Close

This page had been redirected to a new URL, please update any bookmarks.

Font Size: A A A

macroblog

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

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c834f53ef017ee8d5dec1970d

Listed below are links to blogs that reference What the Dual Mandate Looks Like:

Comments

Post a comment

Comments are moderated and will not appear until the moderator has approved them.

If you have a TypeKey or TypePad account, please Sign in

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

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c834f53ef017c35f88d98970b

Listed below are links to blogs that reference Still a Skeptic: Addressing a Few Questions about Nominal GDP Targeting:

Comments

"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

Post a comment

Comments are moderated and will not appear until the moderator has approved them.

If you have a TypeKey or TypePad account, please Sign in

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

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c834f53ef017c353b9a30970b

Listed below are links to blogs that reference What the FOMC Said: More Clarification:

Comments

Post a comment

Comments are moderated and will not appear until the moderator has approved them.

If you have a TypeKey or TypePad account, please Sign in

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

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c834f53ef017ee6b9785e970d

Listed below are links to blogs that reference Nominal GDP Targeting: Still a Skeptic:

Comments

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

Post a comment

Comments are moderated and will not appear until the moderator has approved them.

If you have a TypeKey or TypePad account, please Sign in

December 21, 2012

Try, Try Again

As a regular, satisfied customer of The Wall Street Journal's "Heard on the Street" feature, I was a bit distressed to read this, from an item titled "Bonds Beware Central Bank Regime Change":

In the U.S., the Federal Reserve has announced that future monetary policy tightening will depend on a hard target for falling unemployment and a softer target for rising inflation expectations. That looks like a tilt toward growth as the priority over inflation.

When The Financial Times and The Wall Street Journal in quick sequence publish articles that seem to misinterpret Fed communications, I have to surmise that the message isn't getting through and bears repeating and further explaning.

Earlier this week, in response to the alluded-to FT article, I addressed the charge of a "tilt toward growth as the priority over inflation," noting that Fed Chairman Ben Bernanke clearly indicated in last week's press conference that there has been no "change in our relative balance, weights towards inflation and unemployment...."

It is true that the Committee's threshold for considering policy action was expressed in terms of a realized value for unemployment and a forecast value for inflation. But that choice, as the Chairman explained in that press conference, was motivated by the nature of the two different statistics:

... the Committee chose to express the inflation threshold in terms of projected inflation between one and two years ahead, rather than in terms of current inflation. The Committee took this approach to make clear that it 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.

More importantly, the plan is not to ignore the incoming data and rely solely on internal Committee forecasts:

In making its collective judgment about the underlying inflation trend, the Committee will consider a variety of indicators, including measures such as median, trimmed mean, and core inflation; the views of outside forecasters; and the predictions of econometric and statistical models of inflation. Also, the Committee will pay close attention to measures of inflation expectations to ensure that those expectations remain well anchored.

Even more important, in my view, this broad approach to assessing price-stability conditions is also the approach the Chairman described in thinking about the allegedly hard target for the unemployment rate:

... the Committee recognizes that no single indicator provides a complete assessment of the state of the labor market and therefore will consider changes in the unemployment rate within the broader context of labor market conditions.

It is fair to point out the difficulties that can arise in implementing this policy strategy in the real time, real messy world. And if you doubt that the Committee is as good as its word, there is probably not much I can say that will convince you otherwise. But we ought to at least take care in being clear what the Committee's word actually is.

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

 


December 21, 2012 in Federal Reserve and Monetary Policy, Monetary Policy | Permalink

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c834f53ef017c34da9b89970b

Listed below are links to blogs that reference Try, Try Again:

Comments

David: Think about that headline "Bonds Beware Central Bank Regime Change".

That is precisely the message we want the bond market to hear. We want the people holding bonds and money to sell their bonds and money and buy real goods instead, to increase Aggregate Demand. So if the Fed is not saying that, then the Fed ought to be saying that. And if the bond market has indeed misinterpreted the Fed, we ought to be very glad it has misinterpreted the Fed.

Posted by: Nick Rowe | December 22, 2012 at 07:16 AM

Note their words of "softer inflation target". Despite the fact that the Fed has been saying for some time that the 2% target was symmetric, everyone on Wall Street considered the target to be a 2% inflation *ceiling*. The 2.5% threshold of the new rule is an explicit ceiling.

If the Fed was telling the truth before about the previous target being symmetric, then you are correct that the Fed isn't changing its priorities. But if 2% really was a ceiling, then it really is a change.

Posted by: Redwood Rhiadra | December 22, 2012 at 01:56 PM

Post a comment

Comments are moderated and will not appear until the moderator has approved them.

If you have a TypeKey or TypePad account, please Sign in

December 17, 2012

Plain English

Gavyn Davies writes in The Financial Times (hat tip, Mark Thoma) that he sees a major shift in attitude at the Fed:

In the US, there has been a clear shift in the Fed's policy reaction function, or "Taylor Rule", increasing the weight placed on unemployment and reducing the weight on inflation. The nature and importance of the Fed's policy shift has not yet been fully understood, because it was not really spelled out by Chairman Bernanke in his press conference this week.

I'd score that comment about half accurate. Here's what the Chairman actually said in that press conference:

QUESTION:
Mr. Chairman, what prompted the Committee to make the decision at this particular time to specify targets? And by taking an unemployment rate that is quite low compared to currently, does that shift the balance of priorities in terms of your dual mandate…more in the direction of reducing unemployment rather than inflationary pressures?

BERNANKE:
…It is not a change in our relative balance, weights towards inflation and unemployment, by no means. First of all, with respect to inflation, we remain completely committed to our 2 percent longer- run objective. Moreover, we expect our forecast, as you can see from the summary of economic projections, our forecasts are that inflation will actually remain—despite this threshold of 2.5 [percent]—that inflation will actually remain at or below 2 percent going forward…

I think both sides of the mandate are well-served here. There's no real change in policy. What it is instead is an attempt to clarify the relationship between policy and economic conditions.

That's about as clear a statement about the constancy of the Federal Open Market Committee's (FOMC) objectives as I can imagine. The reason I am giving Davies half credit is his reference to the Taylor rule, and his article's theme that what has changed is the FOMC's "reaction function"—a fancy name for how the Fed will respond to changes in economic conditions in pursuit of its objectives.

I think the intent of recent changes in language is pretty clear, evidenced by comparing this statement following the August FOMC meeting

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.

… with this one, introduced after the September FOMC meeting:

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.

I added the emphasis above, as in my view it is the key change from previous statements. At least from the point of view of the Atlanta Fed's research staff, there wasn't much of a shift in the economic forecast between August and September (or September and December, for that matter). The change in date from late 2014 to mid-2015 is (I argue) best understood, not in terms of changing economic conditions, but in terms of this explanation, from Mike Woodford's paper presented at the Federal Reserve Bank of Kansas City's 2012 Economic Symposium:

We argue for the desirability of a commitment to conduct policy in a different way than a discretionary central banker would wish to, ex post, and show that (in our New Keynesian model) the optimal commitment involves keeping the policy rate at zero for some time after the point at which a forward-looking inflation-targeting bank (or a bank following a forward-looking "Taylor Rule") would begin to raise interest rates.

This, of course, is exactly the change in reaction function to which Davies refers. But two points need to be emphasized. First, the deviation from the Taylor rule that Woodford describes is an exceptional measure designed to deal with circumstances in which policy rates have fallen to zero and can fall no more. Deploying such measures in the current extraordinary circumstances need not reflect some fundamental change in the approach to policy when things return to conditions that more closely approximate normal.

Second, and more importantly, the Chairman's comments make it abundantly clear that whatever changes may have occurred in how monetary policy is implemented, there is in no way a change in the weight the Committee puts on its price stability mandate. On that there should be no confusion.

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

 

December 17, 2012 in Federal Reserve and Monetary Policy, Monetary Policy | Permalink

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c834f53ef017d3ee5544d970c

Listed below are links to blogs that reference Plain English:

Comments

Post a comment

Comments are moderated and will not appear until the moderator has approved them.

If you have a TypeKey or TypePad account, please Sign in

November 02, 2012

Has Fed Behavior Changed?

To the titular question, Steve Williamson thinks the answer is "yes":

… the behavior of the FOMC has changed. Either it cares about some things it did not care about before (and in a particular way), or it cares about the same things in different ways—in particular it is less concerned about its price stability mandate.

Part of the Williamson case relies on an earlier post, where Williamson illustrates deviations of the actual path of the federal funds rate paths from his own estimated version of the Taylor rule:

New Keynesians like to think about monetary policy in terms of a Taylor rule, which specifies a target for the federal funds rate as a function of the "output gap" and the deviation of the actual inflation rate from its target value. According to standard Taylor rules, the fed funds target should go down when the output gap rises and up when the inflation rate rises. You can even fit Taylor rules to the data. I fit one to quarterly data for 1987-2007, and obtained the following:

R = 2.02 - 1.48(U-U*) + 1.17P,

where R is the fed funds rate, U is the unemployment rate, U* is the CBO natural rate of unemployment (so U-U* is my measure of the output gap) and P is the year-over-year percentage increase in the PCE deflator. You can see how it fits the historical data in the next chart.

So that's how the Fed behaved in the past. If it were behaving in the same way today, what would it be doing? Given that U = 7.8, U* = 6.0, and P = 1.5, my Taylor rule predicts R = 1.1%....

So, the Fed's behavior seems to have changed.

An obvious point: It is clear from Williamson's chart above that the predictive power of his version of the Taylor rule is far from perfect. In fact, through 2007 the standard deviation of the estimated rule's prediction error is 1.3 percentage points. From that perspective, the difference between a Williamson-Taylor rule funds-rate prediction of 1.1 percent and the actual current value of 0.14 percent doesn't seem so dramatic. I don't really see an obvious deviation from previous behavior.

More to the point, unless the metric is an absolutely slavish devotion to a particular form of the Taylor rule, I'm not exactly sure what evidence supports a conclusion that the Federal Open Market Committee (FOMC) is now "less concerned about its price stability mandate." As I argued a few weeks back, I think it is not too much of a stretch to construct a justification of post-crisis Fed actions up to the September decision entirely in terms of support for the FOMC's price stability mandate.

I don't take any great exception to Williamson's claim that, with respect to the FOMC's stated inflation objective, things look pretty much on target:

If we look at a longer horizon, as I did here, from the beginning of 2007 or the beginning of 2009, you'll get something a little higher than 2.0% (I didn't have the most recent observation in the chart in the previous post). Too low? I don't think so.

Furthermore, in my previous post I noted that while there is a plausible case that previous asset purchase programs were required to maintain this salutary record on the inflation front, the case is arguably less plausible for "QE3." But, to my mind, that just isn't enough evidence to conclude that the FOMC has downgraded its price stability goals.

Consider a homeowner with the dual mandate of keeping both the roof of the house and the driveway in good repair. If the roof isn't leaking but there are cracks in the driveway, I think you would expect to see the owner out on the weekend patching the concrete. I don't think you would conclude as a result that he or she had ceased caring as much about the condition of the roof. I do think you would conclude that attention is being focused where the problem exists.

I suppose the argument is that the Fed is raining so much liquidity down on the world that the roof is, sooner or later, bound to leak. The FOMC has expressed confidence that, if this happens, it has the tools to patch things up and will deploy those tools as aggressively as required to meet its mandate. I guess Steve Williamson feels differently. But that, then, is a difference of opinion about things to come, not about the facts on the ground.

Update: Here's Steve Williamson's response.

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

November 2, 2012 in Federal Reserve and Monetary Policy, Inflation, Monetary Policy | Permalink

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c834f53ef017d3d374d31970c

Listed below are links to blogs that reference Has Fed Behavior Changed?:

Comments

I think Williamson's problem is that his U*=6 is wrong. There's been plenty of discussion in the econosphere about how the CBO's estimates of output and employment potential have been downwardly biased in recent years. Part of this reflects uncertainty about the extent to which the downturn was structural, but a lot of it is also just a matter of the data being truncated--as more data comes in, the trend estimates will be revised back up due to smoothing processes.

The results on Williamson's Taylor rule are dramatic. First, update the current unemployment to 7.9 instead of the previous 7.9 and it drops from R=1.1% to just 0.98%. Then lower the natural rate of unemployment down to a more realistic long run rate of 5.5% and the predicted interest rate drops to 0.22%, which is within the window prescribed by the fed.

Now, 5.5% is much closer to the natural rate normally used in Taylor rule calculations. Williamson did not find evidence that the Fed was behaving differently, but rather advocating that it should behave differently by being more pessimistic than normal about the economy's potential.

Posted by: Matthew | November 04, 2012 at 07:32 AM

Post a comment

Comments are moderated and will not appear until the moderator has approved them.

If you have a TypeKey or TypePad account, please Sign in

September 27, 2012

Scientists? Engineers? How about Gardeners?

In the past few days Simon Wren-Lewis (at Mainly Macro) and Noah Smith (at Noahpinion) have revisited some past musings by Greg Mankiw on whether we should think of macroeconomists as scientists or engineers. The separation between the two in Mankiw's telling occurs at the point where macroeconomics meets policy—when macroeconomists leave the academic cloister and take up the causes of the real world. In Mankiw's original words:

God put macroeconomists on earth not to propose and test elegant theories but to solve practical problems.

Wren-Lewis and Smith each have their own issues with the scientist/engineer taxonomy, but both seem to more or less buy into the notion of macroeconomist cum policymaker as an engineer.

For my part, I'm not a fan of the engineer metaphor. It seems a little—well, immodest. Consider these comments, to take just a select few, from Federal Reserve officials following the decision of the most recent Federal Open Market Committee (FOMC) meeting. First, from Fed Chairman Ben Bernanke (via Econbrowser):

The policies that we have undertaken have had real benefits for the economy in that they have provided some support, that they have eased financial conditions and helped reduce unemployment. All that being said, monetary policy, as I've said many times, is not a panacea, it is not by itself able to solve these problems. We are looking for policymakers in other areas to do their part. We will do our part and we will try to make sure that unemployment moves in the right direction, but we can't solve this problem by ourselves.

And this, from a September 18 speech by Chicago Fed President Charles Evans:

Given the slow and fragile recovery, the large resource gaps that still exist, and the large risks we face, it remains clear that we needed a more resilient economy that can withstand the headwinds that might come its way. Last week the FOMC provided a more accommodative monetary policy that can help us achieve such resilience.

Or this, from a September 21 speech by Atlanta Fed President Dennis Lockhart:

The core rationale of my support [for the FOMC decision] was to better assure that the economy remains on a growth trajectory sufficient to steadily, if gradually, reduce the rate of national joblessness. I am not expecting miracles.

I think the action recently taken by the committee has improved the country's economic prospects by reducing the potential downside apparent in the incoming data. In this sense, the policy action was a preventative. But I expect policy will do more than just prevent backsliding.

To be sure, each of the three express confidence that the FOMC's actions will yield better outcomes than would otherwise occur. I guess you could say “engineer” better outcomes, if you like. But I am struck by some of the other ideas expressed in these comments, related to reducing downside potential, promoting resilience, and providing some support.

I credit my colleague Mike Bryan (who credits former Cleveland Fed President Jerry Jordan, our mutual former boss) for suggesting that these types of motivations are better associated with gardening than engineering science. The good gardener does not presume to create growth, but knows that he or she can play a part by ensuring that growing conditions are the best that they can be. The gardener cannot make the sun shine by applying scientific knowledge, but can take measures to promote resilience and support until it does.

Science and engineering are important, without doubt. But when it comes to policymakers, I'll take a green thumb any day.

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

September 27, 2012 in Federal Reserve and Monetary Policy | Permalink

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c834f53ef017d3c5af2d8970c

Listed below are links to blogs that reference Scientists? Engineers? How about Gardeners?:

Comments

I am sorry. But when I think about the economy as a garden, I immediately think of
Peter Sellers as Chance the Gardener ( Chauncey Gardener) in the film of Being There
-- which was released in 1979.

Posted by: malcolm | September 28, 2012 at 02:07 AM

So, Dave, which do you think it is? Has Mankiw actually gone utterly off the deep end via his collaboration with the author of "Dow 36,000" to produce a puff piece for Romney? Or is he just a careerist hoping for a juicy post in a new Administration? Wonder about your view.

As for economists, well, it was Keynes who said he wished economists could be dentists. But I doubt he meant that in the sense of inflicting pain that Bernanke's critics are proposing.

Posted by: Rich888 | September 28, 2012 at 12:14 PM

" past musings by Greg Mankiw on whether we should think of macroeconomists as scientists or engineers"

Try asking a scientist or an engineer. You might get an answer, after they stop laughing. I went to engineering school, and the practices of economists seem entirely unlike what I was taught. And clearly, recent events have shown that one of the key areas in which economics is deficient is in planning for system failure. If engineers were like economists, no one would ever drive across a bridge. (You'd drive up to the bridge and there'd be a sign: 30% chance of bridge failure while crossing, 20% chance of leprechauns with a pot of gold on the other side.)

Posted by: Moopheus | October 02, 2012 at 09:28 AM

There is only two sciences. Math and Physics. Everything else is an application of those two sciences. This is why there should be no Nobel Prize for Economics, essentially how Nobel felt.

Macroeconomists are neither scientists or engineers, they are forecasters. No different than someone who sets the point spread for NFL games.

Posted by: BP | October 10, 2012 at 07:30 PM

There are many untapped markets for on demand manufacturing beyond hobby and home use, although for going from a hobby/home business to a full blown business it may be the right solution depending on the product.

Posted by: android phone | December 14, 2012 at 04:19 AM

Post a comment

Comments are moderated and will not appear until the moderator has approved them.

If you have a TypeKey or TypePad account, please Sign in

August 24, 2012

The Cost-Benefit Challenge

In its latest Room for Debate feature, The New York Times poses the question "Should the Fed Risk Inflation to Spur Growth?" Befitting a balanced panel of blogging experts, Mark Thoma (Economist's View) says "yes," John Cochrane (The Grumpy Economist) says "no," and Edward Harrison (Credit Writedowns) says something like "irrelevant question, it's going to do neither."

The whole discussion, naturally, is about differing assessments of the costs and benefits of additional monetary stimulus. Not surprisingly, this was also a theme disclosed in the just released minutes of the July 31–August 1 meeting of the Federal Open Market Committee:

Participants also exchanged views on the likely benefits and costs of a new large-scale asset purchase program. Many participants expected that such a program could provide additional support for the economic recovery both by putting downward pressure on longer-term interest rates and by contributing to easier financial conditions more broadly. In addition, some participants noted that a new program might boost business merits of purchases of Treasury securities relative to agency MBS. However, others questioned the possible efficacy of such a program under present circumstances, and a couple suggested that the effects on economic activity might be transitory. In reviewing the costs that such a program might entail, some participants expressed concerns about the effects of additional asset purchases on trading conditions in markets related to Treasury securities and agency MBS, but others agreed with the staff's analysis showing substantial capacity for additional purchases without disrupting market functioning. Several worried that additional purchases might alter the process of normalizing the Federal Reserve's balance sheet when the time came to begin removing accommodation. A few participants were concerned that an extended period of accommodation or an additional large-scale asset purchase program could increase the risks to financial stability or lead to a rise in longer-term inflation expectations...

The questions about the costs and benefits of any particular policy intervention are abundant, and for virtually every potential pro there is a potential con. Here is my personal, certainly incomplete list of pros/cons or benefits/costs associated with another round of large-scale asset purchases:

Pro:  Lower interest rates (and perhaps a lower dollar) will on balance spur spending.
Con:  The expectation of low interest rates for a longer period of time will reduce the urgency to borrow and spend.
Pro:  Expanded asset purchases and lower rates will preserve needed liquidity in financial markets.
Con:  Expanded asset purchases and lower rates will create or exacerbate financial market distortions.
Pro:  More monetary stimulus reduces the probability of an undesirable disinflation in the near term.
Con:  More monetary stimulus increases the probability of undesirable inflationary pressures in the longer term.
Pro:  Lower Treasury and MBS rates will induce an appetite for risk taking that is needed to get productive resources "off the sidelines."
Con:  Lower Treasury and MBS rates will induce an appetite for risk taking that sets us up for the next bubble.
Pro:  Monetary policy is the only channel of support for the economy, absent new fiscal policies.
Con:  Monetary policy support is relieving the pressure to make needed fiscal reforms that would be much more effective than monetary stimulus.
Pro:  With additional monetary stimulus, GDP growth will be higher and unemployment lower than they would otherwise be, and outcomes may be more consistent with the FOMC's mandate to promote maximum employment.
Con:  With additional monetary stimulus, the exit from monetary stimulus once the economy improves will be more difficult than it would otherwise be, and outcomes may be inconsistent with the FOMC's mandate to achieve price stability.
Pro:  The performance of the economy has not been consistent with the FOMC's mandated objectives.
Con:  The economy is slowly moving in the direction of the FOMC's mandated objectives, and the Fed should "keep its powder dry" in case of further deterioration of the economy.


Many, if not all, of these benefits and costs are familiar, and there has been no shortage of opinions advanced. To some extent, it is inevitable that the weighting of these costs and benefits will be to a large degree judgmental. How one weights the risks associated with continued high rates of unemployment versus the risks of imbalances that may arise from low interest rates, for example, is a subjective thing.

Nonetheless, it would be helpful to frame these subjective judgments with a background of some hard evidence. For example, how much employment can we gain for a given quantity of asset purchases (or any other monetary policy option on the table)? What are the likely—or existing—distortions created by low interest rates, and what do we think are the tangible costs associated with those distortions? And so on.

So, here is my challenge question: No matter what your opinion about what should be done, and whether you arrive at a conclusion by casual observation, econometric studies, or historical evidence, what do you think is the best evidence concerning any or all of these costs and benefits?

OK, then. Bloggers blog, commentators comment.

Update: Jon Hilsenrath sizes up some of the costs of a new bond-buying program.

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

 


August 24, 2012 in Federal Reserve and Monetary Policy, Monetary Policy | Permalink

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c834f53ef0176176b63fc970c

Listed below are links to blogs that reference The Cost-Benefit Challenge:

Comments

I think the Fed has destroyed its credibility on the full employment front and hence the aggregate demand front. Expectations are coming completely unmoored.

For example, the looming 'fiscal cliff' would be considered a non-event if the Fed could be counted on to maintain nominal demand. However, years of opportunistic disinflation confuse any signal and make recession much more likely next year, thanks to political dysfunction and Fed fecklessness.

Without credibility on the AD front you are all making your own jobs much harder than it should be.

Posted by: OGT | August 25, 2012 at 09:45 AM

Good, hard question. But we might not have to answer it if fiscal policymakers would do a much easier cost-benefit analysis. The U.S. govrnment can borrow money in the TIPS market for 30 years at a real rate of 0.42%. Surely, SURELY, there are some long-lived infrastructure investment projects that aren't underway right now that will generate an internal rate of return higher than tat over their useful lives.

Posted by: ASG | August 27, 2012 at 12:20 PM

unfortunately you did not number the arguments.

con #1,3,4,6,7 are arguments that apply to any period of Fed easing. If you accept these then the FOMC should disband, do nothing, and never try to ease, because cutting rates deeper means makes it takes more time to raise them back to neutral. They are also in direct contradiction to Bernanke's testimony that the Fed has suitable room to unwind the balance sheet. Implicit in most is the booms-cause-busts theory of the business cycle.

If the Fed is steering the bus, then it can control the speed.

Con #2 has been rebutted by the Fed's internal research, and we have not seen any evidence for it.

Con #5 accepts the flawed theory that the FOMC should be defacto Senators or elected representatives that put pressure on Congress. It accepts the flawed, disproven, German idea of expansionary fiscal contraction.

Fundamentally, most of these arguments against action are tantamount to the business cycle solves itself and the Fed cannot control the economy. If that's the case, then we should disband the FOMC and save the taxpayers money. Really, FOMC members should thus be justifying their jobs.

Posted by: dwb | August 27, 2012 at 02:10 PM

can i posit a different cost/benefit analysis? with the fiscal mechanism broken? I fail to see who is benefiting from zero rates?!?! so at this point i can name a whole host of cons and less and less pros for the zero bound. For the sake of keeping it short I'll take the first shot across the bow on the zero rate regime, INTEREST INCOME 2007 was $492bln now its $64bln a DROP of $428bln.. WOW, meanwhile (roughly) DEBT Servicing has dropped $195bln.. MAYBE INCOMES WILL GO UP WITH RATES?? thats just the beginning of a very long argument. The purpose of low rates was clear before, but becomes increasingly unclear to me over time.

Posted by: cidiel | August 29, 2012 at 09:43 AM

Thanks - love the pros/cons list. Keep them coming!

Posted by: RebBowDur | September 04, 2012 at 07:05 PM

When we analysis cost and benefit analysis on any business so, it changes business to business. As, it depend o the business which we are handling. Before making any policies, we should first analysis it's pros and cons, as its meter a lot in any business.

Posted by: joshef | December 14, 2012 at 01:31 AM

Post a comment

Comments are moderated and will not appear until the moderator has approved them.

If you have a TypeKey or TypePad account, please Sign in

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

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c834f53ef01774448a2f6970d

Listed below are links to blogs that reference The (Unfortunately?) Consistent Record of the Recovery: Duy and Thoma Respond:

Comments

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. (http://bubblesandbusts.blogspot.com/2012/08/fomc-projections-provide-no-hint-of.html)

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

Post a comment

Comments are moderated and will not appear until the moderator has approved them.

If you have a TypeKey or TypePad account, please Sign in