Abe has to provide an ETA

From the news:

Japanese Prime Minister Shinzo Abe said Thursday that he would seek to expand the nation’s economy by around a fifth, pivoting away from a month’s long fight over security legislation that hurt his popularity among voters.

“Creating a strong economy will continue to be my top priority,” Mr. Abe said during a news conference at the headquarters of the ruling Liberal Democratic Party, where he was officially appointed to another three-year term as party leader.

Mr. Abe said he would aim at increasing the size of Japan’s economy to ¥600 trillion ($5 trillion), from around ¥490 trillion in the latest fiscal year. He didn’t say exactly how or when that growth would be achieved.

As the chart shows, nominal spending in Japan has remained bottled-up for more than twenty years. The 2008 crisis depressed it further. It is also clear in the chart that Abenomics, introduced when Abe assumed the premiership in December 2012, has helped lift-up the economy, but certainly not enough to “crank” the growth engine.

Abe NGDPT

Market Monetarists have for long proposed that central banks, instead of targeting inflation should establish a level target for nominal spending, or NGDP. Abe has “broken the spell”, but to be successful he has to do it right. And that means providing an estimated time of arrival (ETA) at the new target. If that is specified, the route becomes known and that provides the best guidance for all types of economic agents, allowing the Bank of Japan to closely monitor the process and enabling it to undertake timely corrective measures, i.e. quickly reset the “rudder” as soon as deviations from the path are identified.

Anyway, she´s trying hard!

I´ll screw you good

Although others tried before her…and got egg in the face!

I´ll screw you good1

Update: The Vice-Chair, Stanley Fischer made that mistake while head of the Bank of Israel. Why he was so “quick on the draw” I don´t know (maybe like almost every other central banker he was tricked by oil prices?). That should have thought him a lesson, but according to his latest speech, didn´t!

I´ll screw you good2

 

If your premise is wrong, it´s no use hiding it underneath reams of papers, footnotes and citations

Yellen on Inflation Dynamics and Monetary Policy:

Ms. Yellen made her case like a prosecutor making a courtroom closing argument. She presented it in a 40-page speech at the University of Massachusetts in Amherst, including 40 academic citations, 34 footnotes, nine graphs and an appendix.

Central to her argument was a belief that slack in the economy has diminished to a point where inflation pressures should start to gradually build in the coming years.

Why should that be?

Those pressures aren’t asserting themselves yet, she argued, because a strong dollar and falling oil and import prices are placing temporary downward pressure on consumer prices. As those headwinds diminish, she predicted, inflation will gradually rise. The Fed needs to get in front of this, she said, and also prevent speculative forces in financial markets that could lead to “inappropriate risk-taking that might undermine financial stability.”

What she´s doing is prosecuting the people!

If she only for a minute thought outside her “Phillips Curve Box”, she would be free to entertain the hypothesis that the Fed´s tightening that has been going on for more than one year is the major force behind the fall in oil prices, commodities in general and the strengthening dollar!

Let´s just wait for the formal crowning of the “biggest mistake of the year”.

Note: I think another “postponement” will happen!

Blanchflower Baloney

A Mark Sadowski post

In a recent post James Alexander caught Danny Blanchflower tweeting that he thought “NGDP totally impractical due to data revisions”.

This is a familiar complaint, voiced for example by Goodhart, Baker and Ashworth in January 2013.

There are numerous problems with this line of thinking.

First of all, central banks shouldn’t be targeting past values of economic variables anymore than one should attempt to drive a vehicle on a superhighway by looking in the rearview mirror. Arguably the world’s major central banks tried doing that in 2008, and we are still living with the results. Since central banks should only be targeting the expected values of economic variables, bringing up the issue of data revisions reveals a level of obtuseness that borders on the ridiculous.

And as irrelevant as the issue of data revisions is to the proper conduct of monetary policy, although NGDP levels tend to be revised, that certainly should not imply that inflation rates are not revised. In fact the personal consumption expenditure price index (PCEPI), the inflation rate of which is the official target of the Federal Reserve, often undergoes significant revisions.

There’s two main ways of measuring the size of the revisions of the components of national income and product accounts: 1) Mean Revision (MR) and 2) Mean Absolute Revision (MAR). For rate targeting MAR is the more appropriate measure, and in fact the MAR of inflation is usually smaller than the MAR of NGDP. However, for level targeting MR is more appropriate.

Interestingly, at least in the US (Page 27):

“The MRs for the price indexes for GDP and its major components are generally not smaller than those for real GDP and current-dollar GDP and its major components.”

In fact, over 1983-2009 the MR for the final revision to quarterly NGDP is 0.14, whereas over 1997-2009 the MR for the final revision to the GDP deflator and the PCEPI is 0.20 and 0.12 respectively. And over time the revisions have trended downward.

So I suspect that the MR for NGDP is smaller than the MR for PCEPI over 1997-2009.

Which means the claim you frequently hear that NGDP revisions are larger than inflation revisions is pure grade A horse manure. You will never see any evidence supporting this mindlessly repeated spurious claim, because no such evidence exists.

And, finally, inflation is a totally artificial construct requiring that we come up with an estimate of the extraordinary abstraction known as the “aggregate price level.” To see how preposterous this is imagine equating the aggregate price level between what it is now and what it was in say 14th century England. The goods and services are so different it requires the complete suspension of one’s disbelief.

In particular, PCEPI inflation is the difference between nominal PCE and real PCE, meaning PCEPI inflation is nothing more than the estimated residual between a truly nominal variable, which is relatively straightforward to measure, and a real variable, which is fundamentally an exercise in crude approximation.

It’s high time that central banks moved beyond the near medieval practice of targeting real variables and/or their residuals, and started targeting truly nominal variables, which according to the accepted tenets of monetary theory is their proper domain.

The “Rules debate” once again

In Time Inconsistency Is Only One of Many Reasons to Favor Policy Rules John Taylor writes:

Advocates of purely discretionary monetary policy frequently list Kydland and Prescott’s time inconsistency argument as the only reason for policy rules, and then they try to shoot that down or say it is outweighed by arguments in favor of discretion.  This is the gist of Narayana Kocherlakota’s recent argument for pure discretion.

But there are a host of reasons why a monetary policy based more on rules and less on discretion is desirable, and time inconsistency is only one. I listed these seven in a Harry Johnson Lecture that I gave back when Fed policy was more rules-based:

……………………………………………………………………..

This list still applies today and it does not even include a key technical reason (call it number (8)) that I still stress to my Ph.D. students: The Lucas econometric policy evaluation critique implies that in a forward-looking world policy rules are needed simply to evaluate monetary policy

Understandably, John Taylor is an unconditional fan of his namesake rule. Interestingly Yellen says that the Fed shouldn´t “be chained to any rule whatsoever”. Why? Because monetary policy requires “sound judgment”? And rules won´t provide that?

Maybe that´s a problem associated with “instrument rules” like Taylor-type rules, which give out the “desired” setting for the interest rate instrument (the FF target rate in the case of the US). What if the central bank, instead of an “instrument rule” adopted a “target rule”?  For concreteness, let´s assume the Fed had adopted (maybe implicitly) a NGDP level target as it´s rule for monetary policy.

The charts compare and contrast the interest rate “policy rule” and the NGDP level target rule (where the “target (trend) level” is the “Great Moderation” (1987-05) trend). In this comparison, the actual setting of the Federal Funds (FF) rate is “right or wrong” depending on, not if it agrees with the setting “suggested” by the instrument rule, but if it is the rate that keeps NGDP close to the target path; and in case there is a deviation from the path, if the (re)setting drives NGDP back to the target.

For the “instrument rule”, I use the Mankiw version of the Taylor rule. The Mankiw version is simpler because it doesn´t require the estimation of an output gap and doesn´t state an inflation target rate (which the Fed didn´t have any way until January 2012).

The first chart shows John Taylor´s chart from his original 1993 paper. Note that it is qualitative (even if not exactly quantitative) similar to the “policy rule” obtained with the Mankiw rule.

During this period (1987 – 1992) monetary policy was “quite good”, in the sense of keeping NGDP close to the “target path”. Actually, when the Fed reduced the FF rate at the time of the stock market crash, it turned monetary policy a bit too expansionary, given NGDP went a bit above trend.

John Taylor_Rules_1

The next period covers 1993 – 1997. This is the core period of the “Great Moderation”. At the end of 1992, the FF rate had been reduced to 3%, a level which was maintained throughout 1993. According to the “policy rule” this was “too low”. With respect to the “target rule”, the FF rate was “just right”.

John Taylor_Rules_2

All through those years, NGDP remained very close to the “target path”, although the FF rate at times differed significantly from the “policy rule”.

The next period, 1998 – 2003.II is pretty damaging to the “policy rule” advocates. Taylor likes to say that the 2002 – 2005 period was one of “rates too low for too long” (having responsibility for the crash that came later).

What the chart tells us, however, is very different. The FF rate was too low in 1998 – 99. At this time, the Fed reacted to the Russia crisis (and the LTCM affair). Monetary policy loosened up at the same time that the economy was being buffeted by a positive productivity shock.

The monetary tightening that followed was a bit too strong because NGDP dropped below trend. The downward adjustment of the FF rate was correct in the sense that it stopped NGDP from falling lower, and by mid-2002 it began to recover. I wonder how much more grief the economy would have been subjected to if the “policy rule” had been followed.

John Taylor_Rules_3

The 2003.III – 2005 period is the second half of Taylor´s “too low for too long”. In the FOMC meeting of August 2003, the Fed adopted “forward guidance” (FG) (first it was “rates will remain low for a considerable period” followed by “will be patient to reduce accommodation, and finally “rates will rise at a measured pace”).  The fact is that FG helped push NGDP back to trend. Maybe the “pace was too measured”, but the fact is that by the time he handed the Fed to Bernanke, NGDP was square back on trend.

John Taylor_Rules_4

If the “policy rule” had been closely adhered to, the “Great Recession” would likely have happened sooner!

And now (“the end is near…”) we come to see how the Fed botched monetary policy (likely due to Bernanke´s preferred inflation targeting monetary policy regime).

The FF rate remained at the high level it had reached at the end of the “measured pace story”. At the end of 2006, aggregate demand (NGDP) began to deviate, at first slowly, below the trend level. The FF rate remained put (notice that although too high, the “rule rate” changed direction). The FOMC was not comfortable with the “elevated” price of oil and kept hammering on the risks of inflation expectations becoming un-anchored (see the late 2007-08 FOMC transcripts).

John Taylor_Rules_5

Despite the reduction in the FF rate, monetary policy was being tightened! And the “Great Recession” was invited in! Maybe there would have been a “Second Great Depression” if the “policy rate” had been followed closely.

Moral of the story. Yellen and the Fed do not have “infinite degrees of freedom”, hidden under the umbrella of “sound judgment”. They would do well to set a “target rule”.

PS Japan just improved on its 2% IT rule:

Japanese Prime Minister Shinzo Abe will announce a plan on Thursday to raise gross domestic product by around 22 percent to 600 trillion Japanese yen ($5 trillion) as he refocuses on the economy after the passage of controversial security bills that eroded his popularity.

 

 

Japan: Poster child for NGDP Targeting

Historinhas

This take on Japan provides the clearest demonstration that nominal spending, determined by the Central Bank´s monetary policy, is crucial to the macroeconomic outcome. It is also a reminder that no matter how much ‘fiscal stimulus’ a government provides, if monetary policy does not provide support, there´s nothing to be gained and a lot to lose in terms of high debts and deficits. Finally, the Japanese experience demonstrates the danger inherent in a monetary policy geared, unwaveringly, to the attainment of ‘price stability’ or ‘inflation targeting’ on steroids.

The Big Picture

The chart illustrates how the Japanese economy evolved during the decades following WWII. We identify three stages of the growth process. In stage one, from the 1950s to early 1970s, Japan was ‘catching up’ or narrowing the gap relative to the US. From that point up to the end of the 1980s the gap remained relatively constant but began…

View original post 1,401 more words

Elusive guidelines

For some time the economy has been ‘playing tricks’ on policymakers, in particular those at the Fed, concerned with monetary policy.

For more than one year, they have been signaling that the beginning of ‘policy normalization’ (aka the first rise in rates) was imminent, but at each turn something happened to thwart their ‘desire’.

It´s interesting to note, in that context, the ‘bias’ in some of the research being done at the research departments of the Federal Reserve System. Some would indicate that the Fed should start the normalization process now. Others that it could still wait a while.

In the first category, the San Francisco Fed has just released a study downplaying the fall in inflation expectations provided by market-based measures:

A substantial decline in market-based measures of inflation expectations has raised concerns about low future inflation. An important question to address is whether the forecasts based on market information are as accurate as alternative forecasting methods. Compared against surveys of professional forecasters and other simple constant measurement tools, market-based inflation expectations are poor predictors of future inflation. This suggests that these measures contain little forward-looking information about future inflation.

Another, from the Richmond Fed, indicates that we´re in ‘overtime’, given that the natural (aka Wicksellian rate) has for “a long time” been higher than the market rate:

The natural rate of interest is a key concept in monetary economics because its level relative to the real rate of interest allows economists to assess the stance of monetary policy. However, the natural rate of interest cannot be observed; it must be calculated using identifying assumptions. This Economic Brief compares the popular Laubach-Williams approach to calculating the natural rate with an alternative method that imposes fewer theoretical restrictions. Both approaches indicate that the natural rate has been above the real rate for a long time.

Going in the other direction, Mark Thoma discusses the ZPOP measure of the labor market developed by the Atlanta Fed:

The Fed has a difficult job. It must assess how close the U.S. is to full labor force utilization, and how that translates into inflation risk. Both steps of that process involve considerable uncertainty. The Atlanta Fed’s new ZPOP measure attempts to provide additional clarity, but as the researchers acknowledge, this measure isn’t perfect. In the end, the Fed will always have to make its monetary policy decisions based on incomplete information about the economy.

The panel below extends the ZPOP chart of Thoma and the Atlanta Fed to show how the story could have been different (and we wouldn´t be unduly worried about what´s the best measure of inflation expectations, interest rates being below the ‘natural rate’ or what´s the better labor market indicator).

First off, the best thing would have been for the Fed NOT to allow nominal spending (NGDP) to tank! Since it did, the best thing would have been to crank it up at a higher rate, to try and get as close as possible to the original trend level path.

ZPOP

Don´t argue that was not possible, because if the Fed can ‘choose’ one level of spending it can ‘choose’ any. And look how it allowed NGDP to grow at a higher rate after the mistake of 2001/02. This time around, it stopped the rise in NGDP growth too soon!

The Fed has allowed the economy to remain ‘depressed’. And in a ‘depressed’ economy, the ‘gauges’ of performance (most likely) behave differently, and that´s causing a lot of anxiety.

Note: But there are the diehard RBCers, like Ellen McGrattan who write Monetary Policy and Employment:

 Neither conventional nor unconventional monetary policy has much of an impact on employment. What does? Factors that drive the labor-leisure decision.

NGDP data revisions means targeting it is “totally impractical”, really?

A James Alexander post

Danny Blanchflower, the enfant terrible of the Bank of England when he was for a time on its rate-setting Monetary Policy Committee, tweeted here that NGDP Targeting was “totally impractical” because it was a figure that was so subject to data revisions.

Well, first off, revisions don’t matter to Market Monetarist advocates as the “Market” bit of MM refers to the theory that you should target expectations for NGDP Growth. Scott Sumner has argued for a market in NGDP Futures so accurate market forecasts of NGDP growth could be used. This proposal is not much of a leap for standard macro theory that argues you control inflation by targeting inflation expectations. So it’s no big deal to target forecasts, every macro-economist should get that bit.

Market Monetarists are highly sceptical of inflation expectations as measured purely in surveys. The public has little understanding of the term inflation. Although the public sees their shopping basket go up and down in cost it has only modest relevance to the central banks that like to target core inflation, i.e. excluding volatile food and energy. On saner days central banks actually target the measure of inflation that gets them from NGDP to RGDP, known as the GDP Deflator. This figure often runs well below measures of consumer inflation. A good discussion on the good reasons why this happens is here.

Consumers would also have little view on NGDP, of course, if that were targeted. They would roughly see one large element though, in aggregate wage or income growth. This is because NGDP (and therefore RGDP) can be measured by adding up all the income in the economy, via the “income method”. The two other ways to measure NGDP are the self-explanatory “expenditure method” and the very tricky “output method”. Of course, I don’t have to explain this to expert economists like Danny Blanchflower.

Second, NGDP should, in theory be more reliable to measure since RGDP is based upon NGDP. Any errors in NGDP will, de facto, be in NGDP. However, RGDP errors are then compounded by errors in the deflator. It is therefore impossible for RGDP to be more reliable than NGDP.

The question is then whether NGDP is more or less prone to error than “inflation” measures. Well, NGDP only has one definition, so that certainly helps, inflation many. The infamous switch in the UK from RPI to CPI as the main method was certainly a major revision to method and certainly sowed huge confusion. It still does cause problems as index-linked bonds are still based on RPI, as are most inflation-protected pensions and other forms of financial income.

Lastly, Blanchflower demanded that I provide some empirical research that NGDP is less prone to error than RGDP or “inflation”. Well, here is a study by the US statistical office, the Bureau for Economic Analysis that demonstrates that NGDP (“Current-dollar GDP” in the table) is at least as reliable as RGDP looking at the period 1993-2013. This can’t actually be true given RGDP’s two sources of error. The resources spent on RGDP are much larger than those spent on NGDP so that may account for the BEA’s result.

JA-D Blanchflower

Whatever, it at least shows Blanchflower’s “totally impractical” is just wrong in fact as well as theory. He should stop talking nonsense

The great benefit of NGDP Targeting is that it means the central bank concerns itself only with nominal stability and doesn’t have to get concerned with the balance between inflation and real growth, or the hard to measure productivity growth that drives the difference. Those issues can be left to real economy experts to sort out. 

In this way of thinking neither inflation nor Real GDP growth should be of any concern to a Nominal GDP Targeting central bank.

Osborne needs to learn some Market Monetarism

A James Alexander post

Keynesians, especially left-wing ones, are hyper-quick to attack George Osborne, the U.K. Chancellor of the Exchequer (aka the Finance Minister or Treasury Secretary) for the smallest attempts at controlling the budget deficit and howl him down whenever he is so economically illiterate to think there is the smallest problem with Britain’s 80% debt to GDP ratio.

Perhaps on the day when Osborne’s deficit reduction plans went a bit astray they were all too busy cracking open the prosecco that they failed to spot significantly worrying remarks about monetary policy.

The Times reported thus , while Osborne was tripping through ChIna:

Mr Osborne hinted earlier yesterday that interest rates were going to rise, clearly siding with Mark Carney, the Bank of England governor, against Andy Haldane, its chief economist, who recently suggested that rates might have to stay low for longer because of problems in the Chinese economy, or may even need to fall.

Mr Osborne appeared to play down last week’s decision by the US Federal Reserve to hold rates rather than put them up, saying it had been dictated by the circumstances at the time.

Then he added, in what was close to a departure from the traditional reluctance of chancellors to interfere with the independence of the Bank, that the signals of rate rises in recent weeks reflected the growth in the American and British economies and that the “general signal coming from the Bank and the Federal Reserve is that the exit from very loose monetary policy is going to come”.

For starters, I thought this might trigger a debate about Central Bank Independence. (CBI) which has been filling then UK macro blogs like here and here since the Corbynomics debate exploded. Personally, I am CBA about CBI, the policy is the key, and often central bankers can’t be trusted to make good policy, but governments can, eg Japan. Of course, we see things often the other way around, too, but it is a sterile debate about means rather than ends.

The bigger issue is why Osborne thinks monetary policy is very loose. To be fair mainstream macro and “mediamacro” (HT Simon Wren-Lewis for the term) make the common mistake all the time of confusing interest rate levels and the amount of QE with the stance of monetary policy. The stance of monetary policy can only be measured by looking at whether demand for money is outstripping supply of money, and that can only be seen by looking at where nominal growth (aka Aggregate Demand) is headed. If on a downward trend money is tight, if on an upward trend money is loose. If in trend monetary policy is just right.

The recent historical economic evidence is that UK NGDP is slowing down, 2Q15 was quite poor. The relevant inflation rate for macro policy, the GDP Deflator was worse than poor. Tax revenue growth on incomes is still not great, just like the more difficult to measure wage growth itself. Looking forward, implied UK NGDP growth forecasts are weakening too, judging by market indicators like Sterling strength, long term bond yields, commodity prices and the stock market.

Despite some interestingly radical thoughts from the BoE Chief Economist Andy Haldane, Governor Carney seems squarely in the Janet Yellen/Philips Curve camp of warning rates must rise soon.

Hopefully, Osborne’s Treasury advisers will get him to see sense, if not things won’t turn out well. They won’t turn out disastrously as markets will force more delays in further monetary tightening. But the guidance on policy from Carney and his boss Osborne (and Yellen) will remain a mess. And the mess will, of itself, crimp NGDP growth.

Why IOER, oh why IOER, oh why IOER, did I ever do IOER?

A James Alexander post

(With apologies to Leonard Bernstein

Why would you deliberately set out on a path to a goal only to deliberately tie a rope to the start point and tie yourself to the rope?

The Interest on Excess Reserves (IOER) question is a bit like that. Frances Coppola expresses the smart view on the issue here, but it is all a fuss about nothing.

Looking at JP Morgan’s (JPM) balance sheet (from the 10K, p .314) for 2014 you see an average balance of “Deposits with Banks” of US deposits of $328 billion. It earns 25 basis points of interest (0.25%), or $825 million. All the $328 billion is with the Fed.

The question is, what would happen if that 25 basis points of Interest on Excess Reserves went to zero?

For a start JPM would lose $825 million of gross interest income. Not a huge deal for JPM given its $44,619 million of of gross interest income less gross interest expense, ie net interest income.The IOER thus represents just 2% of the total earned on the spread between its balance sheets assets and liabilities. It would lose just 3% of JP Morgan’s $30,000 million pre-tax profit in 2014.

So why does the Fed bother to pay it?

Apparently, the reason is that without paying IOER the Fed would “lose control” of market interest rates. When it set the effective funds rate at 15 basis points it wants it to stick, fair enough, as far as it goes. But if they are also doing massive QE then there will also be a lot of extra liquidity, especially at first. This excess money has to come back to the Fed as excess reserves, sure, all the new cash has to end up back with the banks. And if the Fed didn’t pay the 25 basis points as a minimum then, quel horreur, the excess cash in the system would be expected to force market rates below 15 basis points and the Fed’s rates structure would therefore be unsustainable.

What the sophisticates don’t spot is that this situation proves that the Fed’s rate is the wrong rate. The market rate should be allowed to go much lower if it wanted. The standout feature for Fed interest rates over the last twenty years is the Zero Lower Bound, and its artificiality.

JA_FFT-IOER

So why doesn’t the Fed let QE do it’s work quickly, lowering market rates to wherever they settle, getting out of the way and letting the new cash work its “hot potato” magic?

Well, it doesn’t like the market running things. The Fed knows best and 15 basis points of effective rates is the right level. Official.

Isn’t QE being self-defeated, or at least seriously self-limited, by the Fed itself preventing the free market from working? Yes, broadly. It’s a deeply interventionist, anti-market approach by the Fed. All it’s so-called extra liquidity is mopped by the Fed itself. Sterilised. Wasted.

We’ll never know what might have happened if the Fed hadn’t started paying IOER at the start of the crisis. It sure wasn’t smart if they were trying to reflate the economy. The Fed needed to credibly persuade the markets that it wanted to inflate, but the message was that it didn’t want to do it that badly, hence the floor on market rates. And we had the slowest recovery on record.

There may also be a fear of what market-determined rates in a QE environment might do to bank and customer behaviour. But is this right?

In 2014 JPM’s 10K also shows it held an average of $372 billion of interest free deposits in the US on which it cannot easily charge negative rates, though it could. It had in the US $625 billion of interest-bearing deposits earning the depositors an average of just 13 basis points. It could go to zero on these, or even negative also.

In Europe, a number of countries have moved to negative deposit rates without huge problems. There may be a limit before depositors start hoard cash rather than seeing their bank deposits fall in nominal value via negative interest rate deductions. Andy Haldane recently proposed abolishing cash altogether as one way around this problem. That really would be another wonderful victory for interventionism, following one freedom-limiting policy with another.

The one benefit that even sterilised QE might have had was to bring down longer term interest rates as it bought longer term bonds, especially mortgage backed securities. Even here it was going about its work in a self-defeating way as a successful reflation would have added upward pressure on longer term bond yields.

Fortunately the Fed also adopted forward guidance and said it won’t raise rates until various triggers have been met, or until some constantly moving point of time in the future is reached. This forward guidance has arguably underwritten the economy and allowed the steady, but unspectacular recovery.

Unfortunately, the inflation target of 2% has morphed into a ceiling and become a cap on recovery, and is becoming a trap, especially as the Fed’s definition of full employment has been met several times now. It has got around this problem until recently by continually moving the target down.

Ultimately, the question of what would JPM do if it got zero IOER is not that interesting. Although on balance it would probably seek a higher return from other securities, driving their prices up and their yields down. It might seek to lower the interest paid on interest-bearing deposits. On balance, some of those depositors might seek alternative places to earn a return. However, it is not obvious that either JPM or its lowly-rewarded interest earning depositors would be that minded to move their money elsewhere while the Fed is so clear in having a 2% inflation ceiling, and being willing to put rates up if the current 1% inflation rates began to move towards 2%. Zero IOER with hawkish guidance may still have been just as self-defeating, or self-limiting, as 25 basis points of IOER.

This aversion to lowering either party’s demand for money tells us that through its hawkishness Fed will fail in its responsibility to maintain stable prices. Inflation will keep on falling, or hovering around 0%. Perhaps the Fed’s mission of “stable prices” means zero inflation? Or worse, it means an average of zero.

Eventually, a shock will come along, perhaps even caused by the Fed itself and its constant creation of uncertainty. The US government will probably then force the Fed in some explicit or more likely implicit move towards the correct policy of NGDP Forecast Targeting, or at least flexibly (higher) inflation targeting. And history will probably judge the whole QE episode as a massive, but hugely controversial, sideshow.

Oh, and the Fed will then probably abolish IOER, too.