Pity the “magic acronym” was uttered by someone as fickle as Bullard!

Just a few examples of Bullard´s fickleness in chronological order:

In “The core is rotten” (2011):

In my remarks tonight I will argue that many of the old arguments in favor of a focus on core inflation have become rotten over the years. It is time to drop the emphasis on core inflation as a meaningful way to interpret the inflation process in the U.S. One immediate benefit of dropping the emphasis on core inflation would be to reconnect the Fed with households and businesses who know price changes when they see them. With trips to the gas station and the grocery store being some of the most frequent shopping experiences for many Americans, it is hardly helpful for Fed credibility to appear to exclude all those prices from consideration in the formation of monetary policy.

In “Faulty reasoning” (2012):

The 2014 language in effect names a date far in the future at which macroeconomic conditions are still expected to be exceptionally poor,” Federal Reserve Bank of St. Louis President James Bullard said in a speech in St. Louis. “This is an unwarranted pessimistic signal for the [Federal Open Market Committee] to send,” given that the economy is recovering and forecasters can’t really tell what will happen that far down the road.

In “Bullard needs psychiatric meds” (2014)

On October 9:

In a speech that offered an upbeat assessment of the economy, Federal Reserve Bank of St. Louis President James Bullard said Thursday he is worried about what he sees as disconnect between what central bankers think will happen with monetary policy, and the view held by many in the market.

Right now, “the markets are making a mistake” and expect the Fed to maintain its ultra-easy policy stance longer than Fed officials themselves currently expect, Mr. Bullard said. When it comes to these expectations, “I would prefer that those be better aligned than they are.”

On October 16:

The Federal Reserve may want to extend its bond-buying program beyond October to keep its policy options open given falling U.S. inflation expectations, Federal Reserve Bank of St. Louis President James Bullard said Thursday.

It would keep the program alive,” and the Fed’s options “open as to what we want to do going forward,” Mr. Bullard said during an interview on Bloomberg TV.

In Bullard “Trail & Track” Nov 6 2014:

He´s an “off” “on” switch type of central banker. On October 9 he “switched off”, on the 16th he “switched on” and “switched-off” again today:

Federal Reserve Bank of St. Louis President James Bullard said in a television interview Tuesday that he is upbeat about the economy and doesn’t think any new central bank stimulus is needed to help keep the U.S. on track for 3% growth.

In “In a hurry” (Feb 2015):

Federal Reserve Bank of St. Louis President James Bullard said the U.S. central bank needs to change its policy statement to give it more room to maneuver with interest rate increases, in comments that also expressed hope the first rate rise will come soon.


The Federal Reserve should consider new policy options, including directly targeting a non-inflation-adjusted level of economic growth, after more than six years of sustained monetary easing failed to spur a boom, Federal Reserve Bank of St. Louis President James Bullard said Thursday.

Where does the FOMC get these ideas?

We all know that Janet & Friends are trigger-happy, dying for a plausible excuse to begin the so-called “rate lift-off”. We also know that the labor market is the “star of the play”, being groomed to be the signal that will open “heaven´s gate”!

The “grooming” has changed “styles”. Initially it was 6 to 6.5 “inches” and over the past couple of years has been “trimmed” down to 5 to 5.2 “inches”.

How do they know that´s the “in style”? They don´t, really. They thought it was also “in” almost 20 years ago when Janet was not yet the Head-dresser. In 1997, together with like-minded “fashion guru” Laurence Meyer, she was advising Greenspan that he should raise rates because unemployment was too low! Larry described the “hair style” in detail in April 1997. You can easily see that the playbook today is the exact same:

I am a strong and unapologetic proponent of the Phillips Curve and the NAIRU concept. Fundamentally, the NAIRU framework involves two principles. First, the proximate source of an increase in inflation is excess demand in labor and/or product markets. In the labor market, this excess demand gap is often expressed in this model as the difference between the prevailing unemployment rate and NAIRU, the non-accelerating inflation rate of unemployment. Second, once an excess demand gap opens up, inflation increases indefinitely and progressively until the excess demand gap is closed, and then stabilizes at the higher level until cumulative excess supply gaps reverse the process.

There is a third principle that I subscribe to, which, though not as fundamental as the first two, also plays a role in my forecast and in my judgment about the appropriate posture of monetary policy today. Utilization rates in the labor market play a special role in the inflation process. That is, inflation is often initially transmitted from labor market excess demand to wage change and then to price change. This third principle may be especially important today because, in my view, there is an important disparity between the balance between supply and demand in the labor and product markets, with at least a hint of excess demand in labor markets, but very little to suggest such imbalance in product markets.

Despite the sharpness and force of the Phillips Curve/NAIRU model, it can be difficult to implement in practice. Still, this relationship was about the most stable tool(!) in the macroeconomists’ tool kit for most of the past 20 years; those who were willing to depend on it were likely to be very successful forecasters of inflation, and the record speaks for itself on this score. Nevertheless, the combination of the 7-year low in the unemployment rate and 30-year low in inflation was a surprise to those using this framework. The challenge is to understand why we have been so fortunate. But, it should also be noted that monetary policy has responded appropriately to this surprise. That is, monetary policy has been careful not to be tied rigidly to a constant estimate of NAIRU. Instead, in my view, monetary policymakers have, in effect, implicitly adjusted their estimate of NAIRU to reflect the incoming data; this might be viewed as following a procedure like the time-varying parameter estimation technique applied by Robert Gordon and others.

We were all very lucky that Greenspan didn´t “buy” their suggestion at the time. Unfortunately, now Janet is the Head-dresser, and has enticed others who appear to be like-minded, or that have come on board simply because that´s the best bet available to “open heaven´s gate”.

Look at their “drawing-board”:

Janet´s Salon_1

You can easily understand why the first “style” was 6 to 6.5 “inches”. That´s the unemployment point below which wages began to rise. However, that was during the years before the Fed messed-up, when it strived to keep nominal spending on an “even keel”.

When it did mess up, although unemployment rose, wage growth didn´t budge for quite some time (the flat part of the blue line). That´s evidence for wage stickiness!

When wage growth finally dropped, it´s growth remained about the same even though unemployment was falling. As required by the “playbook”, Janet is adjusting (“trimming”) her estimate of NAIRU to reflect incoming data.

Now we are at the April 2015 point (red). Janet´s view is that if unemployment crosses the “Rubicon”, wages will “take-off”. How fast they have no idea. I do.

Given the level and the rate at which nominal spending has been growing (4% and likely falling), wage growth will likely increase very little.

Why all the anxiety about the impact of wage growth on inflation? It´s a fixed and longstanding image in Janet´s head. Ordinary mortals’ can´t see it!

Janet´s Salon_2

What will happen? More likely they´ll keep “trimming” the NAIRU estimate “to reflect incoming data”.

Atlanta Fed Says Q1 U.S. GDP At Standstill; Nation Below Target-Inflation, Interest Rates Falling; Fed Ponders Rate Hike

A Benjamin Cole post

The Atlanta Fed, usually a quiescent bunch, just X’ed out growth in its Q1 forecast GDPNow index.

Of course, headline inflation is at 0% and rates on 10-year Treasuries are skidding below 2%. Hiring is seizing up, the Dow is stutter-stepping, and unit labor costs have not risen in six years.

And the Fed?

The Fed is endlessly jibber-jabbering about raising rates and getting back to normal.

I have some advice for the Fed: From the clues I detect, raising rates will not get you back to normal. My other advice to the Fed is to send reconnaissance teams to Europe and Japan. It you think now is not normal, wait ‘till you see what comes next.

Back to The Future: QE

I have been tooting all along that the Fed should stay with QE, adding my kazoo to the cacophonic, conductor-less global orchestra of macroeconomic e-pundits.

But, perhaps it wouldn’t matter if I had Gabriel’s Trumpet, and not a kazoo.

I suspect Janet Yellen is marching to the Fed’s own drum, and the beat goes on. And on. And on. And on

Ben´s blogging has generated more heat than light so far

So far the former and wannabe Fed Chairmen crossed swords over the irrelevant and misguided concepts of GSG & SS. (I´ve given those things some thought here and here).

With big dogs growling at each other, Krugman simply could not help butting in (really to show he had been there before). And for very obvious reasons he ends up giving each a “bone”:

There’s been a really interesting back and forth between Ben Bernanke and Larry Summers over secular stagnation. I agree with most of what both have to say. But there’s a substantive difference in views, in which Bernanke correctly, I’d argue, criticizes Summers for insufficient attention to international capital flows – but then argues that once you do allow for international capital movement it obviates many of the secular stagnation concerns, which I believe is wrong.

As it happens, the role of capital flows in the logic of liquidity traps is an issue I tackled right at the beginning, back in 1998; and I’ve been trying to work out how it plays into the discussion of secular stagnation, which is basically the claim that countries can face very persistent, quasi-permanent liquidity traps. So I think I may have something useful to add here.

Start with Bernanke’s critique of Summers. The most persuasive evidence that the US may face secular stagnation comes from the lackluster recovery of 2001-2007. We experienced the mother of all housing bubbles, fueled by a huge, unsustainable rise in household debt – yet all we got was a fairly unimpressive expansion by historical standards, and little if any inflationary overheating. This would seem to point to fundamental weakness in private demand. But one reason for the sluggish growth in demand for U.S.-produced goods and services was a huge trade deficit, the counterpart of huge reserve accumulation in China and other emerging markets. So Bernanke argues that what Summers sees as evidence of secular stagnation actually reflects the global savings glut.

The 2001-2007 recovery is not evidence, let alone persuasive, of secular stagnation. Krugman is on the right track when he says this “would seem to point to fundamental weakness in private demand.” But at the last minute he veers off in the wrong direction by making the fundamental mistake of “reasoning from a (GDP) component change” (a close cousin of “reasoning from a price change”).

A huge trade deficit somewhere is always the counterpart of a huge reserve accumulation elsewhere. The important reasoning is to discover why this came about when it did and if it might be related to other stuff (such as the US housing boom). For an explanation, read here (below the fold).

If “movements in GDP components” had not distracted Krugman he would probably have found out that the post 2001 recession recovery was slow up to mid-2003, being due to the tightness of monetary policy, despite fast falling interest rates.

When the Fed made monetary policy more expansionary in mid-2003 by adopting forward guidance (FG), despite interest rates remaining put, the recovery took off, with nominal spending rising back to trend. Interestingly, many see this strong growth in nominal spending as reflecting a “loose/easy” monetary policy. Grave mistake. Faster NGDP growth was necessary to take nominal spending to trend. Monetary policy was “just right”!

At that point, unemployment begins to fall and core inflation rise towards the “target” level.

Bernanke had the bad luck to take over almost concomitantly with the peak in house prices. Initially house prices fell only a little, increasing the speed of fall after financial troubles erupted in some important mortgage finance companies.

Unfortunately, the Fed was exceedingly focused on headline inflation, fearful of the oil price rise. Interest rates remained elevated, only being reduced after August 2007, when three funds from Bank Paribas folded. However, the pace of interest rate reduction was deemed too slow by the market. In the December 11 2007 FOMC Meeting, for example, the markets were negatively surprised by the paltry 25 basis points reduction in the FF rate. On that day the S&P fell 2.5% and the 10 year TB yield dropped 17 basis points.

Rate reductions stopped in April 2008 (only resuming in October, after Lehman!). In the June 2008 FOMC, it came out that the next move in rates was likely up!

With all this monetary tightening, nominal spending decelerated and then fell at an increasing rate. One casualty was Lehman! The rest is history!

Give me a break and let´s stop talking “Gluts” and “Stagnations”. Bernanke would do much better if he starts shinning some light and blog about how monetary policy could really have been much better! Will he be daring?

The charts illustrate the story

Gluts & Stagnations_1

Gluts & Stagnations_2

Gluts & Stagnations_3


Matt O´Brien thinks it´s the opposite in “Larry Summers and Ben Bernanke are having the most important blog fight ever

Drinking buddies: One wants to slow down the refills, the other wants the punchbowl taken away


“The projected combination of a gradual rise in the nominal federal funds rate coupled with further progress on both legs of the dual mandate is consistent with an implicit assessment by the Committee that the equilibrium real federal funds rate–one measure of the economy’s underlying strength–is rising only slowly over time.”


“In current circumstances, raising the funds rate target a notch or two is less like taking away the punch bowl and more like just slowing down the refills,” he said. “We will still be spiking the punch–just not quite as rapidly as we have been.”

Outside the “bar”, Kevin pickets:

“Now, I would say the markets are exhausted. They’re exhausted that the Fed has decided there’s a new set of benchmarks,” . “Before it was forward guidance. Now it’s, ‘Just kidding about forward guidance. Citing the sliding unemployment threshold for considering an interest rate hike, he said it’s now 5.5 percent or even 5 percent, down from 6.5 percent not too long ago.