The Stein legacy

If you want to understand why economic growth has been “shrinking” for more than one year

Quantitaty Change

Read Leaning, then toppling (by Ryan Avent, March 2014):

IF YOU want to know why the Federal Reserve is undershooting both its inflation target and its maximum employment mandate, cast your eye toward Jeremy Stein. Mr Stein is a Harvard economist and Fed governor. And since assuming his role at the Fed in 2012, he has led the intellectual charge within the Federal Open Market Committee to place more emphasis on financial stability as a monetary policy goal. For a glimpse of Mr Stein’s handiwork, have a look at his most recent speech, where he says:

I am going to try to make the case that, all else being equal, monetary policy should be less accommodative–by which I mean that it should be willing to tolerate a larger forecast shortfall of the path of the unemployment rate from its full-employment level–when estimates of risk premiums in the bond market are abnormally low. These risk premiums include the term premium on Treasury securities, as well as the expected returns to investors from bearing the credit risk on, for example, corporate bonds and asset-backed securities. As an illustration, consider the period in the spring of 2013 when the 10-year Treasury yield was in the neighborhood of 1.60 percent and estimates of the term premium were around negative 80 basis points. Applied to this period, my approach would suggest a lesser willingness to use large-scale asset purchases to push yields down even further, as compared with a scenario in which term premiums were not so low.

Mr Stein is effectively taking ownership of the Fed’s move toward tapering. Long-term unemployed Americans should address their letters accordingly.

5 thoughts on “The Stein legacy

  1. Jeremy Stein should have a long talk with Lars Svensson. The later’s calculations suggest that there are benefits to “leaning against the wind”, but that the cost to benefit ratio is something like 100:1.

  2. Except in the very short term, tight money pushes yields down, though. So what Stein suggested is a reinforcing cycle from which there is virtually no escape until, perhaps, there is only one dollar left in existence for everyone to share, which I think would result in exactly the opposite of what he assumed would happen. I suppose that is what happens when reasoning from a price change.

    • Oh and the illegality of it should have been completely obvious – “by which I mean that it should be willing to tolerate a larger forecast shortfall of the path of the unemployment rate from its full-employment level–when estimates of risk premiums in the bond market are abnormally low.”

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