Why is the Fed so anxious to raise interest rates?

Great Debates
121

Krugman is having something of an Eureka moment. I was skeptical at first, but now I see the beginnings of a research agenda for an economic historian or perhaps an economic sociologist.

I’ll start with the puzzle. Why do monetary permahawks exist when they have such terrible track records? Permahawks come in 2 varieties. One group has Ron Paul, Peter Schiff and Paul Ryan: they are the hysterics who predict hyperinflation and currency debasement. Taking their advice would involve losing a lot of money. It seems that affinity fraud drives allegiances to these guys: think about the Bernie Madoff scam. Informed people with lowered emotional investment will set their views aside.

But the 2nd group is more interesting. The BIS and Jeffrey Lacker are two: they continually predict imminent inflation, which never materializes (or rather sometimes does and sometimes doesn’t to one extent or another). But you don’t get the pyrotechnic rhetoric of the first group; there’s the reasonable suspicion that the 2nd group is sober. Even though their predictions are terrible and ultimately derived from sources other than textbook economics. So what gives?

It could be temperament. But Krugman thinks there’s a second kind of affinity distortion field at work, one that is more localized. In the economic parlance consider the theory of regulatory capture. The idea is that government oversight institutions tend to be captured by those that they are regulating. Part of the reason involves revolving doors. But some of it is just a shared sense of professionalism with those in a similar field. Most people want to be polite; being an unmitigated asshole is generally not a great career move. This tempers enthusiasms.

The Fed deals with banks great deal as does (duh) the Bank for International Settlements (BIS). And banks take a short term hit from very low interest rates because they have to deal with compressed interest margins. During a financial crisis of course they don’t care. But Obama ended the crisis in 2009-2010: that’s a long time ago.

We’ve all heard stories about class interest. In this case though, stories like that don’t make sense. If you hold only savings account funds, you are helped by higher rates. But those holding long or medium term bonds are hurt by them: they suffer financial losses. Higher rates hurt the stock market ceterus paribus. (That is, rates go up when the economy improves. An improving economy helps the stock market, but the higher rates hurt it by making newly priced bonds more attractive.)

But there are sub-classes to consider. And via the alchemy of the Wall Street Journal you can have some sub-classes (e.g. industrialists) feeling sympathy with interest rate specialists. Higher rates hurt industrialists. But they cue off of interest rate specialists (i.e. banks) who are hurt by them. And won’t stop talking about it, because it’s their core business. That’s what deserves further study IMO.

http://krugman.blogs.nytimes.com/2015/09/19/rate-rage/

More On The Political Economy Of Permahawkery - The New York Times

In today’s paper we see that manufacturing is flat, tending to vindicate the Fed’s decision. We also see Bill Gross calling for higher interest rates. Gross was a terrific bond investor pre-crisis and lost money hand over fist afterwards because he was working off the wrong intellectual framework (one that works during normal times). His argument for raising rates involves insurance company balance sheets. He is extrapolating the interests of a small part of the economy to the rest of it. Bad form. He’s a bright guy though, definitely not a Ron Paul/Peter Schiff wacko. And there are systemic issues to consider, though they are not gamed out in the article but instead left implicit. That’s a flag.
http://www.reuters.com/article/2015/09/23/usa-fed-gross-idUSL1N11T0LH20150923

122

I’ll edit my post.

Industrialists are helped by low rates, while banks suffer from interest rate compression. Skilled bond traders also have difficulty securing an edge when interest rates are low. Industrialists looking for advice on interest rates turn to other professionals who awkwardly have different pecuniary interests. And since the discussion is largely one sided and occurs via the newspaper, generalist managers of firms that produce stuff can get the wrong idea.

123

Measure for Measure: I have two questions. The first is, could you explain what you mean by GDP targeting? The second is, what do you mean when you say banks are hurt by low interest rates?

My own idea, fwiw, is that, generally speaking - and putting banks aside for the moment - people with lots of money benefit from high interest rates: if they can get 8% from a bank CD or a treasury bond, they’re better off than if the rate is 2%.

The people who are hurt by high interest rates, on the other hand are people with little money: people who take out student loans, for example, or mortgages.

The people at the Fed - as well as most of the people they work with and associate with - are part to the 1st class, rather than the 2nd class.

Having a financial interest in a particular economic policy is likely to make it seem more attractive.

124

Missed this earlier.

Inflation is below target right now. Even worse, expected inflation is below target for the next ten+ years, so not only are they missing the target today but they are quite deliberately engaging in behavior that will miss the target in the future. Negligence.

Right now I would advocate both slightly higher inflation and more jobs together, because they would come together. Eventually, though, I would advocate keeping inflation low rather than focusing on employment rates because after nominal spending is high enough the central bank can’t do anything more to help with employment rates. After the frictions have been eased, real jobs come from real resources, not from green paper. Past a certain point, inflation that’s too high can only hurt employment and long-term prosperity.

The total amount of spending in an economy on new goods and services is called Gross Domestic Product.

Most central banks target an inflation rate, typically around 2%. So they want their chosen price index (in the US, the Fed uses the PCE) to grow by about 2% every year. GDP targeting means what it says. Rather than targeting inflation, it’s a target of GDP growth. Common suggestions for a GDP target are 4 or 5% growth every year. A GDP target would work better than an inflation target because it would respond more appropriately to supply shocks. (More substantive central bank reforms would include level targeting instead of rate targeting, and targeting the forecast.)

125

Not sure what you mean by “real jobs come from real resources”.

When i think of resources, I think of things like oil, water, human capital, and manpower. Employment utilizes otherwise wasted human capital and manpower, and can - and has - produced new technologies to either create additional natural resources (fracking, oil saids, solar power, etc.) or to use existing resources more efficiently (recycling, for example) I’d argue the most important real resource is human capital (skills and education) and manpower.

4-5% GDP growth (I’m assuming real growth) would be a substantial increase from where we’re at now. Is there a way to achieve that, other than growing the Fed’s balance sheet?

126

That’s a strange thing to assume. GDP as measured is inherently nominal. It’s the sum of all the sticker values, and sticker values are nominal.

It has to be adjusted to become “real” and any adjustment will be at least somewhat arbitrary.

Green paper is not a real resource but green paper is fundamentally all that a central bank can provide. The central bank has no power to target real GDP because real output and real jobs come from real resources. The green paper is nominal, not real. This is why the central bank has extraordinary influence on the inflation rate (and potentially GDP growth if they changed their target), even as they have no influence at all on which factories will be built where, or who will be employed to work in them, or what inputs those factories will use.

The best the central bank can do is clear away the market frictions. That’s an important job. Central banks around the world are failing miserably at that job. But once that job is done, it’s done, and more green paper won’t do anything positive beyond that point.

4-5% (nominal) GDP growth could be achieved if the rules were changed on when the Fed pulled the trigger on Chekhov’s conditional gun.

They are not changing that condition. This is the whole problem. It would be fully possible that higher GDP growth could be achieved even with a smaller balance sheet. GDP is a flow. Even if there’s somewhat less blood in the body, the actual rate of flow can be higher if the heart is beating fast enough. Or to switch metaphors to the game of hot potato: we don’t necessarily need a bigger Fed balance sheet (more potatoes), if they can heat up the potatoes and make them painful to hold. People will pass the potatoes very quickly if they’re hot. It would be very, very easy to increase (nominal) GDP.

This is the same as saying it would very, very easy to create more total spending in the economy. Some of that spending would lead to real growth (higher real GDP). But some of it would lead to higher prices. That’s unavoidable. But since prices are below their own stated target, this is not a bad trade-off. It makes perfect sense to increase real growth and prices right now.

127

Nominal GDP level targeting was explained by Hellestal. As I’ve said in other threads, I’m not quite as sanguine as he is about its effectiveness, mainly because of the lack of empirical data. But AFAICT there’s no downside other than a risk of loss of credibility by the central bank if things don’t go as planned. And that can be finessed. And even if the policy works a tenth of what Hellestal indicates (and I’d bet it would be a lot more than that - you can make that case via an exchange rate effect) it’s still a win. Incidentally, The Economist Magazine pushed nominal GDP growth targeting during the 1990s: these ideas aren’t that exotic.

There are other ways of addressing the zero lower bound problem. I’d be open to them as well. I’m not so keen on hand sitting, which is what we’re doing now. Frustrating.

Banks at the ZLB

I’d like to read a paper that quantifies the extent to which banks are hurt by the zero lower bound. Back in 2013 though the Economist magazine wrote the following (sub req): [INDENT]Banks usually make most of their money on the spread, or difference, between the rate of interest they pay savers and the one they charge borrowers. This spread has narrowed as policy rates in rich countries have fallen, because loans have become cheaper but rates on deposits can go no lower than zero. In America, for instance, the average “net interest margin” at banks supervised by the Federal Deposit Insurance Corporation has fallen to its lowest level since 2006 (itself a 16-year low for small banks). [/INDENT]

That was roughly Krugman’s take 2 months ago (he’s changed his mind). But consider what the portfolio of an affluent family looks like. It will be 1) cash, 2) bonds, 3) stocks and 4) everything else including the house. I’m going to say that 4) behaves much like some combo of 1, 2, and 3. So what do higher interest rates do? Sure, they increase the returns to cash. But they lead to capital losses on bonds and they hurt the stock market (and real estate). An oil driller, real estate broker or highly paid lawyer probably loses from higher rates on net. But bankers and I think bond traders win. And they are the ones that members of the affluent cue off of, since traders and bankers discuss interest rates in the newspaper.

Maybe. It’s an hypothesis.
ETA: As I understand it, bond traders benefit from interest rate volatility, which increases as rates rise. Admittedly, I’d like to see this claim confirmed.

128

Interesting.

Banks could actually go lower than zero on deposits - they could charge depositors. Many checking accounts - to my understanding - still charge fees. Banks could charge fees to anyone who deposited money. I’ve always suspected - without any particular evidence - that that was one of the reasons the Fed started paying interest on excess reserves: to prevent banks from effectively flushing excess reserves out of the system, by charging fees on deposits. The result would be an increase in the number of people holding cash, instead of using the banking system. That’s something, I suspect, the Fed would very much prefer not to happen.

Excess reserves are currently about $2.5 trillion. 0.25% on $2.5 trillion is $6.25 billion. That’s a subsidy from the Fed, since banks are literally doing nothing to get it. (Or from the taxpayers, if you want to look at it that way, since $6.25 billion would otherwise go to the Treasury.)

Banks are doing well, at least according to this article. (Though perhaps not as well as before the financial crisis.) Chase just reported a $6 billion quarterly profit. It’s worth noting that banks make money not just off the spread, but off the volume of loans. Low interest rate encourage borrowing which of course increases volume.

129

Really? I would say sunlight and water, myself. :smiley:

No, it’s very dangerous to assume that “human capital,” whether of man-hours or cleverness, can replace scarce materials.

130

The Economist magazine comes out in favor of nominal GDP targeting (sub req). Again (they made sympathetic noises during the 1990s). Helpfully, they also note that the US, British, European and Japanese economies lack a certain traction and that, “…it’s time to think more boldly.” Whether they want level targeting isn’t entirely clear: they implicitly hint at it but that’s all.

Nominal GDP targeting poses some challenges. I opine they can be addressed, but research is required (or maybe it has already been done). Nominal GDP data is available only with a lag and is subject to revisions.

[ul]
[li]For example the 2nd revision of Apr-Jun 2015 nominal GDP just came out last week and the adjustment was substantial. This isn’t unusual. And monetary policy works with lags that are long and variable (though admittedly growing shorter). Also a one quarter blip means very little. So essentially last week’s number would give us additional insight in evaluating the monetary decisions of 2013 at best (subject to revision). [/li][li] So maybe we might want an intermediate inflation target anyway. Or some sort of target that is not as short as the easily attainable fed funds rate target, but not quite as long as the 4 quarter year on year nominal GDP target. [/li][li] As for level targeting, that has its limits. We are 16% below our (hypothetical) 2006 target and 5% below our 2010 target. Hot money is all fine as well, but after a certain point the Fed can’t credibly commit to double digit inflation. It would be best to indicate an absolute cap in annual core inflation, beyond which will not be passed. 5%? It would be higher than the long run target of course and by necessity. [/li][li] Alternately, you could issue rolling 3 year plans for nominal GDP, and accept they might be missed. But these sorts of compromises limit the degree to which the Fed can heat up expectations. [/li][/ul] Again, I think all of this can be finessed. I’m just saying it is grist for working papers. And further adjustment in light of experience. No worries: central banks worldwide had their adventures with monetary targeting during the early 1980s. It didn’t go well. In fact the initially preferred target (M1) later stopped being published it was so useless. None of that harmed CB reputations though, as most of them were fairly pragmatic, with the possible exception of the UK who may have believed their own propaganda for a little too long. Maybe. “We didn’t abandon the monetary aggregates, the monetary aggregates abandoned us.” Also: “Any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes.”

131

Not even remotely relevant.

The Fed targets the PCE price index, meaning the price index created from Personal Consumption Expenditures component of the National Income and Product Accounts, which is of course part and parcel of the same data collection process as the rest of GDP. This is to say: PCE is subject to exactly the same revisions as every other part of GDP data. But even on top of that, the “price index” isn’t the natural data set gathered from the wild. To create an abstraction like a price index means at least a somewhat arbitrary data manipulation process. Unalloyed GDP data doesn’t require that sort of manipulation. PCEPI data is subject to a lot more haziness than actual GDP data.

Bottom line: the average revision to GDP data as a whole is no larger than the average revision to the price index component. It is quite probably smaller, and at very least no worse. Despite these revisions, there is no actual problem with inflation targeting. Countries that actually focus seriously on reaching their price targets don’t have an issue. It’s only institutions like the ECB which raise rates even in the face of muted (below-target) inflation that are suffering massive misses from their target. Unfortunately, the Fed might be joining that company soon but at least not this month.

What all this means – and it deserves special emphasis – is that they are not targeting the past. They are targeting the future. An average revision of a fifth of a point from past data is simply not relevant. It will barely affect the amount of effort needed to hit the forecasted target another twelve months out, and it is that future forecast that guides expectations in the market.

If their reputations weren’t harmed, it was merely because they had successfully passed the buck for having creating massive inflation in the first place.

A lot of these more contemporary excuses from the Fed and Fed apologists have exactly the same taste. Monetary economists with cozy ties to regional Fed banks have a tendency to deny Fed potency in moving aggregate nominal variables because such potency would damage the reputation of the institution with which they are affiliated.

You don’t see too much FOMC criticism from Fed economists, or the most closely aligned uni professors, is what I’m saying.

When an alternative is offered, they become very defensive of their previous ideas rather than accepting fairly plain facts. Complaining about GDP revisions while neglecting to mention that the PCEPI is derived from a subset of those same numbers is one of the more egregious cases. I’m not suggesting that you are personally doing anything like this but I wouldn’t be surprised if at least some of your various comments have been inspired by reading these sorts of people first. They are not presenting a fair case. The revision argument is particularly irksome.

This is also completely empty.

If you give Soviet workers a nail quota, they will create bajillions of many small nails because they have direct control over that. If you give bankers a money quota, they will create the amount of money that suits them for the same reason.

But no one outside the central bank controls GDP, for exactly the same reason that no one outside the central bank controls inflation. If Goodhart or anybody else wants to deny central bank influence on nominal aggregates – including inflation and GDP – then they simply are not in touch with reality. There is not a 100% case that it’s the best policy but it deserves better than the worst arguments getting thrown at it.

132

Goodhart’s law was essentially saying that you can’t rely on the historical predictability of velocity once you start using the money supply to target nominal GDP. There’s no reason why such a relationship would persist. It doesn’t have a lot to do with nominal GDP targetting though: it was a bit of a tangent, albeit probably one in the far back of the mind of FOMC members, given their age.

Yeah, but PCE is more timely for one thing. And I assume it can be proxied by reweighting the CPI numbers, which are available early in the month for the previous month.

My take though is that real GDP figures are far noisier than the price figures, though that could be a misimpression. Now I know this is just one data point (Q2 2015), but I’ll present it anyway:



                                             Advance Estimate     Second Estimate     Third Estimate
					             (Percent change from preceding quarter)
Real GDP...............................            2.3                 3.7                 3.9
Current-dollar GDP.....................            4.4                 5.9                 6.1
Real GDI...............................            ...                 0.6                 0.7
Average of Real GDP and Real GDI.......            ...                 2.1                 2.3
Gross domestic purchases price index...            1.4                 1.5                 1.5

The real figures are more volatile than the price figures, at least insofar as the advance estimate is concerned. I’m also wondering whether we’d want to target the average of real GDP and real GDI.

I know: details, details. I don’t see these as being deal killers. It’s just something that the Fed will care about, because they will have to have their team actually implement these policies. The only potential deal killers frankly are institutional cautiousness and concerns about being whiplashed by Congress. Still finessible IMHO, given the alternatives.

Woah, I’m going to need a cite for that given the Japanese experience.

If we’re talking about 20 basis points, then I agree. My impressions -and it’s just that- is that the sorts of revisions I displayed above aren’t unusual. And if that’s the case 3.9-2.3=1.6 isn’t trivial. Not a deal killer in my view given that we’re fighting lost decades. But it is something to address. Also, to the extent that we are targetting the future it is convenient that the Livingston survey has been tracking nominal GDP forecasts for a while. The public dataset is very rich and contains individual forecasts so the full distribution can be assessed.

My general understanding is that former Fed Chairman Miller is perceived as the inflation villain, while Volker is the hero. Volker was the guy who initiated monetary aggregate targetting, got inflation down but was wisely not an inflation nutter or a monetarist doctrinaire. Also monetary targets notwithstanding, there’s a Keynesian interpretation of early 1980s fed policy anyway.

Krugman has referred to the Fed as the Borg, given its ability to assimilate former critics like Professor Bernanke. You get some of that attitude in the WSJ and popular financial press as well, even when we’re not at the zero lower bound.

I don’t think so. I read about the revision problem in passing in the Economist. And honestly, much of it was just gaming the idea out in my mind. Like I said, there are problems but I think they can be finessed.

133

The Japanese experience is that the Nichigin raised interested rates, twice, when inflation was threatening to become positive instead of negative. Do you need a cite for these interest rate increases? Do you need a cite for the ECB interest rate increases? They raised rates twice as well. Do you need a cite for the Swedish experience? They raised rates, too. In all of these cases, the interest rate didn’t stay elevated. It had to come back down because the idiot central bankers strangled their own economies. The Japanese rate went back to zero, the ECB rate is below zero, and the Swedish rate came down as well.

This is all part of the public record. Cites are easily provided, but I need to know exactly what you want cited.

The story has changed recently in Japan. The Japanese experience under Governor Kuroda is that they have successfully created inflation when they finally had a governor who, for the first time in twenty years, actually claimed he wanted inflation and kept pushing for more active policy until he created inflation. Again, this is all part of the public record. Kuroda taking the helm, the shift in monetary regime, the increase in inflation expectations and the subsequent increase in inflation. If you are citing the “Japanese experience” as some sort of evidence that central banks can’t fight inflation, then you might be relying on people filtering information for you who are not telling you the actual story.

The people who can print money can create inflation. This is so straightforward it shouldn’t even have to be said.

If inflation remains muted, that is a deliberate choice and their decisions to tighten money even when already below target can easily be seen multiple times in multiple countries. There is simply no question that central banks can create higher inflation (and therefore more nominal spending in the economy). There might be actual deeper problems with GDP targeting that we don’t yet foresee. That is, of course, always possible. But it’s not going to be related to data revisions and it’s not going to be related to any inability of the people who make money to create more spending in the economy.

There are potential problems. Definitely.

Data revisions aren’t one of them. It’s an issue they already deal with because it’s the same data set they already deal with.

134

I think we have misunderstood one another. There are ample examples of central banks getting inflation down, albeit often though not always at the cost of recession. But once deflation or very low inflation is established, the track record isn’t so clear to me. Japan has had an inflation target of 2% for years now and still hasn’t been able to hit it. Latest headline inflation in Japan is 0.3% as of July and is expected to be 0.7% in 2015. I haven’t looked at the core numbers.

Now it’s possible that the Japan CB hasn’t tried hard enough. But it’s also possible, empirically, that we are pushing on a string. Since I see no downside, I think they should push harder. But I’m not pre-judging the outcome.

Anyway, the mechanism would work like this. You can’t push nominal rates significantly below zero. Buying bonds after that only adds to excess reserves. This I believe is a compelling story during financial crisis when banks are scared of lending. It is an odd story after financial conditions stabilize. But it may describe the underlying reality anyway. I’m guessing that Bernanke believed some version of this story: otherwise he probably wouldn’t have called for more vigorous fiscal policy. Unless… there’s some deeper political model he had in mind.

135

Japanese core inflation turns negative (barely) at -0.1% vs. the previous year.

But over here I see it broke 2% in 2008 and 2014: it appears to have collapsed in March or April of this year. http://www.tradingeconomics.com/japan/core-inflation-rate

Looking at a late May 2015 Financial Times article, Japanese consumption appears to have been in free fall after the Spring 2014 consumption tax increase.

The Japanese Central Bank is continuing its unprecedented monetary expansion (QE) but sees no reason to intensify it. In other news, Japan is on the brink of a technical recession, or 2 consecutive quarters of negative growth. “The Bank of Japan is reluctant to ease further because it believes its policy is working…”
Look, it’s possible that the pushing on a string story story is bunk given the capacity of central banks to conduct QE. The argument would be while we have tried QE, we never shaped expectations by promising accelerating QE as long as inflation/nominal GDP/whatever targets weren’t met. But I say that the omnipotence of unconventional monetary policy at the zero lower bound has yet to be established. It’s an hypothesis. (By omnipotence I mean that proper monetary policy could overcome any politically feasible fiscal policy. If that’s too strong, I’ll add that the effectiveness of unconventional monetary policy at the ZLB in ending lost decades in the face of neutral fiscal policy hasn’t been established either. That too is an hypothesis.)

Indeed, how effective was QE? Googling, this guy says not at all, but he hardly has the final word. I should like to read some papers on the subject.

Admittedly, shaping expectations isn’t wholly reliant on QE. If the Fed targets nominal GDP levels, it could represent a promise to accommodate future beneficial supply or demand shocks even it it results in some above trend inflation. That could heat up the money to some extent.

Finally, if central banks had the authority to conduct true helicopter drops -say handing out constant sums of cash to everyone with a social security number- that sort of fiscal/monetary hybrid could overcome the ZLB IMHO.

136

Japanese core inflation turns negative (barely) at -0.1% vs. the previous year.

But over here I see it broke 2% in 2008 and 2014: it appears to have collapsed in March or April of this year. http://www.tradingeconomics.com/japan/core-inflation-rate

Looking at a late May 2015 Financial Times article, Japanese consumption appears to have been in free fall after the Spring 2014 consumption tax increase.

The Japanese Central Bank is continuing its unprecedented monetary expansion (QE) but sees no reason to intensify it. In other news, Japan is on the brink of a technical recession, or 2 consecutive quarters of negative growth. “The Bank of Japan is reluctant to ease further because it believes its policy is working…”
Look, it’s possible that the pushing on a string story story is bunk given the capacity of central banks to conduct QE. The argument would be while we have tried QE, we never shaped expectations by promising accelerating QE as long as inflation/nominal GDP/whatever targets weren’t met. But I say that the omnipotence of unconventional monetary policy at the zero lower bound has yet to be established. It’s an hypothesis. (By omnipotence I mean that proper monetary policy could overcome any politically feasible fiscal policy. If that’s too strong, I’ll add that the effectiveness of unconventional monetary policy at the ZLB in ending lost decades in the face of neutral fiscal policy hasn’t been established either. That too is an hypothesis.)

Indeed, how effective was QE? Googling, this guy says not at all, but he hardly has the final word. I should like to read some papers on the subject.

Admittedly, shaping expectations isn’t wholly reliant on QE. If the Fed targets nominal GDP levels, it could represent a promise to accommodate future beneficial supply or demand shocks even if it results in some above trend inflation. That could heat up the money to some extent.

Finally, if central banks had the authority to conduct true helicopter drops -say handing out constant sums of cash to everyone with a social security number- that sort of fiscal/monetary hybrid could overcome the ZLB IMHO.

137

Maybe so.

But the problem is that you are making statements that are, taken literally, completely absurd. I don’t know whether to take you literally but you’re not offering any qualifications.

Throwing the word “empirically” into the mix does not make your argument any better.

If the Fed printed a couple trillion bucks and dumped it from helicopters, there would be inflation. That is not a matter of debate.

“Pushing on a string” is a reference to conventional monetary policy. Keynes didn’t doubt that FDR could devalue the dollar against gold – an unconventional measure – and in fact he called it magnificently right. If you want to say that conventional policy could be nothing more than pushing on a string, then I would agree with you. If want to say that something like NGDP targeting is potentially too close to conventional policy that it might also be pushing on a string, then that is completely reasonable. If you want to say that something more extreme than NGDP targeting (like literal helicopters full of cash) would definitely create inflation, but that it is an absurd thing to do, then that is completely reasonable. But you haven’t made any of those qualifications.

You’re doing more than that. You’re patting yourself firmly and repeatedly on the back for being so careful and moderate, while also (apparently) denying the power of central banks to create inflation.

If you think central banks literally cannot create inflation, then you are not connected to reality.

If you think they can’t do it safely given their typical political constraints, then that is something else entirely. But those are two very different statements, and you are not distinguishing between those statements. Your QE cite is totally ridiculous. Your Japanese cites back up everything that I’ve said. The markets respond forcefully to QE announcements (although not in the way that poor old man believes it’s supposed to work), and Japan successfully created inflation. If they’re pulling back now, it’s for political reasons and not for economic reasons. If they’re giving up now, then that is a deliberate choice exactly as I said and exactly as your cite says. Markets respond forcefully to changes in expected policy. If you want to deny that and try to claim some wisdom deeper than the crowd, you are again in dangerous ground. The US was in literal deflation in early 2009, and now we’re not. Maybe that’s a magical coincidence. The ECB refused QE until earlier this year, instead opting to raise rates twice. They hit deflation years after the crisis. Again, maybe a magical coincidence.

There are more examples already mentioned. The “empirically” is actually there, you’re just not accepting it.

You’ve demonstrated that you can quickly google up someone being confused about money, but I hope you realize that’s not very hard to do. I can find people who are arguing potential hyperinflation. Not all of them froth at the mouth. Some of them speak of “potential” hyperinflation, of the risk that has not yet “empirically” been disproven.

What, exactly, would you say to those people?

I’m never more than 90% sure about most any topic in economics. It’s possible that the trillions the Fed has created will cause a hyperinflation. I don’t see how it would work, but I can’t deny outright the possibility. But if I come across someone who says the empirical evidence hasn’t yet come in, then I’m not going to tolerate that. The evidence has in fact come in and they simply weren’t paying attention. The “risk” is always going to be right around the corner, no matter how long it’s always been right around the corner. They don’t have to admit error, you see, because they were only talking about risk. They’re not “pre-judging” the outcome, you see? That’s how reasonable they’re being, you see?

No.

Your arguments are the exact mirror image of that. If you think QE (with a central bank that does not raise rates) is having no effect because the evidence hasn’t come in yet, then you are simply not paying attention. The evidence is already there. That’s not a 100% slam dunk. But denying a coming hyperinflation isn’t a 100% slam dunk either.

There might be a hyperinflation. QE might be completely ineffective.

But if you’re betting for either one, you’re playing the ostrich.

138

Let’s go through policy options at the zero lower bound. We both agree that conventional monetary policy has lost its effectiveness under such circumstances. I hope we agree that the Fed lacks statutory authority to (literally) drop money out of helicopters. It also lacks statutory authority to mail checks to individuals (which I would call a metaphorical helicopter drop).

I don’t pretend to know the degree of effectiveness of the QE programs, though I will claim that enough time has transpired for an econometric analysis. My next step might be to go visit the NY Fed and look over their working papers. But instead I’ll request that you provide a link to an academic paper by a credentialed economist that you think provides a solid autopsy of the effects of QE on the real economy.
Heh: This would be a poor candidate:
How the World Achieved Consensus on Monetary Policy. (2007)

139

Federal Reserve Governor Lael Brainard seems to be leaning towards raising rates later and doesn’t care if rates subsequently need to be raised in rapid succession. Tim Duy’s latest:

Duy thinks that this could push the rate hike to mid 2016. Could, not will.
In other news, former Chairman Bernanke has a book out about his days at the Fed. He explains why he rejected a switch to nominal GDP targeting during in Fall 2011: [INDENT]For nominal GDP targeting to work, it had to be credible. That is, people would have to be convinced that the Fed, after spending most of the 1980s and 1990s trying to quash inflation, had suddenly decided it was willing to tolerate higher inflation, possibly for many years. [/INDENT] The next January they reiterated their 2% inflation target and continued the US’s lost decade. The Economist goes on to argue for NGDP targetting.

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Well, I guess that’s the opinion of the new Keynesians or something. The Fed’s mandate is to maintain a stable money supply - not to act as a guarantor of full employment.

Tell me - what if the zero interest rate is causing malinvestments that are making the economy worse, or at least preventing it from acting at peak efficiency? THEN how long do we have to keep screwing things up so as to attain ‘full employment’? What if we aren’t getting to full employment until interest rates return to a normal value that accurately allows us to balance long term and short term investments? I guess we just keep interest rates at zero forever?

Using monetary policy to achieve a specific social outcome is a very crude tool. You are hurting investors on fixed incomes for one thing. For another, this kind of manipulation makes it very hard to determine if various fiscal or regulatory policies are working, as the fed can institute counter-policy and change the outcome. For example, if you raise taxes and that causes a decrease in employment, and the fed responds with expansionary fiscal policy, you’ve created a lot of distortions for nothing.

The Fed should be targeting inflation, or perhaps NGDP as some economists suggest. The fed should never be targeting a social outcome like full employment.