And the stance of policy is defined by interest rates even inside the “fort”. For example, David Altig, head of research at the Atlanta Fed writes: “What Is the Stance of Monetary Policy?”
Here’s the thing. It is not at all clear that winding down asset purchases means an exit from or dismantling of monetary stimulus, gradual or otherwise. In Atlanta Fed President Dennis Lockhart’s words yesterday:
In our public remarks over much of last year, my colleagues and I stressed a couple of very important messages. First, even with the phase-out of asset purchases, the basic stance of policy remains highly accommodative. To translate, the Committee intends to keep interest rates very low. The second message was that the QE program and the Fed’s policy interest-rate target are two separate tools of policy. Consequently, we can wind down the asset purchases—a program that was meant to provide temporary, supplemental “oomph” to the low interest-rate policy—and preserve the accommodative positioning of policy appropriate for the reality of our economic situation.
For corroboration he appeals to the work of Wu and Xia that estimates a “shadow policy rate”:
But those are not just words. Several months back, Jim Hamilton publicized the work of Cynthia Wu and Dora Xia (former and current students of his), who have developed a method of using term structure data to infer the “shadow,” or implicit, monetary policy rate. (Follow-up posts appeared thereafter at Econbrowser—here and here—and from the crew here at macroblog.)
Just recently, the Wu-Xia data has been updated, giving us a first glance at the post-taper shadow policy rate (see the chart):
When James Hamilton publicized Wu and Xia´s work last November, I found this paragraph “telling”:
Of particular interest is Wu and Xia’s observation that their series for the shadow rate exhibits similar correlations with other macro variables since 2009 as the fed funds rate did in data up until the end of 2007. Wu and Xia took a popular model that had been estimated before the Great Recession in which the fed funds rate was used as the summary of monetary policy, and just replaced the fed funds rate with the Wu-Xia shadow rate to get a data set that continues after 2009. Although this device could not fully account for all that happened to interest rates and unemployment during the Great Recession over 2007-2009, Wu and Xia found the evidence to be consistent with the hypothesis that data since 2009 could be described using the spliced series as the monetary policy indicator and using the same model that described pre-2007 data. In other words, the shadow rate displays the same sort of correlation with lagged macro variables since 2009 as the fed funds rate did in earlier data, and likewise the value of macro variables that one would predict using the new shadow rate series is close to the value one would have predicted in earlier data using the fed funds rate instead.
The suggestion is that we then might use the shadow rate series as a way of summarizing what the Fed has been doing with its unconventional policy measures such as large-scale asset purchases and forward guidance. If the Wu-Xia framework is correct, these unconventional policies can all be summarized in terms of what effect they had on the shadow short rate. By comparing the shadow rate with the value that traditional models would have predicted for the fed funds rate, Wu and Xia get a measure of the shocks to monetary policy. Wu and Xia find that monetary policy has recently been a bit more expansionary than usual (pushing the shadow rate about 0.6% more negative over 2011-2013 than the traditional monetary policy rule would imply), as a result of which their estimates imply that the current unemployment rate is 0.23% lower than it otherwise would have been.
In other words, when you really need it it doesn´t work!
I wish that instead of insisting in using interest rates, even if of the shadow variety, to pin the stance of monetary policy, studies would take other paths to that end, maybe studying alternatives like NGDP. Interestingly, it´s exactly the period covering 2007-09, when NGDP took a dive, that not even the shadow rate is capable of accounting for what happened!