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


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.


How not to propose NGDP Targeting

Stephen King (not the popular author) but HSBC’s senior economic adviser, elaborates on Larry Summers´ comments on San Francisco Fed president John Williams´ letter. King´s conclusion, however, in effect disparages the idea of NGDP Targeting. Maybe he doesn´t understand the concept:

In these circumstances, the entire monetary policy framework is up for grabs. Shibboleths will have to be dispensed with. At zero rates, central banks may have to work increasingly closely with finance ministries, prioritising the need for co-ordinated action over the desire for independence. Inflation targeting may have to be ditched, perhaps replaced by nominal gross domestic product targeting: a slowdown in real growth would then be countered by a commitment to higher inflation, boosting nominal GDP and limiting the risk of ever more indigestible debt.

Yet nominal GDP targeting will work only if central banks can credibly demonstrate not just their desire for higher inflation but also their ability to deliver it. To date, they have not been particularly successful. And if productivity growth is permanently lower, expectations of a life of ever-rising prosperity will have to be abandoned. If the economics are already difficult, the politics will be considerably harder.

Characterizing NGDP Targeting as a framework in which a slowdown in real growth has to be countered by a commitment to higher inflation is a confused idea. A real growth slowdown may be the result of a negative demand shock or of a negative supply shock. In the former situation, inflation will also fall. In the latter it will rise.

If the central bank is focused on delivering Nominal Stability (which NGDP Targeting, level targeting does provide), drops in real growth resulting from monetary shocks will be avoided, while supply shocks will be “ignored”. Actually, the fact that the Bernanke Fed was so focused on the inflation from the rise in oil/commodity prices was its downfall. In that sense, you could say the Fed is flexible in allowing the (temporary) rise in inflation following a supply shock, but to say it has to be “committed” to it is pure nonsense.

The charts provide a visual history of the economy´s nominal and real growth and inflation.

How not to propose NGDP Targeting

The first thing to notice is that an inflation process (1970s) is characterized by increases in both headline and core measures. This was true in the 1970s and it was made possible by the up trending NGDP growth.

Instances of oil shocks (red dots) are associated with increases in inflation (both Headline & Core) and recessions in the 1970s, but in the 2003-05 and 2007-08 oil shocks, only headline inflation shows a modest increase. The reason for the very different outcomes can be found in the contrasting behavior of monetary policy: very expansionary in the 1970s (up trending NGDP growth) and “stable” in the 2000s.

Volcker´s first attempt at reducing inflation in early 1980 was unsuccessful. His second attempt in late 1981, characterized by a strong monetary contraction (steep drop in NGDP growth) was a success. The important thing to note is the healthy bounce back in real output growth after the deep 1981/82 recession while inflation kept falling.

As soon as he took the Fed´s helm in early 2006, Bernanke showed concern with inflation. With the second leg of the oil price rise in 2007, the concern became an obsession. Monetary policy (NGDP growth) began to tighten and in mid-2008 the brakes were pressed hard. The aftermath, which shows a complete absence of real output bounce back, has kept the economy depressed (or in a state of “Great Stagnation”).

The “Great Moderation” is strong evidence of the benefit of having nominal stability, a situation where the central bank is successful in keeping NGDP growth on a stable (stationary) path. That is the result of the CB offsetting changes in velocity by opposite changes in the money supply.

Note that, by not explicitly targeting NGDP, in 2001-2003, the Fed inadvertently tightened monetary policy. After mid-2003 this error was corrected, with NGDP growth moving back to the stationary path. The Bernanke Fed quickly changed the (effective) monetary policy framework to one first effectively and then explicitly based on inflation targeting. Lately, with inflation persistently below target and “zero” policy rate, the monetary policy framework has become one geared to policy (rate) “normalization”. The manifest failure of this framework has lately been a topic of discussion at the Fed, with John Williams letter being one example.

However, if you pay attention to NGDP growth, you immediately conclude that both the lackluster recovery and low inflation are the natural consequence of excessively tight monetary policy, or too low NGDP growth. This could be “cured” by the adoption of an explicit NGDP Level Target monetary policy framework.

PS The resistance in abandoning the IT framework is strong. This piece by Greg Ip “The Case for Raising the Fed’s Inflation Target”  attests.


It’s complicated

A James Alexander post

We were rightly excited by John Williams letter from San Francisco on Monday as we had already detected stirrings. We and many others were also equally right to wonder what was going on when JW reverted to type on Thursday.

The JW-induced downward move in the USD Index stuck. The move down was against all major currencies but specifically against the JPY where it fell through Y100 to the USD for a while on Tuesday and more persistently on Thursday.


The Japanese were repeatedly browbeaten by the US Treasury when their currency versus the USD had traded up to Y120. They did what they were told, pulling back from more QE. However, the US Treasury campaign still culminated in the creation of the ignominious “monitoring list” in April this year.

Now the Japanese find themselves with an even stronger currency than in April and overnight we see reported “plunging foreign trade“. In July export volumes were down 2.5% and imports down 4% – despite the new buying power. Exports by value were down 14% and imports by value were down 25%. AD is suffering.

Even more USD weakness to come?

The reaction to the idea of further reform of US monetary policy by John Williams ahead of the “Designing … Frameworks For The Future” brainstorming at Jackson Hole was pretty swift. Japanese currency chief called journalists into his office in Tokyo and issued a public warning.

William Dudley and his market-monitoring colleagues on the NY Fed frontline must have either had a call from Tokyo or felt compelled to react first or both. The NY Fed President’s hastily arranged a five minute interview on CNBC attempted to put a floor on this new USD weakness. Very significantly, he failed. Maybe Dudley failed because he looked so ashen-faced. On such things markets move, or rather refuse to move. John Williams’ latest public speech was very much back-to-business as usual for him, but also failed to raise the USD.

However, the NGDP Level Targeting bandwagon may be hard to stop as widely-read commentators as diverse as Larry Summers and Stephen King both weighed into the debate in favour.

Central banks do not act in isolation from one another. The US monetary tightening since mid-2014 has been causing a global slowdown. The active tightening in December 2015 caused global markets mayhem by early 2016. The rowing back from that tightening caused the USD to weaken, particularly against the JPY.[See chart above]

Ironically, if the US were to adopt NGDP Level Targeting it would lead to a stronger US economy and alleviate the pressure on the currency. The markets do not see it that way at the moment, though.

Most of the world’s central banks have had to pull back from their post-2009 tightening, the Federal Reserve probably will be no different. But it will cause a lot of major ripples, no doubt. Things are complicated. 

Is there an NGDP Targeting bandwagon rolling here? Maybe

A James Alexander post

As recently as the late July John Williams, “an influential centrist” FOMC member and President of the San Francisco Fed, was mouthing the usual threats that have become so common about implementing more rate rises than the market expects:

“The Federal Reserve could raise interest rates up to two times before year end, a top Fed official said on Friday as he downplayed data that showed the U.S. economy grew far less than expected in the last quarter.”

Since then we have had a flurry of comments and speeches suggesting the Fed was engaged in a re-think of its monetary policy. Heck, as we said yesterday, just look a the title of the upcoming Jackson Hole Symposium: Designing Resilient Monetary Policy Frameworks for the Future  .

Now President Williams in a sort of official blog post seems to have completely changed his tune:

“Second, inflation targeting could be replaced by a flexible price-level or nominal GDP targeting framework, where the central bank targets a steadily growing level of prices or nominal GDP, rather than the rate of inflation. These approaches have a number of potential advantages over standard inflation targeting. For one, they may be better suited to periods when the lower bound constrains interest rates because they automatically deliver the “lower for longer” policy prescription the situation calls for (Eggertsson and Woodford 2003).

In addition, nominal GDP targeting has a built-in protection against debt deflation (Koenig 2013, Sheedy 2014). Finally, in a nominal GDP targeting regime, a decline in r-star caused by slower trend growth automatically leads to a higher rate of trend inflation, providing a larger buffer to respond to economic downturns. Of course, these approaches also have potential disadvantages and must be carefully scrutinized when considering their relative costs and benefits.

In stressing the need to study and consider new approaches to fiscal and monetary policy, I am not advocating an abrupt reversal of course; after all, you don’t change horses in the middle of a stream. And in monetary policy, “abrupt” and “disrupt” have more than merely resonance of sound in common. But now is the time for experts and policymakers around the world to carefully investigate the pros and cons of these proposals.”

It’s a shame he doesn’t mention Scott Sumner, the tireless campaigner for NGDP Targeting, but the blogosphere knows where the idea has come from even if a Federal Reserve President can’t be open about the fact.

But a Federal Reserve President who concludes by quoting Machiavelli probably knows a lot more about successful politicking than a mere blogger once of Bentley University.

“Conclusion – Economics rarely has the benefit of a crystal ball. But in this case, we are seeing the future now and have the opportunity to prepare for the challenges related to persistently low natural real rates of interest. Thoroughly reviewing the key aspects of inflation targeting is certainly necessary, and could go a long way towards mitigating the obstructions posed by low r-star. But that is where monetary policy meets the boundaries of its influence. We’ve come to the point on the path where central banks must share responsibilities. There are limits to what monetary policy can and, indeed, should do. The burden must also fall on fiscal and other policies to do their part to help create conditions conducive to economic stability.

Policymakers don’t often cite Machiavelli, but in this instance, the analogy is potent (and, perhaps, a portent). In The Prince, fortune is compared to a river; in times of turbulence it wreaks havoc, flooding and destroying everything in its way. But in calm and sedate weather, people can build dams and stem the tide of destruction. In other words, we can wait for the next storm and hope for better outcomes or prepare for them now and be ready.”

Yesterday we said that there had been little obvious reaction in markets. Well, today there has been a little more. Specifically in the USD, which weakened overnight on the back of the “influential centrist” changing his views. Bond markets do not agree as the yield curve remains flat and low. Bonds seem to be responding more to a perception of incipient economic weakness than a revolution in monetary policy. As true Market Monetarists will only know there has been a revolution when the Fisher effect (aka expectations effect) swamps the liquidity effect as bond prices crash in anticipation of higher nominal GDP growth.

Somebody switched the pedals in John Williams´ car

John Williams´WAPO  interview is mindboggling:

So, just cutting to the chase here, does that gradual path of rate increases include any this year, in your view?

In my view, it does. We’ve been adding enormous policy accommodation over the past several years. As the economy gets closer to its goals, we can again pull our foot off the gas a bit and hopefully execute a nice, soft landing over the next couple of years.

The “eagle” has landed a long time ago, only in the wrong “runway”. It´s now in the process of shifting even lower!

Switched Pedals

HT Kevin Tryon

Update: Seems his pedals were switched a long time ago! Note that was the time NGDP growth began to slow down. Thinking his foot was on the accelerator when in fact his mouth began pressing the brake.

At the FOMC, anything goes!

They haven´t yet figured out that it´s the data that is Fed-dependent:

Federal Reserve Bank of San Francisco President John Williams played down a “low” reading on second-quarter U.S. growth and said the economy could still warrant as many as two interest-rate increases this yearor none.

“There’s definitely a data stream that could come through in the next couple of months that I think would be supportive of two rate increases,” Williams told reporters Friday after speaking in Cambridge, Massachusetts. “There’s data that we could get that wouldn’t be supportive of that — it could be one, maybe, or none. Time will tell.

Dallas Fed President Rob Kaplan, who also spoke Friday, echoed Williams’ wait-and-see attitude, saying he wouldn’t “overreact to one data point,” particularly because the report showed consumer spending continued to be strong.

“We’re still hopeful for solid GDP growth this year, and the basis for that is the consumer,” Kaplan told reporters at an event in Albuquerque, New Mexico,

For the past two years, both the nominal and real economy have been weakening. All the while, inflation has been “dead in the water”.

Anything Goes

Idiotic and Inconsistent Arguments

With monetary policy makers of this caliber, no wonder things are getting worse!


In a recent speech, San Francisco Fed president John Williams pontificated:

San Francisco Federal Reserve President John Williams reiterated Monday his view that the U.S. economy is ready for higher interest rates, but flagged the risk of broad-based declines in asset prices as a result.

“It makes sense for us to be moving interest rates gradually back to more a normal level over the next couple years,” Williams said. “I actually think that’s a sign of strength for the global economy.”

Speaking at a panel on systemic risk at the Milken Institute Global Conference, Williams said the biggest systemic financial risk currently is the possibility that “broad sets of assets are going to see big movements downward” as interest rates rise. “That’s an area that I think is a potential risk.”

“What I worry a lot more about is when people forget about the financial crisis, when they forget about the terrible things that happened,” he said, suggesting that may not happen for another five or ten years.

Nothing he says makes sense. If the economy is “ready for higher interest rates”, why would that cause a “broad-based decline in asset prices”? Also, how could an increase in rates be a “sign of strength”, if the likely outcome is a “big downward movement in broad sets of assets”?

It just shows how stupid it is to have, no matter what, a “gradual normalization” strategy for monetary policy!

Like a first year medical student, John Williams is focused on “cadavers”

  1. All eyes are on inflation

The Fed is looking for signs that it’s meeting its dual mandate of stable inflation and maximum employment as it charts the course for rate increases. Price pressures have remained below the Fed’s 2 percent goal since 2012, and Williams made it clear while talking to reporters that they’ll be his focus this year.

“The big question mark in 2016 to me is really on this inflation front,” Williams said Monday, noting that questions about labor market slack probably would be resolved as the job situation continues to improve. If “global growth slows, and global inflation falls, and that pushes the dollar up, that’s clearly a scenario that would cause us to take longer to get to our inflation goal, and I think would call for a little bit more accommodation.”

The inflation ECG (again)

Patient Dies

And everything points to a Fed that has been tightening (opposite of accommodative) since mid-2014!


NGDP Growth




Dollar Index


Funny thing: Williams believes the “cadaver” will “stand-up” (one day sometime in the future)


Fed leaders don´t pay attention to staff research. Sometimes they don´t even pay attention to themselves

Recently, I asked “Why have such a large research staff if their findings are ignored”?, with Janet Yellen in the “title role”.

Let´s go down to the level of Fed presidents.

First, Bullard has made several recent speeches again calling for tightening……….because you never know when inflation finally is going to appear.  But contrast his call for tightening against this new research from his own staff:

The figure shows the PPM constructed from our preferred specification since January 1995.5 Since the mid-1990s, there have been four periods—broadly speaking—when the PPM exceeded a probability of 0.5 (that is, 50 percent). Inflation was highest in the mid-2000s and the PPM exceeds 0.5 for several months during this period.

But during this most recent business expansion, with inflation averaging less than 2 percent, the PPM averages well under 0.5. As of October 2015, the PPM predicts a zero percent probability that PCEPI inflation will average more than 2.5 percent over the next 12 months.

The PPM is another instrument that policymakers and financial market participants can add to their tool kit to monitor the near-term outlook for inflation. The Federal Reserve Bank of St. Louis will regularly update the PPM shortly after the release of the monthly PCEPI.

Let´s not quibble, understand “0% probability” as meaning extremely low probability.

Next, San Francisco Fed president John Williams (who doesn´t pay attention to himself):

Now that the United States is closing in on full employment and inflation is likely to rise to target levels, the “next step” should be to start gradually increasing rates, a top U.S. central banker said on Saturday.

“I do think it makes sense to gradually remove the policy of accommodation that helped get the economy to where we are,” San Francisco Federal Reserve Bank President John Williams told the Arizona Council on Economic Education.

He must have forgotten the very recent update on his own research “Measuring the Natural Rate of Interest Redux”, which shows it has been negative for the past three years (see Fig 5)! How, then, under his criteria, can policy be accommodative?

By osmosis, inflation will converge on 2%!

John Williams is the “on one hand on the other hand” kind of guy:

I’ll start with the arguments for continued patience in removing monetary accommodation. First, we are constrained by the zero lower bound in monetary policy and this creates an asymmetry in our ability to respond to changing circumstances. That is, we can’t move rates much below zero if the economy slows or inflation declines even further. By contrast, if we delay, and growth or inflation pick up quickly, we can easily raise rates in response.

This concern is exemplified by downside risks from abroad. One such risk is the financial turmoil and economic slowdown in China, which I’ll get to shortly. More generally, economic conditions and policy overseas, from China to Europe to Brazil, have contributed to a substantial increase in the dollar’s value, which has held back U.S. growth and inflation over the past year. Further bad news from abroad could add to these effects.

That brings me to inflation, which has been under our target for over three years. This is not unique to the United States—inflation is very low in most of the world. Although we can ultimately control our own inflation rate, there’s no question that globally low inflation, and the policy responses this has provoked, have contributed to put downward pressure on inflation in the U.S. Although my forecast is that inflation will bounce back, this is only a forecast and there remains the danger that it could take longer than I expect.

Those are arguments on the side of the ledger arguing for more patience. On the other side is the insight of Milton Friedman, who famously taught us that monetary policy has long and variable lags. I use a car analogy to illustrate it. If you’re headed towards a red light, you take your foot off the gas so you can get ready to stop. If you don’t, you’re going to wind up slamming on the brakes and very possibly skidding into the intersection.

Luckily Bullard doesn´t vote, otherwise there would have been two dissents:

“The case for policy normalization is quite strong, since Committee objectives have essentially been met,” he said during his presentation titled, “A Long, Long Way to Go.”

However, he noted, “Even during normalization, the Fed’s highly accommodative policy will be putting upward pressure on inflation, encouraging continued improvement in labor markets, and providing the best contribution to global growth that we can provide.”

Bullard noted that the FOMC wants unemployment at its long-run level and inflation at the target rate of 2 percent. “The Committee is about as close to meeting these objectives as it has ever been in the past 50 years,” he said.

In justification of his dissent, Lacker wrote:

“I dissented because I believe that an increase in our interest rate target is needed, given current economic conditions and the medium-term outlook.

“Inflation has run somewhat below the Committee’s 2 percent objectivein recent years and was held down late last year by declining oil prices and appreciation of the dollar. Since January, however, inflation has been very close to 2 percent. Movements in oil prices and the value of the dollar in recent weeks have renewed downward pressure on inflation. As with last year’s episode, this disinflationary impulse is likely to be transitory. So I remain confident that inflation will move back to the FOMC’s 2 percent objective over the medium term.

They can go on “wishin´and hopin´”, but it just won´t happen, at least not while NGDP growth is so low and constrained!