“Normal”: a word in search of a new definition

You would never guess this guy was head of the Bank of Israel before, during and following the crisis of 2008-09. Now that he´s Vice-Honcho at the Fed, Stanley Fischer “reverts to form”:

In public appearances this week, Janet Yellen’s two top lieutenants sounded like individuals who want to start raising short-term interest rates in the months ahead, despite mounting uncertainties about growth abroad and associated downward pressure on commodities prices.

I had a chance to interview Fed vice chairman Stanley Fischer at The Wall Street Journal’s CEO Council on Tuesday. Foreign demand “is not the main driver of the United States economy,” he noted. “If (U.S.) unemployment continues to decline, if the labor market continues to strengthen and if we see some signs of inflation beginning to increase, then the natural thing is to get the interest rate up. We call it normalization.”

It is clear we are getting closer” to dropping an assurance that rates will stay low for a considerable time, he said. Mr. Fischer repeatedly emphasized his desire to get back to normal. “We almost got used to thinking that zero is the natural place for the interest rate. It is far from it,” he said.

It seems “normal” has nothing to do with the overall economy, it´s only about the level of interest rates!

As the chart shown in a previous post attests, for the past several quarters the economy is doing worse than terrible, what with NGDP persistently falling below the “uninspiring” lower trend level!



8 thoughts on ““Normal”: a word in search of a new definition

  1. Quite concerning comments with NGDP so dull and implied market forecasts for inflation so poor, and getting poorer. But NY Fed Gov Dudley was reassuring about an equity market “put” and the S&P continues to rally. And unemployment does continue to fall. So a wierd world, all in, working hard, but not feeling prosperous.

  2. It’s interesting to see that while people are quick to draw comparisons between the great depression and this previous recession, one actual parallel between the two is the complete stagnation that refuses to go away. We’re reaching the 6 year after the recession supposedly ended, and yet we’re still not seeing growth rates reflective of that. Going into 1939, ten years after the stock market crashed, the world saw the very same thing. It’ll be interesting to see what gets the global economy back on track.

    • Elias, you exagerate. The GD was certainly deeper but in March 1933, less than 4 years into the depression economic activity made a big turnaround (due to mon. policy). Industrial production, for example rose by more than 50%(!) between March and July. NIRA “slowed things down”, but when it was decreed inconstitutional (May 1935) output picked up again. In 1937 the Fed botched again…

  3. Oh, I’m not claiming there wasn’t any progress at all, merely pointing out that development still lagged. The rate of improvement was definitely there, but it was relative to the economy. By 1933, you really still couldn’t argue that the economy was anywhere near to where it formerly was. That is what I’m trying to draw a comparison to, simply that it took quite some time for development to rev up to levels of previous growth, not that it didn’t happen/was non-existent.

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