mandate Looks Like

Sometimes simple, direct points are the most powerful. For me, the simplest and most direct points in Chairman Bernanke’s Senate testimony this week were contained in the following one minute and 49 seconds of video (courtesy of Bloomberg):

At about the 1:26 mark, the Chairman says:

So, our accommodative monetary policy has not really traded off one of [the FOMC’s mandated goals] against the other, and it has supported both real growth and employment and kept inflation close to our target.

To that point, here is a straightforward picture:

Inflation and Unemployment

I concede that past results are no guarantee of future performance. And in his testimony, the Chairman was very clear that prudence dictates vigilance with respect to potential unintended consequences:

Highly accommodative monetary policy also has several potential costs and risks, which the committee is monitoring closely. For example, if further expansion of the Federal Reserve's balance sheet were to undermine public confidence in our ability to exit smoothly from our accommodative policies at the appropriate time, inflation expectations could rise, putting the FOMC's price stability objective at risk...

Another potential cost that the committee takes very seriously is the possibility that very low interest rates, if maintained for a considerable time, could impair financial stability. For example, portfolio managers dissatisfied with low returns may reach for yield by taking on more credit risk, duration risk, or leverage.

Concerns about such developments are fair and, as Mr. Bernanke makes clear, shared by the FOMC. Furthermore, the language around the Fed’s ultimate decision to end or alter the pace of its current open-ended asset-purchase program is explicitly cast in terms of an ongoing cost-benefit analysis. But anyone who wants to convince me that monetary policy actions have been contrary to our dual mandate is going to have to explain to me why that conclusion isn’t contradicted by the chart above.

Photo of Dave AltigBy Dave Altig, executive vice president and research director of the Atlanta Fed

March 1, 2013 in Employment, Federal Reserve and Monetary Policy, Inflation, Monetary Policy | Permalink

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January 18, 2013

Still a Skeptic: Addressing a Few Questions about Nominal GDP Targeting

In a comment to last week's post on inflation versus price-level targeting, David Beckworth asks the following (referring back to an even earlier post on nominal gross domestic product [NGDP] targeting):

You refer back to your previous post on NGDP level targeting, but fail to take note of the comments that respond to your concerns about it. Specifically, see the ones by Andy Harless and Gregor Bush. Would love to see your response to those ones. Do you have a response for them? I am listening if you have one.

Here is an excerpt from the Harless comment...

Most people who advocate NGDP targeting today advocate level path targeting, not growth rate targeting. I don't believe that your "historical justification" applies in this case. Indeed, I think it makes the case for level targeting (of either the price level or NGDP, but there are reasons to prefer the latter) relative to the current system which centers on a growth rate target for the price level (in other words, an inflation target).

...and here is the Bush comment:

Just to add to Andy's point, advocates of NGDP level targeting argue that it's precisely because of uncertainty around estimates [of] potential output [that] NGDP targeting should be adopted. They argue that [as] long as the central bank keeps nominal spending on, say, a 5% trend line, there will be neither demand side recessions (mass unemployment) nor high inflation. In other words, AD will be stable and this will produce a stable macroeconomic environment. Whether inflation is 2% and real output [grows] at 3% or inflation is 3% and real output grows at 2% is of no concern.

In the post on NGDP targeting I was in fact thinking about level targeting, and Gregor Bush's last sentence gets to—in fact is—the heart of our disagreement. I am just not willing to concede that anchoring long-term inflation by saying something like "2 percent, 3 percent, whatever" is the path to sustaining central bank credibility. Over the longer term, inflation is the only thing that monetary policy can reliably deliver, as the Federal Open Market Committee (FOMC) has clearly articulated in its statement of longer-run goals and policy strategy:

The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate...

The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee's policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision.

This excerpt does not imply, of course, that the Fed need slavishly pursue a numerical inflation target in the shorter run and, as I have pointed out before, in his last press conference Chairman Bernanke explicitly indicated that the FOMC does not intend to do so:

The Committee... intends to look through purely transitory fluctuations in inflation, such as those induced by short-term variations in the prices of internationally traded commodities, and to focus instead on the underlying inflation trend.

My price-level targeting post, co-authored with Mike Bryan, was exactly making the point that, over the past couple of decades, the FOMC has essentially delivered on a 2 percent longer-term price-level growth objective, while accepting plenty of shorter-term variability.

In the end, it is an open question whether credibility in delivering price stability, hard won in the '80s and early '90s, could be sustained if the FOMC says it does not care so much about the exact level of the average rate of inflation, even in the long run. To be truthful, I can't give you an answer to that question. But neither can the proponents of NGDP targeting. I just don't feel that this is an opportune time for an experiment.

Update: Scott Sumner responds.

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

 

January 18, 2013 in Federal Reserve and Monetary Policy, GDP, Monetary Policy | Permalink

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"I am just not willing to concede that anchoring long-term inflation by saying something like "2 percent, 3 percent, whatever" is the path to sustaining central bank credibility. Over the longer term, inflation is the only thing that monetary policy can reliably deliver, as the Federal Open Market Committee (FOMC) has clearly articulated in its statement of longer-run goals and policy strategy:..."

Presumably the damning part of the FOMC statement is the following portion:

"...The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee's policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision..."

This might be relevant if nominal GDP (NGDP) level targeting were indeed "specifying a fixed goal for employment." But NGDP level targeting is not specifying a fixed goal for employment. Rather it is specifying a fixed goal for NGDP.

The only thing that the Fed can reliably target are nominal variables, such as inflation and NGDP.

But one very significant problem with targeting inflation is that it is a totally artificial construct requiring that we come up with an estimate of the extraordinary abstraction known as the "aggregate price level." To see how preposterous this is imagine equating the aggregate price level between what it is now and what it was in say 14th century England. The goods and services are so different it requires the complete suspension of one's disbelief.

Inflation is the difference between NGDP and real GDP (RGDP), meaning inflation is nothing more than the estimated residual between a nominal variable, which is relatively straight forward to measure, and a real variable, which is fundamentally an exercise in crude approximation.

In short, this is precisely backwards.

Posted by: Mark A. Sadowski | January 19, 2013 at 12:42 PM

Thanks David,
I appreciate your response. I have to disagree with this statement though:

“I am just not willing to concede that anchoring long-term inflation by saying something like "2 percent, 3 percent, whatever" is the path to sustaining central bank credibility. Over the longer term, inflation is the only thing that monetary policy can reliably deliver, as the Federal Open Market Committee (FOMC) has clearly articulated in its statement of longer-run goals and policy strategy.”

I don’t think that’s correct. It’s true that monetary policy can’t target real variables in the long run. But it can certainly target any nominal variable that it wants to. The Hong Kong Monetary authority has targeted an exchange rate of 7.75 HKD per USD for almost 30 years and it has been completely successful in doing so. Inflation over that period of time has fluctuated substantially, reaching a high of +12% in 1991 to a low of -6% in 1999. Over that 30 year period, Hong Kong inflation has averaged about 1.3 percentage points above US inflation. Does all of this mean that the HKMA has no credibility? Of course not. It has been and continues to be completely credible with respect to the chosen target. Now, we could argue whether Hong Kong might be better severed if it targeted 2% CPI inflation rather than the nominal USD exchange rate (I think it would be). But that’s an argument over which comes closer to the socially optimal target, not over which target would give the central bank more credibility.

We could make a similar argue with the Bank of England successfully targeting the nominal price of gold in the 1871 to the 1914 period. So I see no reason why the Fed couldn’t target nominal GDP and be completely credible with respect to its NGDP target. If Congress instructed the Fed to switch to an NGDP level target would you bet against the FOMC hitting it?

“I just don't feel that this is an opportune time for an experiment.”

Here again, I disagree. I think it’s an excellent time. The only better time would have been January of 2009. The performance of the economy over the past 5 years has been an unmitigated disaster. And the “hard won battles” of the early 1980s and 1990s weren’t enough to prevent it. It turns out that anchoring inflation expectations at 2% is not enough to prevent a massive and sustained shortfall in aggregate demand. In 2007, I thought that a 2% inflation target ruled out the possibility of a recession of this magnitude. But I was wrong.

Posted by: Gregor Bush | January 21, 2013 at 04:56 PM

Thanks David for taking the time to reply. I have been meaning to respond, but as you note Scott already has. I would also encourage you to take a look at Scott's piece in the FT Alphaville where he engages in a similar discussion:

http://ftalphaville.ft.com/2013/01/24/1353932/guest-post-scott-sumner-responds-on-ngdp-level-targeting/

Also, see Bill Woolsey's response to Charles Goodhart's NGDPLT critique:

http://monetaryfreedom-billwoolsey.blogspot.com/2013/01/goodhart-on-ngdplt.html

Posted by: David Beckworth | January 24, 2013 at 10:22 AM

I am fully convinced that the Fed policy and tac is incorrect. 0% interest rates and continuous monetization of the debt through QE is not getting us anywhere.

There are opportunity costs as well.

I realize the fiscal policy which the Fed doesn't control isn't optimum either. But, the Fed ought to let the charade stop.

Posted by: Jeff Carter | January 30, 2013 at 10:13 PM

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January 02, 2013

What the FOMC Said: More Clarification

UC San Diego professor Jim Hamilton is in my opinion one of the blogosphere's best commentators on Fed policy, and his most recent post at Econbrowser has a nice, concise retrospective on U.S. monetary policy over the past four years. But in the nobody's perfect category, there is one bit that I think requires a correction:

At the most recent FOMC meeting, the Fed signaled that QE3 purchases will continue as long as the unemployment rate remains above 6.5% and inflation below 2.5%.

Actually, those thresholds apply to the period of time that the members of the Federal Open Market Committee (FOMC) currently expect the federal funds rate target to remain near its zero lower bound. They do not apply to the duration of the FOMC's asset-purchase programs.

Once again, I will turn to Fed Chairman Ben Bernanke's words at his last post-meeting press conference:

Unlike the explicitly quantitative criteria associated with the Committee's forward guidance about the federal funds rate, which I will discuss in a moment, the criteria the Committee will use to make decisions about the pace and extent of its asset purchase program are qualitative; in particular, continuation of asset purchases is tied to our seeing substantial improvement in the outlook for the labor market. Because we expect to learn more over time about the efficacy and potential costs of asset purchases in the current economic context, we believe that qualitative guidance is more appropriate at this time.

The Chairman goes on to explicitly discuss the 6.5 percent/2.5 percent thresholds on the forward guidance regarding the funds rate, and he circles back to the distinction between that guidance and the "QE3 purchases":

It's worth noting that the goals of the FOMC's asset purchases and of its federal funds rate guidance are somewhat different. The goal of the asset purchase program is to increase the near-term momentum of the economy by fostering more-accommodative financial conditions, while the purpose of the rate guidance is to provide information about the future circumstances under which the Committee would contemplate reducing accommodation. I would emphasize that a decision by the Committee to end asset purchases, whenever that point is reached, would not be a turn to tighter policy. While in that circumstance the Committee would no longer be increasing policy accommodation, its policy stance would remain highly supportive of growth. Only at some later point would the Committee begin actually removing accommodation through rate increases. Moreover, as I have discussed today, the decisions to modify the asset purchase program and to undertake rate increases are tied to different criteria.

The separate moving pieces of interest rate policy and the Fed's asset purchase program are subtle, and I admit at times confusing. But as monetary policy moves forward, it is important to keep the distinctions front and center.

Update: Jim Hamilton has updated his January 1 blog post regarding the Fed's policy intentions.

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

January 2, 2013 in Federal Reserve and Monetary Policy | Permalink

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December 28, 2012

Nominal GDP Targeting: Still a Skeptic

In a few days the clock will run out on another year of disappointing economic growth in the United States and, generally speaking, in the world. It is inevitable and appropriate, then, that the year-end ritual of looking forward by looking backward will include an assessment of whether more or better policy can contribute to a pick-up in growth that failed to materialize in 2012.

To this discussion, Harvard professor Jeff Frankel brings some fresh thinking to the not-quite-fresh notion that the Fed should adopt a nominal gross domestic product (GDP) targeting approach as a replacement for existing central bank practice—described by Frankel and others as policy driven by an inflation-targeting framework. What I particularly like about Frankel's proposal is the fact that he offers up a practical roadmap for using the Fed's current communications tools to transition to an explicit nominal GDP targeting framework. If I were inclined to think such a move would be a good idea, I would view Frankel's proposal with some enthusiasm. Alas, I am not yet so inclined.

As to the case for skepticism on theoretical grounds, I commend to you this excellent post by Mark Thoma at Economist's View. But Professor Frankel suggests a case for nominal GDP targeting on practical grounds by appealing to this counterfactual:

A nominal GDP target for the US Federal Reserve might have avoided the mistake of excessively easy monetary policy during 2004-06, a period when nominal GDP growth exceeded 6 per cent.

Maybe. Average annual real GDP growth over those three years was just over 3 percent, compared to the Congressional Budget Office (CBO) estimates of potential GDP growth of just under 2.5 percent. That's not a big difference, but more importantly the average gap between the level of real GDP and the CBO estimate of potential was just 0.3 percent of average output—essentially zero. The importance of this so-called "output gap" becomes evident if you read the Michael Woodford interview referenced in the aforementioned piece at Economist's View. In that interview, Woodford says, "The idea was to talk about a price level, as opposed to the inflation rate, but a corrected price level target where you add to it some multiple of the real output gap." So for him, something like this measure would be a key element of his proposed monetary policy rule.

What if, rather than some measure of nominal GDP, the 2004–06 Fed had instead been solely focused on the inflation rate? You can't answer that question without operationalizing what it means to be "focused on the inflation rate," but for the sake of argument let's simply consider actual annualized PCE inflation over a two-year horizon. (In his press statement explaining the Federal Open Market Committee's (FOMC) latest decision, Fed Chairman Ben Bernanke suggested using a one- to two-year horizon for inflation forecasting horizon to smooth through purely transitory influences on inflation that the central bank would inclined to "look through.") Here's the record, with the period from 2004 through 2006 highlighted:

121228b

If you really do think that there was a policy mistake over the 2004–06 period—and in particular if you believe the FOMC during that should have adopted a more restrictive policy stance—I'm hard-pressed to see what advantage is offered by focusing on nominal GDP rather than inflation alone. In fact, you could argue that that the GDP part of the nominal GDP target would have added just about nothing to the discussion.

I add the observation in the chart above to my earlier comments on an earlier Frankel call for nominal GDP targets. To summarize my concerns, the Achilles' heel of nominal GDP targeting is that it provides a poor nominal anchor in an environment in which there is great uncertainty about the path of potential real GDP. As I noted in my earlier post, there is historical justification for that concern.

Basically, anyone puzzling through how demographics are affecting labor force participation rates, how technology is changing the dynamics of job creation, or how policy might be altering labor supply should feel some humility about where potential GDP is headed. For me, a lack of confidence in the path of real GDP takes a lot of luster out of the idea of a nominal GDP target.

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

 


December 28, 2012 in Federal Reserve and Monetary Policy, GDP, Monetary Policy | Permalink

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I think you're right to be a skeptic on targeting NGDP. Nominal GDP bounced between 5-7% post the 2001 recession. And that's after all the revisions. Maybe more to the point is that the Great Recession occurred, in large part, because of hyper credit growth. It's likely that rates were kept too low for too long, which ultimately pushed the reach for yield process, which enabled the excess debt creation. We won't go into the abdication of the regulatory bodies.....

Posted by: stewart sprague | December 28, 2012 at 06:53 PM

Most people who advocate NGDP targeting today advocate level path targeting, not growth rate targeting. I don't believe that your "historical justification" applies in this case. Indeed, I think it makes the case for level targeting (of either the price level or NGDP, but there are reasons to prefer the latter) relative to the current system which centers on a growth rate target for the price level (in other words, an inflation target).

The question is whether the Fed should forgive itself for missing earlier targets. Under the current system, there is near-100% amnesty, which has the potential to make the nominal anchor ineffective, in the case where the Fed keeps making the same mistake over and over, as it did in the 1970's. A level path target during the 1970's would have forced the Fed to tighten when it missed its targets on the upside, in order to get back to the target path. This is true for either a price level path target or an NGDP level path target.

Of course the downside of using a level path target is pretty obvious: you need to produce "unnecessary" recessions and/or inflations to compensate for earlier misses. But I think the improvement in credibility (particularly when the zero bound comes into play, but also in a situation like the 1970's, where forecast errors were serially correlated) would be worth the cost. And I don't think there's much of a case to be made that price level path targeting is better than NGDP level path targeting, unless the price level is your only mandated objective.

Posted by: Andy Harless | December 28, 2012 at 07:21 PM

"To summarize my concerns, the Achilles' heel of nominal GDP targeting is that it provides a poor nominal anchor in an environment in which there is great uncertainty about the path of potential real GDP."

I think that most people who are blogging in support of NGDP level targeting would be puzzled by this comment. Yes, NGDP level targeting sets the nominal anchor in terms of nominal incomes, not the price level. But most of what are called "welfare costs of inflation" seem to correlate better with variations in nominal incomes than in prices. For instance, "natural" interest rates are better described as correlating with NGDP growth rates than with inflation rates; nominal wages correlate with NGDP rather than the price level.

George Selgin (in "Less than Zero") advances a rather complex argument that because variations in RGDP are generally due to firm- or sector-specific changes, nominal income targeting interacts better with price stickiness and similar imperfections.

In general, resiliency to supply-side instability is generally seen as a key _benefit_ of NGDPLT: and this should be all the more true when the RGDP path is uncertain.

Anyway, Sumner has come up with a 'compromise' proposal (dubbed a NGDP/inflation hybrid) which aims to stabilize NGDP in the short/medium run while still keeping a stable inflation target in the longer run: see www.themoneyillusion.com/?p=18145

Posted by: anon | December 29, 2012 at 10:13 PM

What matters for monetary policy is how it affects expectations. In that context, you're either missing or ignoring a couple of things about the Market Monetarist position.

First, a level target rather than a growth rate target really matters. The former is equivalent to the latter but with the additional assurance that misses will be made up for. That assurance means that over all but the shortest runs, the implicit growth rate target will be hit. That can only help when expectations are your real target.

In the Thoma post you link to, Woodford also points out that as a pratical matter, an NGPD level target is about the best the Fed can do. A policy rule has to (i) be simple enough that you can explain it to Congress and the public, and (ii) be straightforward enough that it doesn't arouse suspicions that the Fed is cooking the books. We have enough conspiracy theorists out there already. Let's not feed them even more by employing a target that looks like the Fed could be manipulating it via arcane calculations.

As you say, we don't know the future path of potential output. But that's hardly an excuse to add to the uncertainty by refusing to adopt clear and predictable Fed policies.

Posted by: Jeff | December 30, 2012 at 08:02 AM

Isn't there a point at which the policy stance should be to stop intervening in markets, to let the free market determine interest rates like any other price, and for the Fed to stop targeting ANYTHING? Why are we even entertaining never ending central planning as a solution to anything?

Posted by: Chris | January 01, 2013 at 09:49 PM

Isn't there a point at which the policy stance should be to stop intervening in markets, to let the free market determine interest rates like any other price, and for the Fed to stop targeting ANYTHING? Why are we even entertaining never ending central planning as a solution to anything?

Posted by: Chris | January 01, 2013 at 09:49 PM

David,
Just to add to Andy's point, advocates of NGDP level targeting argue that it's precisely becasue of uncertainty around estiamtes potential output is NGDP trageting should be adopted. They argue that has long as the central bank keeps nominal spending on, say, a 5% trend line, there will be niether demand side recessions (mass unemployment) nor high inflation. In other words AD will be stable and this will produce a stable macroeconomic environment. Whether inflation is 2% and real output growth at 3% or inflation is 3% and real output grows at 2% is of no concern.

Posted by: Gregor Bush | January 04, 2013 at 02:13 PM

Anybody here ever heard of Goodhart's Law?

Posted by: Thomas Esmond Knox | January 13, 2013 at 11:54 PM

Most people who advocate NGDP targeting today advocate level path targeting, not growth rate targeting

Posted by: myVegas hack cheats tool | February 07, 2013 at 03:15 PM

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