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November 20, 2013

The Shadow Knows (the Fed Funds Rate)

The fed funds rate has been at the zero lower bound (ZLB) since the end of 2008. To provide a further boost to the economy, the Federal Open Market Committee (FOMC) has embarked on unconventional forms of monetary policy (a mix of forward guidance and large-scale asset purchases). This situation has created a bit of an issue for economic forecasters, who use models that attempt to summarize historical patterns and relationships.

The fed funds rate, which usually varies with economic conditions, has now been stuck at near zero for 20 quarters, damping its historical correlation with economic variables like real gross domestic product (GDP), the unemployment rate, and inflation. As a result, forecasts that stem from these models may not be useful or meaningful even after policy has normalized.

A related issue for forecasters of the ZLB period is how to characterize unconventional monetary policy in a meaningful way inside their models. Attempts to summarize current policy have led some forecasters to create a "virtual" fed funds rate, as originally proposed by Chung et al. and incorporated by us in this macroblog post. This approach uses a conversion factor to translate changes in the Fed's balance sheet into fed funds rate equivalents. However, it admits no role for forward guidance, which is one of the primary tools the FOMC is currently using.

So what's a forecaster to do? Thankfully, Jim Hamilton over at Econbrowser has pointed to a potential patch. However, this solution carries with it a nefarious-sounding moniker—the shadow ratewhich calls to mind a treacherous journey deep within the hinterlands of financial economics, fraught with pitfalls and danger.

The shadow rate can be negative at the ZLB; it is estimated using Treasury forward rates out to a 10-year horizon. Fortunately we don't need to take a jaunt into the hinterlands, because the paper's authors, Cynthia Wu and Dora Xia, have made their shadow rate publicly available. In fact, they write that all researchers have to do is "...update their favorite [statistical model] using the shadow rate for the ZLB period."

That's just what we did. We took five of our favorite models (Bayesian vector autoregressions, or BVARs) and spliced in the shadow rate starting in 1Q 2009. The shadow rate is currently hovering around minus 2 percent, suggesting a more accommodative environment than what the effective fed funds rate (stuck around 15 basis points) can deliver. Given the extra policy accommodation, we'd expect to see a bit more growth and a lower unemployment rate when using the shadow rate.

Before showing the average forecasts that come out of our models, we want to point out a few things. First, these are merely statistical forecasts and not the forecast that our boss brings with him to FOMC meetings. Second, there are alternative shadow rates out there. In fact, St. Louis Fed President James Bullard mentioned another one about a year ago based on work by Leo Krippner. At the time, that shadow rate was around minus 5 percent, much further below Wu and Xia's shadow rate (which was around minus 1.2 percent at the end of last year). Considering the disagreement between the two rates, we might want to take these forecasts with a grain of salt.

Caveats aside, we get a somewhat stronger path for real GDP growth and a lower unemployment rate path, consistent with what we'd expect additional stimulus to do. However, our core personal consumption expenditures inflation forecast seems to still be suffering from the dreaded price-puzzle. (We Googled it for you.)





Perhaps more important, the fed funds projections that emerge from this model appear to be much more believable. Rather than calling for an immediate liftoff, as the standard approach does, the average forecast of the shadow rate doesn't turn positive until the second half of 2015. This is similar to the most recent Wall Street Journal poll of economic forecasters, and the September New York Fed survey of primary dealers. The median respondent to that survey expects the first fed funds increase to occur in the third quarter of 2015. The shadow rate forecast has the added benefit of not being at odds with the current threshold-based guidance discussed in today's release of the minutes from the FOMC's October meeting.

Moreover, today's FOMC minutes stated, "modifications to the forward guidance for the federal funds rate could be implemented in the future, either to improve clarity or to add to policy accommodation, perhaps in conjunction with a reduction in the pace of asset purchases as part of a rebalancing of the Committee's tools." In this event, the shadow rate might be a useful scorecard for measuring the total effect of these policy actions.

It seems that if you want to summarize the stance of policy right now, just maybe...the shadow knows.

Photo of Pat HigginsBy Pat Higgins, senior economist, and

 

Photo of Brent MeyerBrent Meyer, research economist, both of the Atlanta Fed's research department


November 20, 2013 in Fed Funds Futures, Federal Reserve and Monetary Policy, Forecasts, Interest Rates, Monetary Policy | Permalink

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'The shadow rate ... is estimated using Treasury forward rates out to a 10-year horizon.'

The Wu-Xia paper mentions forward rates, but it also describes a three-factor model incorporating 97 different macro series.

Since June 2013, the shadow policy rate has declined from -0.80% to a series-low -1.98%, while forward rates have been rising.

Is this sharp decline in the shadow policy rate due to changes in the macro series (e.g. accelerating GDP growth, to name one example), changes in forward rates, or both?

Posted by: Jim Haygood | January 13, 2014 at 04:45 PM

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August 30, 2013

Still Waiting for Takeoff...

On Thursday, we got a revised look at the economy’s growth rate in the second quarter. While the 2.5 percent annualized rate was a significant upward revision from the preliminary estimate, it comes off a mere 1.1 percent growth rate in the first quarter. That combines for a subpar first-half growth rate of 1.8 percent. OK, it’s growth, but not as strong as one would expect for a U.S. expansion and clearly a disappointment to the many forecasters who had once (again) expected this to be the year the U.S. economy shakes itself out of the doldrums.

Now, we’re not blind optimists when it comes to the record of economic forecasts. We know well that the evidence says you shouldn’t get overly confident in your favorite economists’ prediction. Most visions of the economy’s future have proven to be blurry at best.

Still, we at the Atlanta Fed want to know how to best interpret this upward revision to the second-quarter growth estimate and how it affects our president’s baseline forecast “for a pickup in real GDP growth over the balance of 2013, with a further step-up in economic activity as we move into 2014.”

What we can say about the report is that the revised second-quarter growth estimate is a decided improvement from the first quarter and a modest bump up from the recent four-quarter growth trend (1.6 percent). And there are some positive indicators within the GDP components. For example, real exports posted a strong turnaround last quarter, presumably benefiting from Europe’s emerging from its recession. And the negative influence of government spending cuts, while still evident in the data, was much smaller than during the previous two quarters.  Oh, and business investment spending improved between the first and second quarters.

All good, but these data simply give us a better fix on where we were in the second quarter, not necessarily a good signal of where we are headed. To that we turn to our “nowcast” estimate for the third quarter based on the incoming monthly data (the evolution of which is shown in the table below).

A "nowcasting" exercise generates quarterly GDP estimates in real time. The technical details of this exercise are described here, but the idea is fairly simple. We use incoming data on 100-plus economic series to forecast 12 components of GDP for the current quarter. We then aggregate those forecasts of GDP components to get a current-quarter estimate of overall GDP growth.

We caution that unlike others, our nowcast involves no interpretation whatsoever of these data. In what is purely a statistical exercise, we let the data do all the speaking for themselves.

Given the first data point of July—the July jobs report—the nowcast for the third quarter was pretty bleak (1.1 percent). Things improved a few days later with the release of strong international trade data for June, and stepped up further with the June wholesale trade report. But the remainder of the recent data point to a third-quarter growth rate that is very close to the lackluster performance of the first half.


In his speech a few weeks ago, President Dennis Lockhart indicated what he was looking for as drivers for stronger growth in the second half of this year.

“I expect consumer activity to strengthen.”

Today’s read on real personal consumption expenditures (PCE) probably isn’t bolstering confidence in that view. Real PCE was virtually flat in July, undermining private forecasters’ expectation of a moderate gain. Our nowcast for real GDP slipped down 0.5 percentage points to 1.4 percent on the basis of this data, and pegged consumer spending at 1.7 percent for Q3—in line with Q2’s 1.8 percent gain.

“I expect business investment to accelerate somewhat.”

The July data were pretty disappointing on this score. The durable-goods numbers released a few days ago were quite weak, causing our nowcast, and those of the others we follow, to revise down the third-quarter growth estimate.

“I expect the rebound we have seen in the housing sector to continue.”

Check. Our nowcast wasn’t affected much by the housing starts data, but the existing sales numbers produced a positive boost to the estimate. Our nowcast’s estimate of residential investment growth in the third quarter is well under what we saw in the second quarter. But at 5.3 percent, the rebound looks to be continuing.

“I expect the recent improvement in exports to last.”

Unfortunately, the July trade numbers don’t get reported until next week. So we’re going to mark this one as missing in action.  But as we said earlier, that June trade number was strong enough to cause our third-quarter nowcast to be revised up a bit.

“And I expect to see an easing of the public-sector spending drag at the federal, state, and local levels.”

Again, check. The July Treasury data indicated growth in government spending overall.

So the July data are a mixed bag: some positives, some disappointments, and some missing-in-actions. But if President Lockhart were to ask us (and something tells us he just might), we’re likely to say that on the basis of the July indicators, the “pickup in real GDP growth over the balance of 2013” isn’t yet very evident in the data.

This news isn’t likely to come as a big surprise to him. Again, here’s what he said publicly two weeks ago:

When I weigh the balance of risks around the medium-term outlook I laid out, I have some concerns about the potential for ambiguous or disappointing data. I also think that it is important to be realistic about the degree to which we are likely to have clarity in the near term about the direction of the economy. Both the quantity of information and the strength of the signal conveyed by the data will likely be limited. As of September, the FOMC will have in hand one more employment report, two reports on inflation, a revision to the second-quarter GDP data, and preliminary incoming signals about growth in the third quarter. I don't expect to have enough data to be sure of my outlook.

It’s still a little early to say with any confidence we won’t eventually see a pickup this quarter, and we can hope that the incoming August numbers show a more marked improvement. All we can say at this point is that after seeing most of the July data, it still feels like we’re stuck on the tarmac.

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

Photo of Patrick HigginsPatrick Higgins, senior economist, and

Photo of Brent MeyerBrent Meyer, economist, all in the Atlanta Fed's research department


August 30, 2013 in Data Releases, Economic Growth and Development, Economics, Forecasts, GDP | Permalink

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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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February 22, 2013

Nature Abhors an Output Gap

In The Washington Post, Neil Irwin highlights a shortcoming that I know all too well:

Throughout the halting economic recovery that began in 2009, the formal economic projections released by the Congressional Budget Office, White House Council of Economic Advisers, and Federal Reserve have displayed quite a consistent pattern: This year may be one of sluggish growth, they acknowledge. But stronger growth, of perhaps 3.5 percent, is just around the corner, and will arrive next year.

Consider, for example, the Fed's projections in November of 2009. Sure, growth would be slow in 2010, they held. But 2011 growth, they expected, would be 3.4 to 4.5 percent, and 2012 would 3.5 to 4.8 percent growth. The actual levels of growth were 2 percent in 2011 and 1.5 percent in 2012.

What's amazing is that the Fed's newest projections, released in December of 2012, look like they could have been copy and pasted from 2009, just with the years changed: They forecast sluggish growth in 2013, 2.3 to 3 percent, followed by a pickup to 3 to 3.5 percent in 2014 and 3 to 3.7 percent in 2015.

I, for one, am guilty as charged, and feel pretty fortunate that the offense is not a hanging one. In fact I don't think Irwin's indictment is overly harsh, and he is on the right track when he offers up this explanation for the last several years' persistently overly rosy projections:

Economic forecasters tend to look at past experience and extrapolate; in the past, when there has been a recession, the very forces that caused the recession become unwound, sowing the seeds for expansion...

Here is a basic fact about macroeconomic forecasting. The truly powerful driver of forecasts is mean reversion, which is the tendency of models to predict that gross domestic product (GDP) will move toward an average trend over time. This fact holds true whether we are talking about formal statistical analysis or the intuitive judgmental adjustments that all forecasters apply to their formal statistical models.

Forecasters are not completely robotic, of course. Irwin is correct when he says "forecasters tend to look at past experience and extrapolate, but forecasters do leaven past experience with incoming details that alter judgments about what is the mean—the "normal state," if you will—to which the economy will converge. But whatever is that normal state, our models insist that we will converge to it.

Nothing illustrates this property of forecasting reality better than this chart, which supplements the latest economic projections from the Congressional Budget Office:

130222a


The potential GDP line in that chart is the level of production that represents the structural path of the economy. Forecasters, no matter where they think that potential GDP line might be, all believe actual GDP will eventually move back to it. "Output gaps"—the shaded area representing the cumulative miss of actual GDP relative to its potential—simply won't last forever. And if that means GDP growth has to accelerate in the future (as it does when GDP today is below its potential)—well, that's just the way it is.

Unfortunately, potential GDP is not so simple to divine. We have to guess (or, more generously, estimate) what it is. That guessing game has been harder than usual over the past several years. Here is the record of the CBO's potential GDP since 2009:

130222b


I think this picture is a fairly representative record of how views about the potential level of U.S. GDP has evolved over the past several years. What has not been resolved is the debate over what conclusions should be drawn from persistent overestimates of potential and serial misses to the high side on GDP projections.

Irwin seems to be of two minds. On the one hand he offers very structural-sounding reasons for poor forecasting experience:

... the financial-crisis-induced recession of 2008–2009 was so deep that it had deep-seated effects that go beyond those explained by those traditional relationships. It messed up the workings of the financial system, and banks are still trying to figure out what the new one looks like.

On the other hand, he makes appeals to very traditional explanations tied to deficient spending and insufficient policy stimulus (though even here structural change may be one reason that stimulus has been insufficient):

Breakdowns in the financial system mean that low-interest rate policies from the Fed don't have their usual punch. An overhang of household debt means that consumers hold their wallets more than usual. Federal fiscal stimulus to offset those effects is now long-over...

This much, in any event, is clear: Given any starting point where the level of GDP is below its potential level—that is, given an output gap—forecasts will include a bounce back in GDP growth above its long-run average, at least for a while. That's just the way it works.

If, contrary to conventional wisdom, you believe that the true output gaps are much smaller than suggested in the CBO picture above, you might want to take the under on a bet to whether GDP forecasts will prove too optimistic once again.

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

 

February 22, 2013 in Forecasts, GDP | Permalink

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Dave - I generally enjoy your posts, but I am surprised that in this one you pretty much ignored the single biggest...and unresolved...question about econometric modeling in this case. You (not just you, of course, but lots of modelers) assume that GDP is trend-stationary rather than unit root. But the history of the last few years is MUCH easier to describe as 'failing to reject the hypothesis' that GDP growth is unit root, wouldn't you say?

I wrote something about this a couple of years ago to explain the issue to non-economists: https://mikeashton.wordpress.com/2010/10/12/the-root-of-the-problem/

Anyway, otherwise I like your articles. Thanks.

Posted by: Michael Ashton | February 22, 2013 at 08:45 PM

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July 13, 2012

What’s to be done?

It's always hard to please everyone. Sometimes it's hard to please anyone. You probably don't need a lot of convincing on this point, but if you desire one more case study look no further than the past week's commentary on monetary policy, starting with Wonkblog's rather negative performance review (post by Brad Plumer) of the Fed's recent policy decisions:

"Right now, unemployment is falling more slowly than the Fed expected when it issued its forecasts back in April... When the Fed published its forecasts, it expected more jobs reports like April's, which initially showed the economy adding 115,000 jobs new jobs. But that hasn't happened… Which means the Fed's own numbers prove the Fed is failing to meet its dual mandate of keeping unemployment and inflation low. (Inflation is below the central bank's target right now; unemployment is not.)"

Plumer favorably references an earlier item from the Peterson Institute's Joe Gagnon, bearing the damning title "The Fed Shirks Its Duty":

"On June 20, 2012, the Federal Reserve System's Federal Open Market Committee extinguished the last shred of doubt as to whether it intends to achieve its mandated objectives."

Carnegie Mellon's Alan Meltzer similarly wonders "What's Wrong With the Federal Reserve?" But his lament, published earlier this week in the op-ed pages of the Wall Street Journal, doesn't exactly mesh with the Gagnon-Plumer school of thought.

"One of the Fed's big mistakes is excessive attention to the short term, over which it has little influence...

"The problem with the short term is that data reported today are subject to revision, or reflect only transitory changes. The better economic data last winter are one of many examples. Would the reported improvement in the economy persist? We didn't learn the answer until weaker data reported this spring. Is the slowdown persistent or temporary? We can only guess.

"Executing monetary-policy changes in response to transitory data is a mistake...

"Today's economic problems are serious, but the Fed can't do much about them if these problems are not monetary. Very expansive monetary policies did help during the crisis of 2008–09, but they're not what is needed now…"

I don't see a dispute here about the fact in the first half of the year the U.S. economy has grown considerably slower than most people—including those in the Fed—thought it would. As usual, the dispute comes down to how to interpret those facts and what to do about them.

Material differences of opinion about how to interpret the current economic environment was the focal point of a speech given today by Atlanta Fed President Dennis Lockhart, in Jackson, Mississippi. Acknowledging the divergent views represented by the Plumer, Gagnon, and Meltzer views, President Lockhart offers his own:

"The question that the members of the FOMC confront is whether there is more that can be done to address the related challenges of slower GDP growth and tepid job creation. So, to wind up, let me give you my take on the key questions underlying a decision to bring on more monetary stimulus.

"I think the output gap—the amount of slack in the economy—is neither as sizeable as the high-end estimates, nor is it zero. If there were no slack at all, 8.2 percent unemployment would represent full employment. If this were so, the economy would have undergone profound structural change over the last five years. As I weigh the findings of research by Federal Reserve economists and others, I do not think a compelling case has yet been made that structural adjustment has played a dominant role in slowing growth and progress against unemployment.

"If, on the other hand, slack in the economy were close to the high estimates, we should have seen more and more persistent downward pressure on prices and wages than has, in fact, been the case. Deciding on the extent of the output gap is not straightforward. I believe the truth is in the gray middle.

"On the risk associated with the balance sheet: in my judgment, some further use of the balance sheet to promote continued recovery and/or financial stability brings with it manageable risks. I think reversal of the cumulative balance sheet scale and maturity structure can be accomplished in an orderly manner. But the step of additional balance sheet expansion should be undertaken very judiciously. Such a step would take us further into uncharted territory.

"On the likely effectiveness of further monetary stimulus—a policy that would necessarily be brought to bear at least in part through credit channels—I think we should have modest expectations about what further action can accomplish. I do not think this means monetary policy is impotent or has reached its limit. But I don't see more quantitative easing or similar policy action as a miracle cure, especially absent fixes in policy areas outside the central bank's purview."

And to the dimming forecasts:

"So, as one policymaker, here's my situation: my support for the current stance of policy rests on a forecast that sees a step-up of output and employment growth by year-end and into 2013. If the economy continues on the track indicated by the most recent incoming data and information, that forecast will become untenable, as will the policy premises underlying it."

Plumer and Gagnon argue we are already at that point. Meltzer believes otherwise. Lockhart is weighing both possibilities. That approach pleases neither camp, but it's the right thing to do.

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

July 13, 2012 in Federal Reserve and Monetary Policy, Forecasts, Monetary Policy | Permalink

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We never know the "natural rate" of employment or unemployment, or the speed limit of the economy, until we find it. It's an unknown and always will be. We never know how the economy is doing, except with a lag. Back on the 70s we overestimated it, now we are underestimating it (and please don't tell me about structural unemployment, construction is starting to pick up in AZ and NV as the foreclosure pipeline drains, just as one would expect- there is even demand for drywall).

The key fact about the recovery is that its not a new phenomenon that the Fed missed forecasts. The Fed forecasts have consistently underestimated the strength of the recovery, an indirect effect of underestimating how long it would take to work out all those mortgages (200k/month foreclosures and 700+ days homes are in foreclosure).

The Fed has also consistently overestimated inflation.

Underestimating inflation and underestimating the strength of the recovery (in a biased way, both of which mean insufficient aggregate demand) means the Fed has done a very poor job correcting for bias.

The even sadder news is that there is a policy that corrects for uncertain potential output in the face of the kinds of nominal rigidities facing the economy, ngdp level targeting.

And the worse news is that if the magically Fed corrects its bias and/or adopts better policy in a Romney administration, it will damage its credibility and independence forever because the perception will be that the FOMC was willfully blind to hurt Obama, especially when it knew of policies that worked in the past but did not use them. I am not saying i agree, but perception is reality in DC and there is a strong case the Fed will be seen as a GOP/banker tool having failed to catch the housing market, JP Morgan, and failure to even conduct monetary policy appropriately. Sad to see the Fed shoot itself in the head.


Posted by: dwb | July 15, 2012 at 10:07 AM

There's an old saying in the newspaper business that goes something like "Just because everybody hates what you're doing doesn't make you right." There is no better example of that than this post.

A huge problem in public discourse these days is the "false balance" epidemic that is sweeping through our policy debates. One side steps up and offers facts, the other polemic, yet each are presented with the same deference. For example, Mr. Meltzer states that:

"Evidence is growing that many think higher inflation is in our future." If you look at these expectations in places such as, say, the Atlanta Fed inflation dashboard, you see no such thing. Instead what you have is someone who is so invested in their paleolithic monetarist framework that they simply have checked out of reality altogether.

The notion of policymakers agonizing over difficult choices amidst the well-thought-out differences of opinion among experts is appealing, but has no application to the current situation. There are only timid and coopted unelected (and unconfirmed) regional Fed bank presidents who unnecessarily prolong the agony of millions in the interests of the top tier of financiers.

Posted by: Rich888 | July 15, 2012 at 08:29 PM

The Fed needs to reassess those policies fixes outside their purview for they are not. It's policies are leading directly to tax cut extensions and larger budget deficits. At this point they have responsibility for both inflation and deficits.

Posted by: Lord | July 16, 2012 at 12:08 PM

I think the Fed is out of bullets. Only responsible fiscal policy can save the short term, and good luck with that.

Posted by: Jeff Carter | July 16, 2012 at 05:48 PM

Dave,
You only get to play the "elder statesman" card if you get things right. The Fed has been wrong over and over since the crisis started....and always in the same direction. Inflation is always below target and unemployment is always over.

Not to be mean, but wake up and smell the recession!

Posted by: robbl | July 17, 2012 at 12:17 PM

I think the Fed is out of principal points. Only accountable financial plan can save the temporary, and best of fortune with that.

Posted by: seo florida | July 18, 2012 at 02:33 PM

your first chart, the prices are actually always increasing every month....i think thats interesting given the question of this blog post...

Its so funny to read questions from Fed people regarding prices and where they are headed, you print the money and control interest rates, how do you not know over the long term. You guys should give me a job there, I could do the thinking for 5 of you.

Good luck with your balance sheet guys. When your bank notes collapse, people like yourself will be responsible.

Posted by: youguyshavedegree's?? | July 19, 2012 at 03:23 PM

Unemployment in a certain country contributes a great help to the growth of its economy. Just like the U.S. economy which has grown slower because of the increase of unemployment in the country. More jobs must be opened to make a country more financially stable and the continuous growth of the economy will be easily met.

Posted by: Jonathan Mansho | August 11, 2012 at 12:16 PM

There are many encouraging signs and indicators tbat are improving.....Stay the course
.be patient
.....Good Work Bernanke!

Posted by: Anne | September 04, 2012 at 04:02 PM

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February 16, 2012

How are we doing?

Near the beginning of the minutes of the January meeting of the Federal Open Market Committee (FOMC), released yesterday, you'll find a reiteration of the FOMC's historic decision explicitly endorsing a numerical definition of long-run price stability:

"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 minutes include the motivating force behind this decision:

"The Chairman noted that the proposed statement did not represent a change in the Committee's policy approach. Instead, the statement was intended to help enhance the transparency, accountability, and effectiveness of monetary policy."

In a speech given Tuesday at New College in Sarasota, Fla., our local participant in this decision—Atlanta Fed President Dennis Lockhart—provided his interpretation of this numerical inflation objective:

"The 2 percent inflation target is an aid to understanding how the FOMC will react to developments in the economy within an overarching approach that can be called 'flexible inflation targeting.'

"The word 'flexible' describes and qualifies the committee's exercise of judgment in reaction to adverse developments. The word 'flexible' also reflects the principle that it is not always feasible or desirable to hit the target in the short run. Short-lived shocks to the economy can temporarily move measured inflation well away from the 2 percent target."

The thinking behind that statement can be clearly seen in the following chart, which illustrates the volatility of annualized inflation rates as the horizon extends from one to five years:


As the chart shows, volatility noticeably declines as the horizon extends beyond one year to two years, and a similar decline occurs as we move from a two- to five-year horizon. This picture is exactly the type you would expect if inflation were subject to temporary ups and downs that dissipate over time. In his speech, President Lockhart offered his thoughts on the policy meaning of an inflation process that has this characteristic:

"Consider last year's energy and commodity price increases. Those cost pressures pushed up inflation in the early part of the year. Then, as expected, their influence dissipated as the year progressed.

"Had the FOMC tightened monetary policy early last year in response to the inflation threat, we might have compromised progress on growth and employment to no particular benefit with respect to our inflation mandate…

"As I see it, this is a recent, real-world example of a balanced approach in action. It illustrates the idea of flexible inflation targeting."

Of course, that particular example might ring somewhat hollow if the record suggested that the FOMC just got lucky this time around. A criticism that emerged in the aftermath of the inflation target announcement was not so much that it was flexible per se, but that in its focus on an undefined long-run, it is essentially an empty commitment. That opinion was offered in a Financial Times article penned by Lorenzo Bini Smaghi:

"The first [question about the FOMC's definition of price stability] relates to the time horizon over which the Fed is supposed to achieve price stability, namely the long-run. This differs from most other central banks in advanced economies, where price stability is targeted over a horizon of two to three years…

"Monetary policy produces its effects with lags of one to three years. This is the period over which the central bank should be held accountable."

That thought was echoed on The Economist's Free Exchange blog:

"According to the Fed's projections, it hits its target—2% inflation—over the long term. Mr Bini Smaghi's point is that it doesn't make much sense to judge current Fed actions against a long-run inflation projection.

"…the Fed doesn't necessarily run into problems of inconsistency if it projects inflation above 2% 1 or 2 years from now—a timeframe over which markets readily understand this group of policymakers to have control—while maintaining the long-run 2% goal."

The second part of The Economist comments move the conversation to an operational middle ground between an inflexible commitment to a target in the very short run and a promise that provides little discipline because its attainment remains out in a perpetually undefined future.

In particular, think about monitoring policy performance against a stated inflation objective over some "medium-term" horizon. "Medium-term" is itself a term of art, but I find it attractive to think about a three- to five-year horizon. Given the continuous arrival of shocks to the economy, uncertainties about the timing of policy effects, and the desirability of trading off precise control over inflation against the risks of destabilizing influences on real economic growth, I think it is still unrealistic and unwise to expect that an inflation target will be hit precisely even over a medium-run horizon. This is the reason, I believe, that an exact point target for inflation is relegated to the long run. But I think it is realistic, and wise, to expect realized average inflation to fall within a reasonable tolerance range about a long-run target over something like a three-to-five-year medium-term horizon.

People can disagree about what constitutes a reasonable tolerance range, but one option that I find sensible would be along the lines of the average volatility of medium-term inflation (calculated over a period in which inflation outcomes were deemed to be acceptable, which I've chosen to be the period since the mid-1990s). With this in mind, the following chart plots realized inflation over three-, four-, and five-year horizons. (For reference, the chart highlights the 2 percent target with upper and lower limits that are plus and minus 1 percentage point.)


The plus or minus 1 percentage point threshold in the above graph is somewhat above the standard deviation of medium-term outcomes shown in my earlier chart, so one might want to tighten up the bounds. But if you are willing to accept that it's close to your definition of tolerable deviation, the record does support the position that, over the past two decades or so, the Fed has delivered on the its now-explicit long-term objective, or taken sufficient to steps to correct matters when it wasn't.

Looking forward, if the midpoint of FOMC participants' most recent inflation projections comes to pass, the four- to five-year averages would remain near the long-run objective, with the three-year average moving away from its recent flirtation with the lower end of my hypothetical tolerance range.

I'm not saying that the above chart alone defines "appropriate policy"; performance against the other half of the dual mandate is obviously relevant. But I think it provides at least one way to think about what success looks like, and a sensible metric for whether the Fed is delivering on its long-run promise.

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

 

February 16, 2012 in Federal Reserve and Monetary Policy, Forecasts, Inflation, Monetary Policy | Permalink

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I'm just wondering, how will inflation react to our overall economy with the recent 9 month high increase of crude prices? Just a thought.

Posted by: Johnny | February 21, 2012 at 02:57 PM

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February 10, 2012

Reading the bump in inventories

Yesterday's wholesale trade report, with its positive surprise in December inventory accumulation, has estimates of fourth quarter gross domestic product (GDP) on the rise again. For the advance GDP release, the U.S. Bureau of Economic Analysis assumed that the book value of merchant wholesale inventories rose by $17 billion (at a seasonally adjusted annual rate, or SAAR) in December. The wholesale trade report suggests the book value instead may have risen by $56 billion SAAR. Our own calculations suggest fourth quarter GDP may be revised up from 2.8 percent to around 3.1 percent. A piece of that revision comes from positive sales activity, which would appear to be an unambiguous plus.

The inventory piece is trickier. Forecasters have a tendency—because the statistics have a tendency—to take a larger-than-expected inventory buildup in one quarter out of growth estimates for the next quarter. The implication in present tense is, of course, that 2012 may start out on the slow side as the fourth quarter inventory swell is run off.

That's not how we see it. Our current read is that it is better to think of the fourth quarter inventory buildup as a payback from a decumulation in the third quarter. Here's a look at overall inventory changes over the recent past, broken down into their various industrial components:


If you look hard, you will see that, though the fourth quarter inventory rise was broad-based, the third to fourth quarter change in wholesale inventories was particularly notable. In fact, the wholesale inventory picture in the back half of 2011 was dominated by a fairly large decumulation of nondurable goods inventories in the third quarter, a decline that was reversed in the last three months of the year:


In the background of those details are some pretty nonthreatening-looking inventory-sales ratios:


So, consider two stories that might frame thinking about the role of inventories in GDP growth in the first quarter or first half of this year. One story is inventory-inflated growth in the fourth quarter of 2011, to be followed by payback in the form of a drag on production in the first quarter (or so) of 2012. Another story is that the drag actually emerged in the third quarter of last year, providing a little extra juice in the fourth quarter, with no particular consequences for the current-year growth trajectory.

Right now, it looks to us like the latter story might be the right one. Of course, that doesn't mean there aren't significant risks to the outlook for domestic production, and hence inventories. For instance, although today's report on international trade in December was relatively benign in terms of fourth quarter GDP revisions, it did show a substantial further weakening in exports to the euro zone. Weaker demand from Europe will weigh on U.S. export growth. The big unknown is how weak that demand will get.

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

 

February 10, 2012 in Data Releases, Economic Growth and Development, Forecasts | Permalink

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December 16, 2011

Maybe this time was at least a little different?

Earlier this week, Derek Thomson, a senior editor at The Atlantic, began his article "The Graph That Proves Economic Forecasters Are Almost Always Wrong" with some observations that don't really require a graph:

"As the saying goes: 'It's hard to make predictions. Especially about the future.' Thirty years ago, it was obvious to everybody that oil prices would keep going up forever. Twenty years ago, it was obvious that Japan would own the 21st century. Ten years ago, it was obvious that our economic stewards had mastered a kind of thermostatic control over business cycles to prevent great recessions. We were wrong, wrong, and wrong."

In a recent speech, Dennis Lockhart—whom most of you recognize as president here at the Atlanta Fed—offered his own thoughts on why forecasts can go so wrong:

"… you may wonder why forecasters, the Fed included, don't do a better job. To answer this question, let me suggest three reasons why forecasts may be off.

"While it's relatively trivial in my view, the first reason involves missing the timing of economic activity. An example of that was mentioned earlier when I explained that GDP for the third quarter had been revised down while the fourth quarter is expected to compensate.

"A second reason that forecasts miss the mark is, in everyday language, stuff happens.

"To be a little more precise, unforeseen developments are a fact of life. In my view, the energy and commodity shocks early in the year had a significant impact on growth in the first half of 2011. The tsunami-related supply disruptions, though temporary, were an exacerbating factor. In fact, a lot of shocks or disruptions are quite temporary and don't cause one to rethink the narrative about where the economy is likely going.

"Which brings me to the third reason why economic prognostications go off track: we, as forecasters, simply get the bigger story wrong.

"What I mean by getting the bigger story wrong is failing to understand the fundamentals at work in the economy."

"Getting the bigger story wrong" is Simon Potter's theme in the New York Fed's Liberty Street Economics blog post, "The Failure to Forecast the Great Recession":

"Looking through our briefing materials and other sources such as New York Fed staff reports reveals that the Bank's economic research staff, like most other economists, were behind the curve as the financial crisis developed, even though many of our economists made important contributions to the understanding of the crisis. Three main failures in our real-time forecasting stand out:

1.  Misunderstanding of the housing boom …

2. A lack of analysis of the rapid growth of new forms of mortgage finance …

3. Insufficient weight given to the powerful adverse feedback loops between the financial system and the real economy …


"However, the biggest failure was the complacency resulting from the apparent ease of maintaining financial and economic stability during the Great Moderation."

Potter does not implicate any of his Federal Reserve brethren, but you can add me to the roll call of those having made each of the mistakes on the list.

Should we have known? A powerful narrative that we should have has taken hold. The boom-bust cycle associated with large bouts of asset appreciation and debt accumulation has a long history in economics, and the theme has been pressed home in its most recent incarnation by the work of Carmen Reinhart and coauthors, including the highly influential book written with Kenneth Rogoff, This Time is Different: Eight Centuries of Financial Folly.

Unfortunately, even seemingly compelling historical evidence is not always so clear cut. An illustration of this, relevant to the failure to forecast the Great Recession, was provided in a paper by Enrique Mendoza and Marco Terrones (from the University of Maryland and the International Monetary Fund, respectively), presented last month at a Central Bank of Chile conference, "Capital Mobility and Monetary Policy." What the paper puts forward is described by Mendoza and Terrones as follows:

"… in Mendoza and Terrones (2008) we proposed a new methodology for measuring and identifying credit booms and showed that it was successful in identifying credit boom events with a clear cyclical pattern in both macro and micro data.

"The method we proposed is a 'thresholds method.' This method works by first splitting real credit per capita in each country into its cyclical and trend components, and then identifying a credit boom as an episode in which credit exceeds its long-run trend by more than a given 'boom' threshold, defined in terms of a tail probability event… The key defining feature of this method is that the thresholds are proportional to each country's standard deviation of credit over the business cycle. Hence, credit booms reflect 'unusually large' cyclical credit expansions."

And here is what they find:

"In this paper, we apply this method to data for 61 countries (21 industrialized countries, ICs, and 40 emerging market economies, EMs), over the 1960-2010 period. We found a total of 70 credit booms, 35 in ICs and 35 in EMs, including 16 credit booms that peaked in the critical period surrounding the recent financial crisis between 2007 and 2010 (again with about half of these recent booms in ICs and EMs each)…

"The results show that credit booms are associated with periods of economic expansion, rising equity and housing prices, real appreciation and widening external deficits in the upswing of the booms, followed by the opposite dynamics in the downswing."

That certainly sounds familiar, and supports the "we should have known" meme. But the full facts are a little trickier. Mendoza and Terrones continue:

"A major deviation in the evidence reported here relative to our previous findings in Mendoza and Terrones (2008) is that adding the data from the recent credit booms and crisis we find that in fact credit booms in ICs and EMs are more similar than different. In contrast, in our earlier work we found differences in the magnitudes of credit booms, the size of the macroeconomic fluctuations associated with credit booms, and the likelihood that they are followed by banking or currency crises.

"… while not all credit booms end in crisis, the peaks of credit booms are often followed by banking crises, currency crises of Sudden Stops, and the frequency with which this happens is about the same for EMs and ICs (20 to 25 percent for banking and currency for banking crisis, 14 percent for Sudden Stops)."

Their notion still supports the case of the "we should have known" camp, but here's the rub (emphasis mine):

"This is a critical change from our previous findings, because lacking substantial evidence from all the recent booms and crises, we had found only 9 percent frequency of banking crises after credit booms for EMs and zero for ICs, and 14 percent frequency of currency crises after credit booms for EMs v. 31 percent for ICs."

In other words, based on this particular evidence, we should have been looking for a run on the dollar, not a banking crisis. What we got, of course, was pretty much the opposite.

No excuses here. Speaking only for myself, I had the story wrong. But the conclusion to that story is a lot clearer now than it was in the middle of the tale.

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

 

December 16, 2011 in Business Cycles, Financial System, Forecasts | Permalink

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When your currency is the global reserve currency, there is nothing
available in sufficient size to run TO. Therefore, a run ON the dollar
was an impossibility. The ONLY other possibility was the only one remaining, a run on the Banking System.

Posted by: Robert K | December 18, 2011 at 01:13 PM

Indeed, you can't predict economic events. No kidding.

However, that fact means you must also give up attempts to control the economy.

If you cannot predict any future, how do you navigate to one particular desired future?

There is no actual evidence over 50-year periods that any country has successfully done so. Economists have destroyed a lot of countries in their attempts, however.

Abolish the Fed.

Posted by: Lew Glendenning | December 18, 2011 at 08:51 PM

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September 08, 2011

Another cut at the postrecession job picture

There is not much to be said about the August employment report released last Friday—or not much good, anyway. The ongoing updates at Calculated Risk provide a chronicle of the questions and challenges that have characterized the postrecession period. An exhaustive set of graphs are spread across several posts, here, here, and here. The last post in the series focused on construction employment specifically and includes this observation, which is based on the addition of 26,000 construction jobs in 2011 through August:

"After five consecutive years of job losses for residential construction (and four years for total construction), this is a baby step in the right direction. However there will not be a strong increase in residential construction until the excess supply of housing is absorbed."

Given the likely pace of turnaround in the housing market, that sounds like a problem. It is not much surprise that employment in the construction sector is, and likely will continue to be, significantly weaker than it was before the recession. Can the same be said of most other sectors? The following chart shows pre- and postrecession, cross-sector average monthly changes in payroll employment, broadly defined according to U.S. Bureau of Labor Statistics' classifications. For reference, the size of the circles in the chart reflect the relative prerecession size of the sector in terms of employment.


A few points:

  • The 45-degree line represents points where average monthly employment changes before the recession (from December 2001 through November 2007, precisely) are exactly the same as the average changes after the recession (July 2009 through August 2011). Consistent with the slow pace of overall employment growth during this recovery, the majority of circles representing different sectors lie below the 45-degree line.
  • In general, the pattern of circles is such that those sectors with relatively high employment changes prerecession are those that have exhibited relatively high changes during the recovery. In other words, we have not yet seen a widespread reshuffling of cross-sectoral employment trends outside of the recession. For example, employment changes in the education and health care sector led the pack before the recession, and that sector has led the pack thus far in the recovery. At the opposite end of the scale, job growth in the information sector has remained on a negative trend in the recovery period, just as it was prior to the recession.
  • I want to note a few exceptions to the preceding observation, which discusses the sectors with relatively high employment changes before the recession being the same ones that exhibited relatively high changes during the recovery. As noted, employment in the construction sector is well off its prerecession pace. What may be less appreciated is the fact that manufacturing employment, outside of the motor vehicles and auto parts sector, has experienced monthly employment gains that are better than the prerecession rate. Employment in the government sector, on the other hand, has noticeably flipped from positive to negative. This shift is also true of job growth in the financial activities sector, though the change is less dramatic than in the government sector.


Manufacturing and government represent relatively big shares of employment. Including motor vehicles and parts, manufacturing payroll employment was over 11 percent of total U.S. jobs for the period from 2002 through 2007. Government employment was about 16.5 percent (and had the largest single share of sectoral employment in the breakdown used in the chart above). The bad news in the big picture is that the better performance in manufacturing job creation is really a shift from negative job creation in the prerecession period to zero job creation in the postrecession period. And as for government employment, it seems unlikely that the forces will soon align to move job growth in the public sector back into positive territory. (The same could probably be said of financial activities employment.)

I am not pushing any particular interpretation of these facts, but a couple of questions come to mind. Will non-auto manufacturing employment revert to the contracting trend in place prior to the recession? Will employment in the financial activities and government sectors continue to shrink? If so, will these jobs be absorbed by increased employment in other sectors, and how long will that take?

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

 

September 8, 2011 in Data Releases, Employment, Forecasts, Labor Markets | Permalink

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Dave: Can you create a similar graph that measures not number of employed but % of income going to each of those sectors?

Posted by: bryan byrne | September 10, 2011 at 08:30 AM

It's not that hard to figure this out. In 1928, the average workweek was 48 hours. In 1935, the average workweek was 40 hours.

Work is finite and shrinks over time in a productive economy. The 40-hour workweek was the coarse-grained tool to enforce an equality between production and consumption, and government employment has been the fine-grained tool to keep it balanced since 1929.

The only true fix for current situation is to reset the coarse-grained tool to 36 or 32-hour week, which will reset the fine-grained tool.

Posted by: Broward Horne | September 10, 2011 at 01:07 PM

I hope you guys are paying attention:

http://2.bp.blogspot.com/-5rxDm-_8-0I/TnmNJYKW4wI/AAAAAAAAAA8/zhetiAWZL9s/s1600/SPXvsTIPSBetas.bmp

The SPX - TIPS spread beta is a credible tool for resisting calls for more inflation in scenarios that Volker imagines, and for resisting inflation hawks in scenarios like... right now. The policy rule suggested is: Hold the beta near zero. Unlike inflation targeting, the beta has no sharp thresholds - you can under or overshoot slightly without killing people.

I'm putting this here both because it's your most recent post, and because it's a post about structural nonsense. Current economic conditions would require completely fantastic frictions to explain structurally. So people talk in vague ways about employee education, or an overburden of housing inventory. If houses are so plentiful, why does everyone I know rent or live with their parents? It's completely ridiculous. Then you have (as far as I understand it) a sterilized intervention like Twist. Newsflash: sterilized interventions can't do anything at the zero bound. Only inflation can.

Posted by: Carl Lumma | September 26, 2011 at 01:59 PM

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August 26, 2011

Lots of ground to cover: An update

If you have to discuss a difficult circumstance, I guess Jackson Hole, Wyo., is as nice as place as any to do so. This morning, as most folks know by now, Federal Reserve Chairman Bernanke reiterated the reason that most Federal Open Market Committee (FOMC) members support the expectation that policy rates will remain low for the next couple of years:

"In light of its current outlook, the Committee recently decided to provide more specific forward guidance about its expectations for the future path of the federal funds rate. In particular, in the statement following our meeting earlier this month, we indicated 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 mid-2013. That is, in what the Committee judges to be the most likely scenarios for resource utilization and inflation in the medium term, the target for the federal funds rate would be held at its current low levels for at least two more years."

There are two pieces of information that emphasize the economy's recent weakness and potential slow growth going forward. The first is this week's revised forecasts and potential for gross domestic product (GDP) from the Congressional Budget Office (CBO), and the second is today's revision of second quarter GDP from the U.S. Bureau of Economic Analysis (BEA). Though estimates of potential GDP have not greatly changed, the CBO's downgrade in forecasts and BEA's report of much lower than potential growth in the second quarter have the current and prospective rates of resource utilization lower than when macroblog covered the issue just about a month ago.

Key to the CBO's estimates is a reasonably good outlook for GDP growth after we get past 2012:

"For the 2013–2016 period, CBO projects that real GDP will grow by an average of 3.6 percent a year, considerably faster than potential output. That growth will bring the economy to a high rate of resource use (that is, completely close the gap between the economy's actual and potential output) by 2017."

The margin for slippage, though, is not great. Assuming that GDP ends 2011 having grown by about 2.3 percent—as projected by the CBO—here's a look at gaps between actual and potential GDP for different, seemingly plausible growth rates:


Attaining 3.5 percent growth by next year moves the CBO's date for closing the output gap up by about a year. On the other hand, a fall in output growth to an average of 3 percent per year moves the date for eliminating resource slack back to 2020. If growth remains below that—well, let's hope it doesn't.

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

 

August 26, 2011 in Business Cycles, Economic Growth and Development, Employment, Forecasts, Saving, Capital, and Investment | Permalink

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«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 mid-2013.»

The exceptionally low funding rates to financial intermediaries are not resulting in equally low rates for customers of those intermediaries, because the Fed has repeatedly hinted that they want to rebuild the balance sheet of the finance sector boosting their profits by granting them a huge spread (and hoping that at least half of those profits go into capital instead of bonuses).

Bernanke's statement then may be interpreted as saying that the Fed does expects the financial sector to need another several years of extra profits resulting from the Fed "subsidy" because the finance sector seem unlikely to be able to make any profit if market conditions prevailed, and indeed it seems that the capital position of many finance sector "national champions" is still weak considering the cosmetically hidden capital losses they have.

As to inflation, wage inflation is indeed well contained (wages are declining in real terms) even if cost of living inflation seems pretty rampant; in a similar country like the UK where indices are less "massaged" the RPI has been running at over 5% and on an increasing trend:

http://www.bbc.co.uk/news/uk-14538167

Posted by: Blissex | August 26, 2011 at 05:28 PM

Why can't the Federal Reserve tell the public the obvious: Growth will only come about by hiring people with livable wages.

If we don't raise incomes nationally we will be forced to liquidate on a massive scale. It doesn't matter who does the hiring, just that it is done.

It isn't the deficit. It isn't the debt. It's the incomes, stupid.

Posted by: beezer | August 27, 2011 at 06:10 AM

Ken Rogoff says 3-5 years of 1-2% GDP and Carmen Reinhart thinks 5-6 years of 2%. =(

Posted by: DarkLayers | August 27, 2011 at 11:19 PM

In terms of econometrics, annual increment of real GDP per capita is constant over time http://mechonomic.blogspot.com/2011/08/revised-gdp-estimates-support-model-of.html . Therefore, the rate of real GDP per capita growth has to decay as a reciprocal function of the attained level of GDP per capita. The exponential component in the overall GDP is fully related to population growth which has been around 1% per year in the U.S. Currently, the rate of population growth falls and the trajectory of the overall GDP lags behind the projection which includes 1% population growth. If to look at the per head estimates, there is no gap between "potential" and observed levels.
In no case should an economist mix the growth in population and real economic growth.

Posted by: kio | August 28, 2011 at 04:03 AM

It's going to be a long time. Do you know how hard it will be for a person to live in the same town for 30 years?

Our money game will need new rules because 30 years at the same job/house/town is over.

But once that issue is fixed, watch out. Technologically America is so far ahead that earning a 100k(todays $$) salary can be done in 6 months.

To keep the NYC banks from leeching on it will be a task.

Posted by: FormerSSResident | August 31, 2011 at 07:00 PM

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