Stanley Fischer has no idea about what tight monetary policy means!

In early January, he thought four rate hikes in 2016 was in the “ballpark”.

In a speech yesterday he was less sanguine, but still believes monetary policy remains accommodative.

The framework under which the Fed operates, which Kocherlakota, who knows what he´s talking about, clearly set out recently, permeates the Fischer´s speech: “gradual” and “normalize”.

According to Fischer:

“[M]y colleagues and I anticipate that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate, and that the federal funds rate is likely to remain, for some time, below the levels that we expect to prevail in the longer run” [the normal level].

The saddest thing is to see that to Fischer, as well as to many other FOMC members, what informs monetary policy is employment/unemployment and oil/commodity prices! Within that framework, inflation will climb back to 2% when oil prices stabilize and unemployment falls a bit more!

In a recent post, using the federal funds future rate, David Beckworth has argued that monetary policy has been tightening since mid-2014. That´s quite true as the chart indicates.

Stan Fischer mistakes_1

More generally, that reflects the fact that NGDP growth, the best measure of the stance of monetary policy, has turned down since that time. This fall in AD growth has been accompanied by “negative” trends in most indicators of economic activity and sentiment, including oil prices and the broad dollar index.

Stan Fischer mistakes_0

Only when a recession is announced by the NBER will the Fed realize it has been on a tightening spree!


6 thoughts on “Stanley Fischer has no idea about what tight monetary policy means!

  1. “Only when a recession is announced by the NBER will the Fed realize it has been on a tightening spree!” And perhaps not even then! Will they really take responsibility for the (hypothetical) recession?

  2. Marcus, regarding your reference to the expected fed funds rate as proof that policy has become tighter, is this not an example of “reasoning from a price change,” akin to the claims made in 2008 and since that, because the funds rate dramatically that year, the Fed’s stance was accommodating? The NGDP figures of course support your view; but it seems to me that the suggestion that the tightening hypothesis is “true” by virtue of the funds rate evidence alone is a non-sequitur.

    • George
      I tend to agree with what you say. I made a point of including the NGDP growth chart because that´s my preferred indicator of the stance of MP. The FFFR was prominent in David Beckworths latest post and to me it´s just one more “coincidence” of things going sour (ind production, oil prices, the dollar appreciation, retail sales, etc) at the same point in time, i.e. when, according to NGDP growth, MP tightens!

  3. Just checking here ahead of Fischer’s speech today. Although you were harsh on him here, perhaps not harsh enough. The speech reads like a massive backtracking from the four more rate rises “ballpark” interview. He can’t admit he was wrong, at least while in office. But the sub-text is very clear. It’s really pathetic. In a way he does know what tight monetary policy means as the market had just demonstrated it to him in a brutal, but fair, fashion. His major error is flip-flopping.

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