A James Alexander post
In the last day of public comments by FOMC members before the whole committee entered purdah the market was treated to three separate statements.
First off was Neel Kashkari. He knows little about monetary economics and it showed he hasn’t bothered to find out anything since his appointment. He should take this course for starters. At least is he is enthusiastic and inquisitive.
In a blog post entitled “Nonmonetary Problems: Diagnosing and Treating the Slow Recovery” he rather airily dismissed the idea that the slow recovery was due to poor monetary policy. He tasked his economics team at the Minneapolis Fed with building on some random thoughts of Greg Mankiw in a New Times op-ed. Mankiw came up with five, Kashkari and his team added two more, I think. I have read so many of the secular stagnation theses and other ad hoc nostrums I go a bit bored.
What was not seriously discussed was monetary policy. He did at least mention raising the inflation target, moving to a level target or even NGDP targeting. But he then spoilt these promising thoughts with this incredible statement:
“However, there are significant downside risks with these policy recommendations [raising the IT, LT of NGDPLT] that I believe must be carefully considered before being adopted. First, the Federal Reserve is struggling to hit its current target of 2 percent and has come up short for four years. Market forecasts and expectations about our ability to hit 2 percent have fallen. If we announced a new higher target, it isn’t clear why anyone would believe that we could hit it. The Federal Reserve’s credibility could be weakened.“
The trouble is, the Fed has buckets of credibility. Despite “struggling to hit its current target” it ended QE in 2014, threatened all through 2015 to raise rates and did so in December. And then the Fed projected four more 25bps hikes in 2016 and around eight more within two years or so. What on earth effect does Kashkari think all that actual and clearly threatened firepower have on inflation expectations? No wonder the inflation data the Fed is so dependent upon keeps disappointing.
Still Kashkari is a lot more dovish than his two peers in the Kansas (George) and San Francisco (Williams) Feds, and will swing the average vote much more dovish in 2017 when it is his turn to vote.
The president of the Atlanta Fed is a bit on the hawkish side, but mostly a bit of a tease. He said nothing of note in his speech and ended a bit dovish, but teasingly so:
“Among these—and I will close on this note—are, first, what is the right policy setting given an outlook of getting to full employment and price stability relatively soon—in the next couple of years? And, if 1.6 percent inflation and 4.9 percent unemployment were all you knew about the economy, would you consider a policy setting one tick above the zero lower bound still appropriate? These are some of the questions on my mind as I approach the next few meetings. I think circumstances call for a lively discussion next week.”
This was the big one. The speech worried markets on Friday 9th September when it was announced, especially after a litany of hawkish regional Fed presidents reiterating their inane and extremely tired views on the coming hyperinflation unless rates were raised soon.
The markets need not have worried. Brainard echoed many of the very sensible comments made by her governor colleague Tarullo.
“1. Inflation Has Been Undershooting, and the Phillips Curve Has Flattened … With the Phillips curve appearing to be a less reliable guidepost than it has been in the past, the anchoring role of inflation expectations remains critically important. On expected similar to realized inflation, recent developments suggest some reasons to be concerned more about undershooting than overshooting. Although some survey measures have remained well anchored at 2 percent, consumer surveys have moved to the lower end of their historical ranges and have not risen sustainably“
The other four sections were all pretty sensible:
2. Labor Market Slack Has Been Greater than Anticipated …the unemployment rate is not the only gauge of labor market slack, and other measures have been suggesting there is some room to go …
- Foreign Markets Matter, Especially because Financial Transmission is Strong …In turn, U.S. activity and inflation appear to be importantly influenced by these exchange rate movements. In particular, estimates from the FRB/US model suggest that the nearly 20 percent appreciation of the dollar from June 2014 to January of this year could be having an effect on U.S. economic activity roughly equivalent to a 200 basis point increase in the federal funds rate
[but whose fat finger caused the USD appreciation?] …
- The Neutral Rate Is Likely to Remain Very Low for Some Time … Ten years ago, based on the underlying economic relationships that prevailed at the time, it would have seemed inconceivable that real activity and inflation would be so subdued given the stance of monetary policy. To reconcile these developments, it is difficult not to conclude that the current level of the federal funds rate is less accommodative today than it would have been 10 years ago. Put differently, the amount of aggregate demand associated with a given level of the interest rate is now much lower than before the crisis
[OK, this is really confused. Interest rates are not monetary policy, expected nominal growth is. High rates mean money is or was easy, low rates mean it is or was tight] …
- Policy Options Are Asymmetric… From a risk-management perspective, therefore, the asymmetry in the conventional policy toolkit would lead me to expect policy to be tilted somewhat in favor of guarding against downside risks relative to preemptively raising rates to guard against upside risks.”
And then we get what seems to be a highly encouraging trend, seen first with John Williams, but repeated by Neel Kashkari today, a nod to alternative policy options:
“There is a growing literature on such policy alternatives, such as raising the inflation target, moving to a nominal income target, or deploying negative interest rates.15 These options merit further assessment. However, they are largely untested and would take some time to assess and prepare. For the time being, the most effective way to address these concerns is to ensure that our policy actions align with our commitment to achieving the existing inflation target, which the Committee has recently clarified is symmetric around 2 percent–and not a ceiling–along with maximum employment.”
The last point echoes what we have identified coming from the Bank of England, that 2% is not necessarily a ceiling, although the Fed is not yet saying that about projected inflation.
There is no mea culpa, that the Fed has caused the inflation undershooting by excessively tight monetary policy but, hey, we can’t have everything just yet.
And all this is going to be evaluated in the “months ahead”. Read my lips: no September, November or even December rate hike. A good news day!