White Collar trigger-happy terrorists

This is Loretta:

But there are also risks to forestalling rate increases for too long when we are continuing to make cumulative progress on our policy goals. Waiting too long increases risks to financial stability and raises the chance that we would have to move more aggressively in the future, which poses its own set of risks to the outlook.

I believe waiting too long also jeopardizes our future ability to use the nontraditional monetary policy tools that the Fed developed to deal with the effects of the global financial crisis and deep recession.

If we fail to gracefully navigate back toward a more normal policy stance at the appropriate time, then I believe there is a non-negligible chance that these tools will essentially be off the table because the public will have deemed them as ultimately ineffective. This is a risk to the outlook should we ever find ourselves in a situation of needing such tools in the future.

Bullard seems to have “holstered his gun”. However, his reasoning is reversed. It´s not monetary policy that is regime-dependent, but the regime that is monetary policy dependent. If he switched his reasoning, switches between regimes would become forecastable!

Regimes are generally viewed as persistent, and optimal monetary policy is viewed as regime dependent. Switches between regimes are viewed as not forecastable.

2 thoughts on “White Collar trigger-happy terrorists

  1. If what we are experiencing is the new normal, low nominal short rates as far as the eye can see, then the place she wants monetary policy to go isn’t normal and hasn’t been since the 1930’s. In fact, the new normal isn’t normal at all in modern history – the recent things are explicit inflation targeting and a FOMC packed with hawks for the sake of hawkishness.

  2. I notice the tight-money crowd having exhausted the inflation boogeyman, is now more often referencing future “financial instability.”

    Personally, I think recessions cause financial instability.

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