It´s really a ‘sing & dance’ among FOMC members

Hoenig Sept 2010

Voting against the policy was Thomas M. Hoenig, who judged that the economy continues to recover at a moderate pace. Accordingly, he believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted and will lead to future imbalances that undermine stable long-run growth. In addition, given economic and financial conditions, Mr. Hoenig did not believe that continuing to reinvest principal payments from its securities holdings was required to support the Committee’s policy objectives.

Fisher 2014 (imbued with the spirit of Hoenig)

I fear that we are feeding imbalances similar to those that played a role in the run-up to the financial crisis,” Mr. Fisher said in the text of a speech prepared for delivery in Mexico City. “With its massive asset purchases, the Fed is distorting financial markets and creating incentives for managers and market players to take increasing risk, some of which may result in tears,” the official said.

Yellen 2014

“The economy continues to operate considerably short of these objectives,” Ms. Yellen said during a ceremonial swearing-in event held more than a month after she took over as Fed chief. “I promise to do all that I can, working with my fellow policymakers, to achieve the very important goals Congress has assigned to the Federal Reserve.”

That´s very unlikely with the ‘crew’ she has. And the delays in swearing-in Board members sure doesn´t help.

Yellen´s promises sound hollow. After all, the Fed has had several opportunities to ‘correct course’, with the clearest (and easiest) being in mid-2008. Unfortunately they were focused like a laser on headline inflation! The sequence of QE´s certainly avoided an even worse fate, but were clearly too weak to propel the economy (spending) up. Inflation has been going in the ‘wrong’ direction and employment still has a “hole” to fill.

The charts illustrate.

Song Dance_1


Song Dance_2


Song Dance_3

The next chart indicates that the Fed has accomplished exactly what it wanted!. It accelerated spending growth in 2009-10 and then kept it stable around 4% for the past 3 years. It seems that if it wanted it could have accelerated spending much higher early on to try to close at least part of the gap, and then brought growth down to something closer to 5%.

Song Dance_4

This is not just conjecture. The Fed has done it before, and in a much less dire situation. The next charts reproduce the ones above for the 2001-05 period. In 2003, when the gap was widest and inflation below target, the Fed introduced forward guidance (promising to keep rates low for an ‘extended period’). It worked!

Song Dance_5


Song Dance_6


Song Dance_7

The next chart shows how the Fed increased spending growth to push the economy towards trend and then ‘throttled’ down to keep it on target.

Song Dance_8


25 thoughts on “It´s really a ‘sing & dance’ among FOMC members

  1. Excellent blogging, beautiful charts…But Fisher has made clear that no inflation is the goal, and that large amounts of even permanent economic damage are worth it to obtain zero inflation…

      • Marcus, thanks for the link. I guess I’m wondering though about this statement by Vincent:

        “The only way hyperinflation is ever stopped is for the central bank to stop funding a large government deficit. The only way they stop funding a large deficit is if the deficit gets smaller as a percentage, or the government collapses. All the other things, like making a new currency, finding some backing for it, etc do not solve the problem on their own. Getting rid of the deficit solves the problem on its own.”

        The message I got from this article of yours:
        Wasn’t “Getting rid of the deficit solves the problem on its own.” Am I misreading you? Was getting rid of the deficit a key aspect of the solution in Brazil in 1994?

      • “Tom, the origin of Latin American hyperinflations was (almost) always fiscal.”

        Which one(s) do you think were not fiscal in origin? Even in these cases it was necessary to stop funding government deficits to stop the hyperinflation, right?

      • Vincent, in those cases, I’m not claiming that any of them were not fiscal in origin. I’m not familiar with the specifics of those cases. I was pointing out your comment because of what it said about the cure, not the origin: namely that getting deficits under control is both necessary and sufficient to cure hyperinflation. And in terms of what the evidence supports in these cases in terms of it being necessary, I don’t know. That document you provided yesterday was unclear regarding the 1994 cure in Brazil. I don’t think it covered that late of a time period. That’s why I’m asking Marcus. I figure he’d probably know. BTW Marcus, here’s the document Vincent provided yesterday:

        Click to access c7663.pdf

      • Marcus, if you were a diabolical central bank director, do you feel confident that you could produce hyperinflation in ANY country, regardless of their debt and deficit?

  2. That´s right: “Stop funding…” But you don´t have to get rid of the deficit. If the government makes a credible promise that money will be good in the future that implies that government finances will be “well behaved.”

    • Marcus, thanks. Do you believe that Japan should “stop funding…” now because otherwise they’ll experience > 2% inflation per MONTH within the next two years? That’s Vincent’s prediction. If you don’t agree with Vincent, why not?

      • Tom, the central bank can not really fix the deficit problem. If they stopped funding interest rates would shoot up, and the government would be broke. So the government has already replaced the head guy at the bank. The only hope is if the government reduces the deficit now.

    • The problem is that once hyperinflation has started the value of the currency has been so unlreliable that few private parties want to buy government bonds. So once in the death spiral, it is very hard to fund much of a deficit with anything other than the central bank money. So in practice, it seems they really have to get the deficit well under control to cure hyperinflation.

    • No, you need a “diabolical Dictator” ( a Robert Mugabe type dictator) to do it.The “diabolical dictator” could start off directly by acting as a forger, printing money to nationalize industry, provide “free housing” for the poor, etc

      • Interesting… What if instead that in addition to running the CB you also had the power to enact price, wage and rent controls. Maybe you could get a little above normal inflation going, then put price controls on things to “try to stop it.” Which then worries people about what you’re going to do next, etc. Do you think “Dictator” is really the minimum you’d need to make it happen? BTW, thanks for taking the time to answer all these questions. I won’t keep “polluting” I swear! :D… you’ve been super helpful.

  3. Vincent, do you realize we’ve not completely polluted Marcus’ comment section with off-topic comments! I wouldn’t be surprised if he erased them all! Sorry Marcus!

    • sorry that should read “we’ve completely” not “we’ve not completely” 😀 … it’s not like it’s my goal!

  4. Yes, you guys have done a lot of “polluting”, especially with all the hyperinflation trash!
    The proximate cause of all variants of inflation is excess money creation. You get to the hyper kind when the “authorized forger” goes on a “forging binge”. Why it went on a “forging binge” may vary. Certainly making government debt “worthless”, so unwanted, is the most common reason. But the basic cause of that may be an internal upheaval, revolution, etc, that make people directly turn away “national money”.
    But surely to call 26% p.a. inflation hyper is a stretch. And if Japan will have difficulty in taking inflation to 2% p.a., to get to 2% p.m. in a relative short period would be a feat worthy of Houdini!

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