Scott Sumner is his diplomatic self:
Stanley Fischer is one of the world’s most thoughtful monetary economists. And now he is also vice chairman of the Federal Reserve Board. He recently gave a speech on monetary policy, which as you’d expect contained many wise observations. However I was also deeply troubled by some of his comments.
And than proceeds to “trash” him:
However, I was also deeply troubled by some of his comments.
One “troubling” comment:
For over six years, the federal funds rate has, effectively, been zero. However it is widely expected that the rate will lift off before the end of this year, as the normalization of monetary policy gets underway.
The approach of liftoff reflects the significant progress we have made toward our objectives of maximum employment and price stability. The extraordinary monetary policy accommodation that the Federal Reserve has undertaken in response to the crisis has contributed importantly to the economic recovery, though the recovery has taken longer than we expected. The unemployment rate, at 5.5 percent in February, is nearing estimates of its natural rate, and we expect that inflation will gradually rise toward the Fed’s target of 2 percent. Beginning the normalization of policy will be a significant step toward the restoration of the economy’s normal dynamics, allowing monetary policy to respond to shocks without recourse to unconventional tools.
Stanley Fischer has been the Governor of the Bank of Israel, a country that managed to altogether avoid a recession in 2008-09 for the simple reason that, just like Australia, it was following a de facto NGDP level target. But as I have argued here, that was “luck”! Just before stepping down from the BoI Fischer made a speech:
In my work as a central banker, I have made much use of my knowledge of central banking history around the world. Many of the events that are taking place today remind me of events from the past, and knowing the lessons from the past helps us develop policy in the present.
A prominent example of this is that of Ben Bernanke, who learned the lessons and the mistakes in handling the Great Depression of the 1930s during his research, and knew how to deal with the most recent financial crisis differently and more efficiently than how they tried to handle the situation in the 1930s.
We, the central bankers, thought at the outset of the crisis that we were about to experience another great depression like in the 1930s, when the unemployment rate in the US reached 25 percent. I am not here to claim that the current situation is good, but during the current crisis, US unemployment rate hit 10 percent and then began to decline, and I am sure that the situation would have been very different had Bernanke not acted according to the knowledge that he acquired in the course of his research.
Apparently, learning was only partial and selective because he also said:
There are those who support setting a nominal GDP target. I think that this is very impractical. The data that we receive on nominal GDP are very unstable. There are changes of whole percentage points between the various estimates of GDP. For this reason, I think that there is no reason to use nominal GDP as a target.
Maybe he thinks inflation, output gaps and natural rates are precisely defined and known!
So much for the Fed´s Vice-Chairman monetary policy “abilities”.
Another voting member this year is also “dying” to vote for a rate rise. This is SF Fed president John Williams:
NEW YORK–Federal Reserve Bank of San Francisco President John Williams reiterated on Monday his belief that central bankers should consider raising rates some time this summer.
“Things are looking better–in fact, they’re looking downright good,” the official said in a speech to be delivered to an audience in Sydney and Melbourne via video.
Given how much the economy has improved and is likely to continue to gain ground, “I think that by mid-year it will be the time to have a discussion about starting to raise rates,” Mr. Williams said.
The strength of the U.S. dollar against a “broad index” of currencies is not an impediment to the U.S. economy reaching real GDP growth of 2.5% this year, he said .
“The U.S. economy has good momentum…even with what is a rather large appreciation of the U.S. dollar,” Mr. Williams said.
Fischer wants to raise rates to “restore(!) the economy´s normal dynamics”. Williams thinks things are looking “downright good”! So much crap with a straight face. Only FOMCers can do that and get away with it!
The charts illustrate what “significant progress”, “extraordinary monetary accommodation” “economy looking downright good” and “gradual climb of inflation to 2%” looks like.
Now, think for a moment while contemplating the charts above and the next one. If the Fed managed to keep NGDP growing at such a stable (3.95%) rate for the past five years, after the economy “lifted-off” from the depths of the “Great Recession”, don´t you think it would also be capable (if it wanted) to:
1. Give nominal spending an initial boost (6%-7%) for it to regain “height” and
2. Then “levelled ” it off at a 5% growth rate (or 4% if you prefer)?
1. Would inflation be closer to target?
2. Would RGDP growth be closer to 3+%?
3. Would employment be so “structurally” constrained?