White Collar trigger-happy terrorists

This is Loretta:

But there are also risks to forestalling rate increases for too long when we are continuing to make cumulative progress on our policy goals. Waiting too long increases risks to financial stability and raises the chance that we would have to move more aggressively in the future, which poses its own set of risks to the outlook.

I believe waiting too long also jeopardizes our future ability to use the nontraditional monetary policy tools that the Fed developed to deal with the effects of the global financial crisis and deep recession.

If we fail to gracefully navigate back toward a more normal policy stance at the appropriate time, then I believe there is a non-negligible chance that these tools will essentially be off the table because the public will have deemed them as ultimately ineffective. This is a risk to the outlook should we ever find ourselves in a situation of needing such tools in the future.

Bullard seems to have “holstered his gun”. However, his reasoning is reversed. It´s not monetary policy that is regime-dependent, but the regime that is monetary policy dependent. If he switched his reasoning, switches between regimes would become forecastable!

Regimes are generally viewed as persistent, and optimal monetary policy is viewed as regime dependent. Switches between regimes are viewed as not forecastable.

Group-think within and amongst central banks

A James Alexander post

A new book has just been released on problems with central banks. The best chapter looks like the one on group-think. John Taylor, one of the book’s editors describes it thus:

 “Kevin Warsh’s (ex-FOMC member) report on the lack of effective deliberations at the FOMC is one of the most surprising parts of the book. In his commentary Peter Fisher notes Warsh’s refreshing candor, and uses it to jump off on a critique of policy committees, including the unwillingness of committee members to change priors when presented with new arguments or data.”

It is not just within central banks that we see such group-think. Loretta Mester, a current FOMC member gave a speech this week drawing comfort that all central banks saw an uptick in inflation just around the corner.

JA Inflation_1

JA Inflation_2

We have already commented on just how happy central banks are with their current monetary stance, they are all on target with their central projections for inflation. Meanwhile, in the real world, anaemic economic growth is the result of low nominal growth, and recession is always and only a few active monetary tightenings away.

They just can’t see the group-think, either within their central banks or amongst them.

Ester and Mester Are The Fed

A Benjamin Cole post

Ester and Mester were never elected by the citizenry, yet arguably they have more influence on American prosperity than any U.S. Senator, or Cabinet member.

The dynamic duo is Ester George, the Kansas City Fed President and a 34-year veteran of the central bank, having started as a bank examiner. Loretta Mester, the Cleveland President, is a 31-year soldier, having started as an economist for the Philly Fed.

The rhyming deuce are an interesting pair for what they reveal about the U.S. Federal Reserve. Ester and Mester are nearly purely professional creatures of the Fed, having never worked outside the central bank, let alone having started a business, or run the division of, say, a mid-sized manufacturing concern.

As Marcus Nunes recently pointed out (Marcus stole some of my thunder) Ester and Mester publicly rhapsodize about tighter money, and often ruminate about getting back to “normal.”

However, it does not appear that “back to normal” is what Ester/Mester want, but rather a “new normal.” After all, from 1982 to 2007, the average CPI was nearly 3%, and real growth was a little bit better. That used to be “normal.” But that sort of “normal” does not make Ester and Mester nostalgic.

The twins are pointing at sub-2% inflation (despite the official 2% PCE target), and as for economic growth—well, who is sure if growth is anymore on the Fed’s radar.  No matter, the Ester-Mester tag team does want “normal” interest rates, meaning higher than now, despite falling factory output, a rising U.S. dollar, an epic commodities slump, and national and global economies characterized by gluts of everything.

As lamented in this space often, the Fed refuses to target nominal GDP growth, which has been declining steadily. Neither does the Fed target real growth. Fedsters do jibber-jabber about inflation incessantly, even monomaniacally, and often fret about “low” unemployment, that being any rate below 6%.

Keep your central banker spy-eyes on Ester and Mester, as nearly undiluted products of Fed institutional culture and thinking. Chair Janet Yellen may be the face of the Fed, but the heart and soul is Ester and Mester. And with the passing of Fed Chairman-giants, such as Paul Volcker, or Alan Greenspan, Fed policy today is institutionally and consensus-driven. Watch Ester and Mester.


It was not supposed to be like this, when the Fed was established. The Fed regional bank presidents, who rotate on-and-off of the policy-making Federal Open Market Committee, were intended to bring the economic outlooks of the states they serve to the national central bank, and to serve as an institutional bulwark against money-center financier-dominated monetary policy.

Instead, we see Ester and Mester playing at national policy posturing, pettifogging on global economics, and reciting Fed nostrums.

The independent Fed has proved a failure of gathering ossification and self-reverence. Better to place the central bank into the U.S. Treasury Department, and have monetary policy made by the Executive Branch. At this point, fine, let the President goose the economy to get reelected. A goosed economy is a misdemeanor compared the Fed felony of monetary murder.

Funny thing about democracy. It is a lousy way to run a country, until you try the next best way.