The profession is in dire need of new analytical structures

Martin Feldstein, former Reagan CEA Chair, former president of the NBER and Harvard professor had this to say recently:

CAMBRIDGE – The United States Federal Reserve’s recent announcement that it will extend its “Operation Twist” by buying an additional $267 billion of long-term Treasury bonds over the next six months – to reach a total of $667 billion this year – had virtually no impact on either interest rates or equity prices. The market’s lack of response was an important indicator that monetary easing is no longer a useful tool for increasing economic activity.

(Illustration by John Overmyer)

The Fed has repeatedly said that it will do whatever it can to stimulate growth. This led to a plan to keep short-term interest rates near zero until late 2014, as well as to massive quantitative easing, followed by Operation Twist, in which the Fed substitutes short-term Treasuries for long-term bonds.

These policies did succeed in lowering long-term interest rates. The yield on ten-year Treasuries is now 1.6%, down from 3.4% at the start of 2011. Although it is difficult to know how much of this decline reflected higher demand for Treasury bonds from risk-averse global investors, the Fed’s policies undoubtedly deserve some of the credit. The lower long-term interest rates contributed to the small 4% rise in the S&P 500 share-price index over the same period.

The correct view:

1)      The markets lack of response was an important indicator that there´s been NO monetary easing.

2)      Exactly because they succeeded in lowering long-term interest rates, the policies are perceived as innocuous.

5 thoughts on “The profession is in dire need of new analytical structures

  1. Yes, sometimes when I see some of these pronouncements by academic economists, I wonder if they have ever paid attention to the way real financial markets have acted over the past few years!

  2. Or, the Fed flew out on its latest reconnaissance mission in a perfectly good plane, but subsequently missed the target because the photographer’s camera was malfunctioning.

  3. Let’s see: Your baseball team is losing every game as it never scores any runs, and loses by about 4-0 every game.

    So you hire one good hitter, and you start losing by 4-1.

    You conclude that scoring runs is not the problem (you are still losing), and you don’t need more hitters. (Apologies to soccer/football fans!)

  4. “The market’s lack of response was an important indicator that monetary easing is no longer a useful tool for increasing economic activity.”

    Hmmm, the Fed does exactly what the market was expecting it to do, and the market yawned. How is “meeting expectations” an indicator of anything, and what is wrong with all the Harvard people?

  5. Pingback: An Unforeseen Effect of Global Warming? « Uneasy Money

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