Only a monetary policy dummy could make a remark that allowed the Fed to come out looking good!

Ralph Nader wrote Yellen a sexist letter complaining about low interest rates and its effects on savers and got this response:

Would savers have been better off if the Federal Reserve had not acted as forcefully(!) as it did and had maintained a higher level of short-term interest rates, including rates paid to savers? I don’t believe so.

Unemployment would have risen to even higher levels, home prices would have collapsed further, even more businesses and individuals would have faced bankruptcy and foreclosure, and the stock market would not have recovered.

True, savers could have seen higher returns on their federally-insured deposits, but these returns would hardly have offset the more dramatic declines they would have experienced in the value of their homes and retirement accounts. Many of these savers would have lost their jobs or pensions (or faced increased burdens from supporting unemployed children and grandchildren).[many did lose jobs and many faced increased burdens]

If instead Nader had asked Yellen why the Fed allowed nominal spending to fall continuously from early 2006 and then crash after mid-2008, she would be dumbstruck and at pains to give a coherent answer!


A Good Economics Reporter! Alex Rosenberg of CNBC. When Did Ralph Nader Get Extra-Stupid?

A Benjamin Cole post

In the Market Monetarist community, there is a lot of bemoaning “the media.”

Well, meet Alex Rosenberg of CNBC.

While other reporters weigh in on inflation and the U.S. Federal Reserve Board’s ponderous decision-making, Rosenberg (correctly) points out the markets say inflation is about dead.

“The Federal Reserve now looks set to raise rates in December, partially based on expectation that inflation is set to finally rise to its 2 percent target. There’s only one potential problem. There’s actually a way that markets can see where investors think inflation will go. And they do not exactly see eye to eye with America’s central bank.”

Rosenberg adds,

“Over the next five years, annual inflation is expected to run at less than 1.3 percent. Even over the next ten, investors are looking for no more than 1.6 percent per year.”

Hot dang! Of course, Rosenberg is referring to the TIPS market, and deducing inflation expectations from inflation-protected U.S. Treasuries compared to plain-vanilla Treasury IOUs.

It gets better:

“So while the Fed continues to bang the drum on its 2 percent inflation target, and is now apparently trying to prevent inflation from rising above that in the future, it is striking to note just how quickly the bond market’s expectations of inflation have been decreasing,” writes Rosenberg.

The CNBC’er does such a good job, I will stand aside and just quote some more:

“Over the past year, almost no inflation has been seen, with prices actually falling year-over-year during some months. And while this is partially a reflection of falling oil prices, inflation has generally been declining for the past quarter of a century.”

Now that is some great reporting, econo-punditry. Where have they been hiding this guy? Well, he is “new,” as they say. His bio says he has a BA from Brown, minted 2011. He did something for NBC Universal before. CNBC calls him a “producer,” but he obviously one of the nation’s better econo-pundits already.

On The Other Hand…

From the elevated insights of Rosenberg, we descend to the befouled chambers of Ralph Nader, who a couple generations ago made his mark as a consumer activist. Nader on Oct. 30 (he should have waited a day) wrote a public letter haranguing Fed Chair Janet Yellen for keeping interest rates low, and so harming ordinary savers.

“We want to know why the Federal Reserve, funded and heavily run by the banks, is keeping interest rates so low that we receive virtually no income for our hard-earned savings while the Fed lets the big banks borrow money for virtually no interest.”

This is a blog, not a book, so I run of pixels to list all the reasons why Nader is making an ass out of himself. We could start with Rosenberg, who correctly points out inflation has been dying for decades. So interest rates come down too—duh.

Or that savers are also employees, employers and investors, and tighter money could wreck the economy, as it did in 2008. Or that higher short-term interest rates could lower long-term interest rates (by lowering growth and inflation expectations), so investors in bonds—that is, savers—would get lower yields. Or that even if yields on long-term bonds went up, then savers who bought bonds would suffer capital losses (bond values would go down).

The helmet-haired Yellen soiled herself by responding to Nader, but the Federal Reserve enjoys any discussion, however poorly premised, about why rates should go up, so she seized the opportunity.

How do we get CNBC’er Rosenberg to run the Fed?

Whom should you listen to? A time saving indicator

Over the past few years, the Fed-cacophony has been loud. That has kept people devoting a lot of time and effort to extract some sort of signal amid all the noise.

Enters the Wall Street Journal to provide some guidance about whom you should listen to help form your views.

It says most member’s views are dispensable, so you should concentrate on listening to Yellen and Fischer, the Chairperson and Vice-Chair, and not waste much time following up on the others.

Whom to listen to

It´s a pity that Yellen´s and Fischer´s views have been so pathetic!

On the other hand, the views of someone like Bullard veer so much that they most resemble a windsock!Whom to listen to_1

Where does Yellen get these crazy ideas – 2

Yellen and other high-ranking members of the FOMC are partial to the following type of statement:

There is good reason to believe that inflation will move higher as the forces holding down inflation dissipate further.

One of those forces is the price of oil.

The charts below show that this particular idea lacks foundation. Between 2004 and 2008, there were two back-to-back oil price shocks. The first from 2004 to 2006 and the second in 2007-2008.

Yellen Crazy Ideas2

What to expect when there is an adverse supply shock like an increase in the price of oil? The dynamic AD-AS model tells us that inflation will tend to rise and real growth to fall. In that situation, the best the Fed can do is to maintain nominal spending (NGDP) growing in a stable manner.

Looking at the left side charts, we see that´s exactly what happened, at least until early 2006. Inflation went up a bit and real growth decreased somewhat, but nominal spending growth remained stable. Bernanke took over the Fed as the first oil shock was ending and immediately (given his inflation targeting “preferences”) allowed NGDP growth to falter.

Soon after, the second oil shock materialized, putting pressure on headline inflation (not shown). NGDP growth continued to fall, magnifying the fall in real growth from the oil shock. We know that after mid-2008 NGDP growth tumbled, being negative for the first time since 1937.

The right hand side of the chart depicts the economy over the last five years, after the worst of the crisis passed. Note that inflation was slowly falling long before the drop in oil price in mid-2014.

Why do they expect inflation to move higher, if they are constraining NGDP growth? They´ll be surprised when real growth (in addition to inflation) falls when oil prices dropped!

An economic impossibility theorem: You cannot have rising inflation without rising NGDP growth!

Where does Yellen get these crazy ideas?

Maybe from her Phillips Curve upbringing. In her Congressional Testimony today, she said:

The U.S. economy is “performing well” and could justify an interest rate hike in December, Federal Reserve Chair Janet Yellen told Congress on Wednesday.

“I see underutilization of labor resources as having diminished significantly,” Yellen said, with inflation expected to rise over the medium term.

The Fed is “expecting the economy will continue to grow at a pace to return inflation to our target over the medium term,” she said. “If the incoming information supports that expectation … December would be a live possibility” for a rate increase, Yellen added.

As James Alexander wrote recently:

The central banks seem to define inflation as inflation two years out, that is, expected inflation based on their own “official” expectations. And, therefore, central bankers are on target with their own targets.

While she expects inflation to rise over the medium term, market based inflation expectations have fallen significantly since July.

Yellen Crazy Ideas_1
Neither does history provide evidence for her “wishes”. The chart shows nominal and real growth and inflation over a five year period following the 1990/91, 2001 and 2008/09 recessions!

Yellen Crazy Ideas_2

Anyway, she´s trying hard!

I´ll screw you good

Although others tried before her…and got egg in the face!

I´ll screw you good1

Update: The Vice-Chair, Stanley Fischer made that mistake while head of the Bank of Israel. Why he was so “quick on the draw” I don´t know (maybe like almost every other central banker he was tricked by oil prices?). That should have thought him a lesson, but according to his latest speech, didn´t!

I´ll screw you good2


If your premise is wrong, it´s no use hiding it underneath reams of papers, footnotes and citations

Yellen on Inflation Dynamics and Monetary Policy:

Ms. Yellen made her case like a prosecutor making a courtroom closing argument. She presented it in a 40-page speech at the University of Massachusetts in Amherst, including 40 academic citations, 34 footnotes, nine graphs and an appendix.

Central to her argument was a belief that slack in the economy has diminished to a point where inflation pressures should start to gradually build in the coming years.

Why should that be?

Those pressures aren’t asserting themselves yet, she argued, because a strong dollar and falling oil and import prices are placing temporary downward pressure on consumer prices. As those headwinds diminish, she predicted, inflation will gradually rise. The Fed needs to get in front of this, she said, and also prevent speculative forces in financial markets that could lead to “inappropriate risk-taking that might undermine financial stability.”

What she´s doing is prosecuting the people!

If she only for a minute thought outside her “Phillips Curve Box”, she would be free to entertain the hypothesis that the Fed´s tightening that has been going on for more than one year is the major force behind the fall in oil prices, commodities in general and the strengthening dollar!

Let´s just wait for the formal crowning of the “biggest mistake of the year”.

Note: I think another “postponement” will happen!

For more than one year monetary policy has been tightening, but the Fed thinks it´s highly accommodative!

Lars Christensen has a good post – Yellen is transforming the US economy into her favorite textbook model:

When I listen to Janet Yellen speak it leaves me with the impression of a 1970s style keynesian who strongly believes that inflation is not a monetary phenomena, but rather is a result of a Phillips curve relationship where lower unemployment will cause wage inflation, which in turn will cause price inflation.

And what that model is doing is to tighten monetary policy!

They should know better. In 2003, Bernanke wrote:

The imperfect reliability of money growth as an indicator of monetary policy is unfortunate, because we don’t really have anything satisfactory to replace it. As emphasized by Friedman  . . . nominal interest rates are not good indicators of the stance of policy . . .  The real short-term interest rate . . . is also imperfect . . .  Ultimately, it appears, one can check to see if an economy has a stable monetary background only by looking at macroeconomic indicators such as nominal GDP growth and inflation.

And those indicators of the stance of monetary confirm that the Fed is tightening the screws, with NGDP growth and inflation going down.

Stance of policy_1

A spillover effect of the monetary policy tightening is the appreciation of the dollar and the fall in commodity and oil prices.

Stance of policy_2

But the geniuses at the FOMC reason from a price change and argue that the fall in inflation is a consequence of the fall in oil prices and appreciation of the dollar, and when these effects dissipate, inflation will climb towards the 2% target!

With that caliber of central bankers, no wonder things are a mess.

“Somewhere, beyond the sea”

When we get there rates will rise!


“The forecasts show that Fed officials still expect slow progress on achieving their 2% inflation target, hitting that mark some time in 2018. Officials lowered their median projection of inflation this year to 0.4%, from 0.7%, with the median projected rate of inflation coming in at 1.7% next year, and at 1.9% in 2017.”

Beliefs are to be held forever

And Chairwoman Yellen has forever held the belief that Phillips Curve/NAIRU is the “best inflation indicator”.

In his Final Thoughts on September, Tim Duy writes:

I expect the Fed will ultimately pledge allegiance to the Phillips curve. I think they believe that stable inflation is incompatible with sub-5% unemployment if short term interest rates remain at zero. Hence, they will signal that the first rate hike is imminent.

While a BoG member in 1996, she teamed up with PC/NAIRU other big fan Laurence Meyer:

Dec/96 FOMC Transcript:

L Meyer:

A second justification for policy change would be the conviction that we are already below NAIRU and not likely to move back to it quickly enough to prevent an uptick in inflation. This is basically the staff forecast, and my view has been and continues to be that this is the most serious risk factor in the outlook. Yet, we get stuck in place because we continue to be confronted by the reality of stable to declining core inflation in the face of this prevailing low unemployment rate. So, we wait for additional data to resolve our doubts. The risk of waiting, judging from the modest rise in inflation in the staff forecast, is not very great. Still, it is probably worthwhile noting that in all of the five private-sector forecasts that I looked at, there are increases in core inflation over the next year or two. That is a pervasive tendency that just about everybody is worried about. I think we need to keep that in mind.

J Yellen

To my mind, labor markets are undeniably tight. You remarked last time, Mr. Chairman, that we should be careful not to lull ourselves into a false sense of security about incipient wage pressures by reading too much into that suspiciously low third-quarter ECI, and I agree with that. So, I still feel that we need to avoid complacency about the potential for inflationary pressures to emerge from the labor market down the road.

Sometime later, now as head of President Clinton´s CEA we read:

Yellen CEA  Report 1998

This chapter’s analysis of macroeconomic policy and performance concludes that the economy should continue to grow with low inflation in 1998. The chapter begins with a review of macroeconomic performance and policy in 1997, to show in some detail where the year’s growth came from and how inflation remained so tame. The second section examines the important question of whether our understanding of inflation and our ability to predict it have changed in significant ways. This question is part of a broader inquiry into whether the economy has changed in such fundamental ways that standard analyses of how fast it can grow without inflation need to be replaced with a new view. The conclusion reached here is that no sea change has occurred that would justify ignoring the threat of inflation when the labor market is as tight as it is now;

In a few hours we´ll know if beliefs changed!