Two presidents and a governor

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.

  1. Kashkari

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.

  1. Lockhart

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.”

3.Brainard

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 … 

  1. 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?] …

  1. 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] …

  1. 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!

“Heads or Tails”

From a recent Vox post: “The tail that wags the economy: The origin of secular stagnation”:

The Great Recession has had long-lasting effects on credit markets, employment, and output. This column combines a model with macroeconomic data to measure how the recession has changed beliefs about the possibility of future crises. According to the model, the estimated change in sentiment correlates with economic activity. A short-lived financial crisis can trigger long-lived shifts in expectations, which in turn can trigger secular stagnation.

The typical post-WWII recession has a distinct trough, followed by a sharp rebound toward a stable trend line. Following the Great Recession, however, this rebound is missing. The missing recovery is what Summers (2016) and Eggertsson & Mehotra (2014) call ‘secular stagnation’ (see also Teulings and Baldwin 2014).

And show a version of this chart

holy-grail_1

Why did the dysfunction in credit markets impact the real economy for so long? Many explanations for the real effects have been advanced, and these are still being compared to data (e.g. Gertler and Kiyotaki 2010, Brunnermeier and Sannikov 2014, and Gourio 2012, 2013). Existing theories about why the crisis took place assume that the shocks that triggered it were persistent. Yet such shocks in previous business cycle episodes were not so persistent. This differential in persistence is just as puzzling as the origin of the crisis. What most explanations of the Great Recession miss is a mechanism that takes some large, transitory shocks and then transforms them into long-lived economic responses.

Perhaps the fact that this recession has been more persistent than others is because, before it took place, it was perceived as an extremely unlikely event. Today, the question of whether the financial crisis might repeat itself arises frequently. Financial panic is a new reality that was never perceived as a possibility before.

I believe there´s a simpler and more direct explanation – or mechanism – consistent with the changes in “beliefs, expectations or sentiment” which, in addition to helping understand the fall in productivity growth, is also consistent with the post war history of the behavior of RGDP depicted in the chart above.

That alternative explanation relies on observing that what is manifestly different in the present cycle is the behavior of monetary policy, if you understand monetary policy to be the main determinant of aggregate nominal spending (NGDP).

My strategy divides the post war period (actually the period after 1953, to avoid complications from the immediate post war years and the period of the Korean War) in four parts. The “low inflation” 1950s and early 1960s, the “rising-high inflation” of the late 1960s to the early 1980s, the “falling-low inflation” years from the mid-1980s to 2006, and the “Great Recession/Great Stagnation/Too Low Inflation” years thereafter.

In this story, it´s not “the tail that wags the economy”, but the “hydra-head” of the FOMC, who wields close control of aggregate nominal spending in the economy.

The panel depicts NGDP and RGDP during the four episodes. All corresponding charts have the same scale and they cover the period from the peak of the cycle to 28 quarters from the trough (which is the time span since the Great Recession ended in June 2009).

holy-grail_2

holy-grail_3

From looking at the behavior of NGDP and the associated behavior of RGDP during the episodes, it becomes clear why we´re living a Great Stagnation. For the past 60 years, monetary policy has never been this tight! That´s the mechanism that transforms transitory shocks into long-lived economic responses.

And on the productivity implications of inadequate AD growth, this was tweeted by Adam Tooze:

Keynes on the aggregate demand context necessary for rapid productivity growth

holy-grail_4

The genius that was Milton Friedman

Going back over old posts, I found one from 6 years ago that covered Milton Friedman. That was in Portuguese, and here I have more.

This is taken from the Q&A following Friedman´s Keynote Address at a Bank of Canada Conference in 2000. Here´s Friedman, on the hot topics of today: The Euro, Inflation Targeting operated primarily through interest rates, and Japan

Michael Bordo: Do you think the recent introduction of the euro will lead to the formation of other common-currency areas?

Milton Friedman: That’s an extremely interesting question. I think that the euro is one of the few really new things we’ve had in the world in recent years. Never in history, to my knowledge, has there been a similar case in which you have a single central bank controlling politically independent countries.

The gold standard was one in which individual countries adhered to a particular commodity—gold—and they were always free to break or to leave it, or to change the rate. Under the euro, that possibility is not there. For a country to break, it really has to break. It has to introduce a brand new currency of its own.

I think the euro is in its honeymoon phase. I hope it succeeds, but I have very low expectations for it. I think that differences are going to accumulate among the various countries and that non-synchronous shocks are going to affect them.

Right now, Ireland is a very different state; it needs a very different monetary policy from that of Spain or Italy. On purely theoretical grounds, it’s hard to believe that it’s going to be a stable system for a long time. On the other hand, new things happen and new developments arise.

The one additional factor that has come out that leads me to raise a question about this is the evidence that a single currency—currency unification— tends to very sharply increase the trade among the various political units. If international trade goes up enough, it may reduce some of the harm that comes from the inability of individual countries to adjust to asynchronous shocks. But that’s just a potential scenario.

You know, the various countries in the euro are not a natural currency trading group. They are not a currency area. There is very little mobility of people among the countries. They have extensive controls and regulations and rules, and so they need some kind of an adjustment mechanism to adjust to asynchronous shocks—and the floating exchange rate gave them one. They have no mechanism now. If we look back at recent history, they’ve tried in the past to have rigid exchange rates, and each time it has broken down. 1992, 1993, you had the crises. Before that, Europe had the snake, and then it broke down into something else. So the verdict isn’t in on the euro. It’s only a year old. Give it time to develop its troubles.

(Note)

Malcolm Knight: Countries with a flexible exchange rate need a nominal target for monetary policy to anchor expectations. Do you feel that inflation targeting provides a useful nominal target?

Milton Friedman: As I mentioned earlier, I think it’s a good thing to have a nominal target, to say that you’re not going to try to fine-tune, and to indicate what you aren’t going to do.

The problem I have is this: the current mechanism for all of the central banks who are inflation targeting is a short-term interest rate—as in the United States—in all of the central banks.

We know from the past that interest rates can be a very deceptive indicator of the state of affairs. A low interest rate may be a sign of an expansive monetary policy or of an earlier restrictive policy. And similarly, a high rate may be a sign of restriction, of trying to hold things down; or it may be a sign of past inflation.

The 1970s offer the classical illustration in which there were high interest rates that were reflecting the Fisher effect of inflation expectations. So I’m a little leery of operating primarily, or almost primarily, via interest rates. But, I think that having a given inflation target is a good objective. The question is, how long will you be able to keep it?

David Laidler: Many commentators are claiming that, in Japan, with short interest rates essentially at zero, monetary policy is as expansionary as it can get, but has had no stimulative effect on the economy. Do you have a view on this issue?

Milton Friedman: Yes, indeed. As far as Japan is concerned, the situation is very clear. And it’s a good example. I’m glad you brought it up, because it shows how unreliable interest rates can be as an indicator of appropriate monetary policy.

The Japanese bank has supposedly had, until very recently, a zero interest rate policy. Yet that zero interest rate policy was evidence of an extremely tight monetary policy. Essentially, you had deflation. The real interest rate was positive; it was not negative. What you needed in Japan was more liquidity.

Federal Reserve Bankers Victoriously Declare Defeat!

A Benjamin Cole post

Speaking in Beijing a few days ago, Chicago Federal Reserve Bank President Charles Evans said economic stagnation is the new normal and so he sees slow inflation, interest rates and growth for far as the eye can see. Ergo, there is nothing for the Fed to do.

Eric Rosengren, Boston Fed President, reviewed the same outlook, but added that rate hikes will be needed soon, as the U.S. economy, particularly commercial real estate, could “overheat.”

Overheat?

Again, here is a telling graph:

BC Hours

For Q1 2016, the index of hours worked nationally in the United States private sector was 112.3. It was 110.2 in Q2 2007, and 109.2 in Q2 2000. That is 16 years of essentially no employment growth in the United States.

This is overheating?

And look at the 1990s—strong employment growth, and sustained. Yet inflation was moderate throughout the decade.

Presently, the PCE core is reading 1.6% YOY. As Marcus Nunes has pointed out repeatedly on these pages, nominal GDP growth has been falling in recent years.

Conclusion

There remains a premise in central banker and monetary circles that fiat-money central banks have been “easy” (perhaps for decades) or “accommodative,” and have done all they can do, sometimes wreaking destruction in their path.

So now it is time for central bankers to victoriously declare defeat.

Central bankers contend that by being so easy for so long, they have driven the developed world into deflation, or close to it.

So now, raising rates makes sense.

The blameless crowd

They are masters in shifting responsibility.  See “ECB’s Nowotny: Don’t Blame Central Bankers for Low Rates”:

The low interest rate environment has more to do with economic developments, rather than the autonomous actions of central banks, said European Central Bank Governing Council member Ewald Nowotny in a speech Thursday. He added that in this environment it was difficult for a central bank to set interest rates on its own.

Speaking at a conference in Alpbach, Austria, Mr. Nowotny said that one of the factors keeping inflation down is globalization. Low prices are “an advantage for consumers, but puts pressure on wages,” he noted.

Moreover, growth is also relatively low. “We have a trend of long-term, low growth rates, which is not easy to interpret,” he said.

In his pre-Jackson Hole ‘manifesto’:   John Williams shows this chart

Nincompoops_1

And writes:

The underlying determinants for these declines are related to the global supply and demand for funds, including shifting demographics, slower trend productivity and economic growth, emerging markets seeking large reserves of safe assets, and a more general global savings glut.

Although the main reason was starring him in the face, it is never acknowledged. And that reason is the simultaneous crash in NGDP, resulting from sweeping the monetary policy framework pursued during the great moderation under the rug, first by the Fed, immediately followed by the other nincompoops.

Nincompoops_2

The Fed, by tightening, is reducing “slack”!

Speaking at a conference in Beijing, Boston Fed President Eric Rosengren said it has been appropriate to be patient about normalizing interest rates, given that growth “has continued to underwhelm.” But the Fed’s mandated goals – stable prices and maximum sustainable employment – are likely to be achieved relatively soon, and “keeping interest rates low for a long time is not without risks.”

As a result, important questions confront monetary policymakers in the United States, including when and how quickly to continue normalizing interest rates.

Why are they so worried if inflation, as measured by the PCE-Core has remained below the 2% target level for almost the whole time since end-2008, even if “full employment” is all around us?

Fed&Slack_1

What they don´t realize is that “slack” has been diminishing because they are keeping the economy ever more subdued. The idea of “potential” is risible because actual NGDP seems to be the strongest determinant of “potential” NGDP.

In the chart you can see that while for the years prior to 2013 potential NGDP in the latest vintage (August 2016) was revised slightly up, compared to the 2011 vintage (the earliest available in Alfred), for the past two years it was revised down significantly.

Fed&Slack_2

 

Now, note that´s exactly the period during which NGDP growth has tumbled down, the outcome of all the tightening talk going on at the FOMC!

Fed&Slack_3

The Fed’s logic is faulty but may yet end up with the right answer

A James Alexander post

The last blog post was a great analysis of the last thirty years of US monetary policy as the Fed focused on Core PCE inflation and unemployment and for most of the time accidentally got NGDP growing on target. When the Fed switched rigidly to focusing on its own projections for Core PCE things started to go awry, both with unemployment and NGDP.

Still focusing on those projections since 2009 it has got things right in fits and starts only. Unemployment has ever so gradually returned to 5%, a record slow recovery. That said, there is still tons of labor market slack as evidenced by the participation ratios, ultra-low nominal wage growth and low quit rates. These factors mean there is very little productivity growth as the labor market is so lacking in energy. Core PCE keeps missing Fed projections of a return to 2%.

This troubled but not yet terrible situation is summed up by, actually caused by, the dreadful growth rate and level of NGDP.

So why does the Fed want to raise rates?

Trying to put myself in the mind of the average FOMC member I came up with this “logic”, although it is not logical – perhaps because it reflects so many competing views and not just one human brain:

1. The Fed wants to raise rates to give it the room to cut them when the data goes bad – even though we know the data will go bad due to the raising of rates, or the constant threat of raising rates.

2. The Fed is thus stuck as it really doesn’t want to:

a. use negative rates because the banks, insurance companies, money market mutual funds and savers will complain very loudly;

or,

b. do more/wider QE because too many politicians, internet Austrians/goldbugs, alt-right, progressives, socialists, etc. will all            complain about the Fed creating winners and losers “and may require legislation” as Yellen said;

or,

c. do helicopter money, defined here as directly new-money financed fiscal expenditure as it is bound to run up against any unaltered Core PCE inflation target projections

3. While the Fed needs rate-cutting firepower it is unlikely to have been able to raise before the data goes really bad

4. So the Fed has to look at more innovative alternatives than negative rates or more/wider QE. Thus it is tentatively looking at a higher inflation target or even level targets for inflation or nominal growth, instead as a sort of last resort back-up plan.

The Fed is causing this confusion becausthe logic is confused. It has the wrong targets and they are both causing and storing up trouble. Changing the targets would be the right thing to do, even if for all the wrong reasons.

 

The Great (Monetary) Unraveling

In “Years of Fed Missteps Fueled Disillusion with the Economy and Washington”, Jon Hilsenrath gives his contribution to the “Great Unraveling” series. He starts off writing:

In the past decade Federal Reserve officials have been flummoxed by a housing bubble that cratered the financial system, a long stretch of slow growth they failed to foresee and inflation persistently undershooting their goal. In response they engineered unpopular financial rescues, launched start-and-stop bond buying and delayed planned interest-rate boosts.

“There are a lot of things that we thought we knew that haven’t turned out quite as we expected,” said Eric Rosengren, president of the Federal Reserve Bank of Boston. “The economy and financial markets are not as stable as we previously assumed.”

In the 1990s, a period known in economics as the “Great Moderation,” it seemed the Fed could do no wrong. Policy makers and voters saw it as a machine, with buttons officials could push to heat or cool the economy as needed. Now, after more than a decade of economic disappointment, the central bank confronts hardened public skepticism and growing self-doubt about its own understanding of how the U.S. economy works.

For anyone seeking to explain one of the most unpredictable political seasons in modern history, with the rise of Donald Trump and Bernie Sanders, a prime suspect is public dismay in institutions guiding the economy and government. The Fed in particular is a case study in how the conventional wisdom of the late 1990s on a wide range of economic issues, including trade, technology and central banking, has since slowly unraveled.

During the Great Moderation, the Fed did do wrong. It just didn´t fail utterly! I believe the chart tells a convincing story.

Great Monetary Unraveling_1

Note that during the Great Moderation – the Greenspan years – NGDP growth was relatively stable. In 1990-91, the story is the Fed engineered a “strategic Disinflation”, with inflation coming down from the 4% level to 2%. In 2000-02 the Fed, worried about the low (4%) rate of unemployment and what it would do to inflation, erred, allowing NGDP growth to fall significantly. This mistake was subsequently corrected.

In level terms we see that NGDP remained close to its “target level”.

Great Monetary Unraveling_2

In the first two years of his mandate, Bernanke managed to keep NGDP close to its “target level”. Inflation remained very close to target and unemployment low and stable.

Great Monetary Unraveling_3

The follow-up in 2008-09, however, was a disaster. The Fed allowed NGDP growth to take a beating. The result was a massive increase in unemployment (given wage stickiness) with inflation dropping below target.

Great Monetary Unraveling_4

This outcome is very closely linked to the Fed´s renewed obsession with the likelihood of inflation shooting up on the heels of an oil shock. This is somewhat surprising given that 10 years earlier, in 1997, Bernanke and co-authors had published a paper “Systematic Monetary Policy and the Effects of Oil Price Shocks” (now gated), which was summarized by Business Insider in March 2011, at the time the ECB was considering hiking rates because of the oil price rise.

Earlier we mentioned a Ben Bernanke paper from 1997 titled, Systematic Monetary Policy and the Effects of Oil Price Shocks and while the full thing is definitely worth a read, we have a breakdown for you right here.

CNBC is talking about it today, too, in light of the ECB’s talk of higher rates.

The thesis is that it is central bank monetary policy in reaction to oil price spikes that creates economic downturns, not the oil price spike itself.

On the other hand, a rate hike ends up causing problems for years, reducing output.

The implication of this is that Federal Reserve Chair Ben Bernanke has no interest in raising rate for a commodity or oil spike, so long as prices remain within Fed range, because it has a damaging impact on output that could send unemployment higher.

In 2008, however, the Bernanke Fed was very worried about the inflationary impact of oil. Although the Fed didn´t raise rates (they didn’t lower them either between April and September 2008), all the FOMC talk, as gleaned from the 2008 Transcripts, was about the risk of inflation and how the next rate move would likely be up!

“Fed talk” is monetary policy, and it gets transmitted through the expectations channel. You get the idea about how monetary policy was severely tightened during 2008, in addition to looking at the behavior of NGDP growth, that tanked, by looking at how the dollar strengthened, how the stock market plunged, and how long-term interest rates dropped.

Great Monetary Unraveling_5

In mid-2009 the economy began to recover, with NGDP growth reversing course. QE1 had a positive impact.

Great Monetary Unraveling_6

During this policy easing, the dollar fell while stocks and long-term bond yields rose.

Great Monetary Unraveling_7

For some reason, by mid-2010 the Fed decided that “enough was enough”. QE1 ended and NGDP growth was stabilized initially at 4%. In other words, unlike after the 2000-03 when NGDP fell below trend but was brought back to trend, this time around the Fed decided that a lower trend path was the way to go.

Great Monetary Unraveling_8

For the past two years, even with inflation remaining below target, through its raise hike talk the Fed has been tightening monetary policy. NGDP growth is coming down, the stock market has remained sideways while the dollar has boomed, oil prices have tanked and long-term bond yields are coming back down. It seems the Yellen Fed is guided by the unemployment rate.

Great Monetary Unraveling_9

It is, therefore, not surprising that the level chart for the Bernanke/Yellen period contrasts sharply with the one observed during the Greenspan years ( I would have imagined that would give useful pointers for the “design of a new monetary framework”)

Great Monetary Unraveling_10

The Jackson Hole Conference had an encouraging title: “Designing Resilient Monetary Policy Frameworks for the Future”. Unfortunately, they mostly talked about the nuts & bolts of policy implementation. Furthermore, while Yellen signalled one rate rise this year, her number 2 Stan Fischer said he “roots” for two. And Bullard said once in the next two years!

It was certainly a missed opportunity for the Fed to regain some modicum of credibility.

While they discuss about economy “overheating”, the economy is “overcooling”

Stan Fischer:

The Federal Reserve’s governors are debating what is going on in the U.S. economy and how to set policy, the Fed’s No. 2 official said on Thursday.

“The issue of overheating of the economy is being discussed within the Fed board,” Fed Vice Chair Stanley Fischer told a room of labor activists who met with Fed officials to press them not to raise interest rates.

“Everything that’s being argued here is being argued in the board as well,” said Fischer.

But reality “stinks”!

Fischer-Overheating

The Fed Is Artificially Budging Rates—But Higher Not Lower Does Fiat-Money Central Banking Lead to Deflation?

A Benjamin Cole post

At the always interesting Alt-M website is a post by highly regarded monetary scholar Gerald P. O’Driscoll, pondering if the Fed can raise rates even if it wants to, whether Fed presently is artificially pumping up short-term rates.

O’Driscoll notes that today 20 central banks globally have negative interest rates in place.  Were now an activist Fed to jack-up the Fed funds rate and the interest on excess reserves (IOER) by another 25 basis points, the spread between U.S. rates and global rates would widen even more.

O’Driscoll points out such an action will attract capital to the U.S., thus raising the exchange rate of the U.S. dollar, slowing domestic business activity when the economy barely growing anyway.

Moreover, the Fed appears to be struggling to even keep short-term rates as high as they are. As O’Driscoll notes, in December 2015 the Fed raised interest on excess reserves from 25 to 50 basis points and also posted an offering rate of 25 basis points on reverse repurchase agreements. The Fed’s mysterious reverse-repo program has expanded to $321 billion at recent count, as it tries to sop up enough cash to prevent even lower rates.

But the Fed is battling the tide. O’Driscoll notes interest rates on short-term treasury bills (4 weeks) have recently traded down close to or even below 25 basis points.

Of course, long-term rates are primarily set by market forces, and 10-year Treasuries have been yielding near record-lows, now offering about 1.50% interest.

“There are real questions as to whether further hikes in what are administered (not market) interest rates will move market interest rates as desired. We have no experience on which to base such a forecast,” intones O’Driscoll.

There is much to admire in O’Driscoll’s blogging, but perhaps I quibble with his non-conclusion, which is that, “Fed policymakers are still mostly stuck in closed economy thinking. But, so, too, are most advocates of monetary reform. New thinking is needed all around.”

Well, bring it on, I say. Like what?

The Alt-M Outlook

In the past O’Driscoll has called for free banking, or a gold standard, and noted that modern-day central banks are aligned with nationalist malignancies of financing wars, empire-building, welfare-ism, oppressive state seizure of private assets and inflation.

Maybe all true in the past, but what about inflation since 1982 or so?

In the last 35 years the direction of interest rates and inflation internationally has been down, under globalist central-bank management. Indeed, much of the planet is now in deflation, and the U.S. but one recession away from joining the world. As Milton Friedman noted, you don’t get to chronically low interest rates through chronically easy money. For 30 years we have heard doom from inflation-mongers, and now we have global deflation.

If central banks have an inflationist agenda, they are even more incompetent than we suspect. The admirable Alt-M team still discusses fiat-money central banking as having statist-inflationary agenda. Yet the Alt-M perspective appears out of date, by a few decades.

Conclusion

Maybe free banking or a gold standard will work better than globalist central banking.

But unlike O’Driscoll, I think the problem is globalist fiat-money central bankers are obsessed with inflation and not economic growth. The ECB, for example, appears intent on crushing nations, not promoting statism.

Indeed, for now it would be better if a modern-day Korekiyo Takahashi (Japan’s central banker who ended the Great Depression on the islands) seized the Fed and sent in the helicopters. Darken the skies, and don’t stop until we see robust real growth and inflation north of 4%.

Of course, Market Monetarists contend the practical path forward is central-bank NGDPLT. It may actually happen.

The Alt-M crowd offers plenty of food for thought, but perhaps some updating is needed.