Calomiris to FOMC: Don´t hesitate, ‘get ´em up and fast’

According to Charles Calomiris:

Some observers of the Fed were complaining Wednesday that the FOMC statement should have rolled back plans for a mid-2015 rate increase. In their view, reduced rates of inflation observed currently, along with the strong dollar and weak nominal wage growth, should lead the Fed to postpone any rate increases. Such concerns are dead wrong. They reflect a deep misunderstanding of the time lags inherent in the removal of accommodative monetary policy, and confusion about the proper way to target inflation. Dovish critics are also wrong about how the Fed should respond to lower oil and gas prices, the strong dollar, and slow wage growth.

A monetary policy shift from maximum accommodation (the present stance) to a neutral monetary policy posture probably will take about two years to accomplish, and certainly will take more than a year, given the maximum pace of raising interest rates that the Fed is willing to pursue. During the period that it is lessening accommodation, the Fed will still be contributing to expansion of nominal GDP growth, and thereby will be adding fuel to the economic fire.

Given the built in lags in withdrawing accommodation, the Fed must begin to raise rates long before the economy is expected to achieve the long-run objective of 2% inflation and full employment. Beginning this long process of raising rates soon is essential to avoid over-heating over the next two years.

As a financial economist he cannot think outside the box of “monetary policy equals interest rate policy”, seeing “zero” rates as maximum accommodation!

I love “the Fed will still be contributing to expansion of nominal GDP growth, and thereby will be adding fuel to the economic fire.

You can only wish, because “fuel” is only “dripping” at such a slow rate that “fire” is never capable of catching on. So there´s no danger of “overheating” in the next two years.

He should take a look at instances of regime change (1933 for example) to see how “short and stable” lags really are.

He wrote that yesterday. Today, numbers for the last quarter of 2014 came out. Will he change his mind? I doubt it. His “conviction” is too strong!

Much worse is to read that “Yellen Tells Senate Democrats U.S. Economy is Strong”:

An upbeat Janet Yellen at a private luncheon on Thursday told Senate Democrats the U.S. economy is strong.

Ms. Yellen conveyed that “things are going well” for the economy, unemployment is low, but some people are still hurting, Sen. Joe Manchin (D-W.V.) told reporters after emerging from the luncheon Thursday afternoon. “She feels the economy is strong, a lot is good,” he said.[reminding me of Peter Sellers as Chance the Gardner in “Being There”).

That was also yesterday. What does she think today?

The pictures tell a different story:

A 2.2% average real growth rate may seem strong if you have the Eurozone in mind!

Calomiris_1

Maybe a year ago, when inflation was higher, Calomiris would have been even more strident!

Calomiris_2

And some pundits love calling economic reports “solid”, even if they are “watery”:

Calculated Risk Bill McBride: “Overall this was a solid report with strong PCE and private domestic investment.”

 

2 thoughts on “Calomiris to FOMC: Don´t hesitate, ‘get ´em up and fast’

  1. I really love the buzz words. Overheat. What does that even mean? Most people who read this don’t really know, but likely won’t put much thought toward how bad this sounds compared to a tight money depression. Oh yes, doing too much with people having too much opportunity is a very bad thing – tisk tisk!

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