Non voting Fed member Narayana Kocherlakota is repeating his belief that “as long as the FOMC is continuing to satisfy its price stability mandate, it should keep the fed funds rate extraordinarily low until the unemployment rate has fallen below 5.5%. Kocherlakota defines “price stability” as inflation “within a quarter of a percentage point of the target inflation rate of 2%.” Now most of my readers know I’ve been highly critical of the Fed dating back to the Greenspan years and this commentary from Kocherlakota just gives me more reason to be critical. I apologize to those who are tired of hearing it but I feel its necessary to call them out when deserved. With $1.5T of excess banking reserves sitting with the Fed, after a 250% increase in the Fed balance sheet with money conjured out of nowhere, he thinks the US economy can somehow improve to such an extent that the unemployment rate is going to fall to below 5.5% and consumer price inflation will remain 2.25% or less. I of course don’t know what econometric models he is using but without using one I feel confident that this will be virtually statistically impossible. Just looking to last year, from April ’11 to Feb ’12, the headline PCE (the Fed’s preferred inflation gauge now instead of CPI) rose 2.4% or greater y/o/y while the unemployment rate was between 8.3% and 9.0%. Bottom line, while it can still be a ways off, the Fed’s memoirs won’t be fully written until this extraordinary policy is unwound as the process will be clearly eventful to say the least.
Category: MacroNotes
Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.
It’s another sample of David Stockmans “Rosy scenario economic analysis”…You decide on the result you want and then plug in values in the formula until you get the desired answer. It proves that you can cut taxes and balance the budget or in this case you can increase liquidity until you get the unemployment rate you want.
” I feel confident that this will be virtually statistically impossible.”
And if it happens, will you re-think everything you “know” about economics?
” I feel confident that this will be virtually statistically impossible.”
And if it happens, will you re-think everything you “know” about economics?
please cite one econometric model that backs up your claims.
I really don’t understand your point. Kocherlakota’s proposal is to target a zero federal funds rate until either inflation ticks up 0.25% higher than the 2% target, or unemployment gets below 5.5%. You assert that this is impossible. Of course, you proffer absolutely zero evidence or logic to support your assertion. Regardless, what would be the “additional”* harm? If Kocherlakota’s proposal were followed by the Fed, as soon as inflation reached 2.25%, the FFR would be raised. Exactly how ruinous is 2.25% inflation? This is a fundamental issue I just don’t understand. The vast majority of the past two decades I’ve been investing, 2.25% inflation has been considered pretty darn good. Excellent in fact. In the late eighties, when I started investing, 2.25% inflation was considered by most to be an unattainable goal to be eagerly sought but never achieved. Now all of a sudden huge numbers of people (like you) are equating ANY increase in inflation from the dismal level it sits at today as the ultimate evil. Give me a break. Enough Fed pumping to get some real (but low) inflation would be a godsend to this economy and this country. If I were a benevolent dictator, I would amend Kocherlakota’s proposal to 3% inflation and 5% unemployment. This country’s history has numerous examples of incredible growth and prosperity during eras of 3% inflation.
*I don’t actually buy that there is any previous harm. The fed is not perfect, but they have definitely kept us out of Great Depression 2 this time around.
This is wrong on several levels.
*The Fed is concerned with long-term inflation expectations, not brief periods of higher inflation. Mr. Kocherlakota has called this twice now and is correct in his focus on medium-term and long-term inflation expectations.
* The Fed’s preferred inflation gauge is not headline PCE but rather core PCE. The distinction is important because headline tracks core (not the other way around) and food & energy prices are more likely to be volatile due to non-monetary events (droughts, Middle-East tensions, etc.). The Fed’s switch from CPI to PCE was made in 2000 and from PCE to Core PCE in 2004.
*The money wasn’t conjured out of nowhere. The exchange of reserves for Treasuries is an asset swap which just changes the duration of government liabilities. To say money is created out of nowhere would mean the Treasuries bought disappear into nothing. All of the Fed’s actions to date are balanced and quantitative easing is balance sheet neutral.
*Which leads to the point Kocherlakota doesn’t need an econometric model to feel at ease with increasing excess reserves. Increased reserves are necessary to increase lending, but are not sufficient. Reserves, by themselves, are not inflationary and at some level carry the risk of being deflationary.
*Finally, this has nothing to do with statistical significance and saying you are “confident that this will be virtually statistically impossible” is choosing to be verbose so as to muddy the waters in an effort to gain credibility.
There are numerous, legitimate complaints we can have about the Fed’s handling of the economy; we don’t need to invent pretend ones.
Why would anybody think 5.5% unemployment is “normal?” I just took about 60 seconds, did a quick Google search for monthly unemployment numbers back to 1948, and the average monthly number since then is 5.8%. For decades now we’ve had a combination of productivity increases through technology and the ability to outsource jobs to foreign countries — lower labor demand and increased labor supply. Even before those trends 5.5 percent unemployment was difficult to achieve. It’s simply not realistic to believe that monetary stimulus will achieve that number.
A reply to finn0123
I am curtain that you have a deeper knowledge than I about the intricacies of the policies outlined by the FOMC, but I also see a few flaws your rebuttal, even though it shows you are well-versed on this subject. The flaws that I am going to refer to are more idealistic in nature than pragmatic in nature. I believe that my view points will be more respected over the course of time because they follow solid monetary principles of history. I do respect your view points however, and concede that some of them may be hard to overlook.
You said that Kocherlakota was concerned mainly with long-term, not short burst of inflation. While I don’t disagree that he said this nor do I disagree with the assertion, I believe it to be an insignificant stance on inflation. In a world where news buzz whips through the telecommunications world at lightning fast speeds, and where consumer spending confidence that vanish with nothing more than a short statement of an individual, and where main street workers have a blatant distrust of wall street tycoons, and where any flow of information is so radically fast that opinions change with each flip of a coin, it seems to me that short bursts of inflation (these days) will have a dire effect on the world economy as well as long-term rises/changes in inflation. Furthermore, an immediate injection of too much capital that causes main street panic over the possibility of soaring prices is not something that can be corrected quickly. Most Americans that are not vested in financial instruments will be looking to save, not spend. So, while I don’t necessarily disagree with anything you said, I think that avoiding the potential problems of short term bursts in the rise in the money supply is reminiscent of investment bankers arrogantly thinking short term drops in housing prices won’t disrupt the housing market in the long run.
The very act of the Fed using the core PCE as it’s “new measure” shows how stupid and afraid they are of the truth (IMHO)…….the truth being that they are, as an organization, one of the most historic failures since the 20th century. Correct me if I’m wrong, but core PCE discounts food and energy prices in it’s equation because they are too volatile. What? Are you shitting me? Are these not durable or non-durable expenditures? Just because they may damage their precious little equations is no excuse to excuse 2 industries that provide the most essential necessities of life. However, you pointed out that the reason for excluding them was because of “common” circumstances that arise outside the realm of their control. Is this really a viable reason? Better yet, is it even true? In 2008, when Bear Sterns, Lehman Bros., Goldman Sachs, Merill Lynch, etc. were obviously on the verge of going bankrupt, did Henry Paulsen and Fed President Geithner dismiss their problems because they had no involvement in their greed? No. They felt they had an obligation (although a terrible choice) to keep the credit markets sound. Conversely, the Fed and the FOMC need to be working hard to fight inflation NOT excluding factors that make their jobs harder. After the Federal Reserve purpose is to maintain the solvency of it’s nation’s currency (which it has an extremely poor track record of doing). I just don’t think your argument here about core PCE to have common sense.
The Federal Reserve DOES conjure money. Period. It may have “reserves” from time to time, but it has this power and often exercises it. I don’t really understand why many people treat the Federal Reserve like it would any other investment company also buying securities and treasuries. Does Fidelity have the authority to type digital money into a computer into existence and add it to their reserves? And why does the Federal Reserve need to hold cash reserves? It is our nation’s central bank, and I have never seen an official statement by a Fed policy member that they are a for-profit company. If they have cash reserves, then they belong to the people or the government that created them. And there is absolutely no reason to be holding onto reserves, in my opinion, when we continue to be in a deflationary period with middle income Americans starving for purchasing power.
I agree with you that reserves in themselves are not inflationary no doubt, and I also agree that they carry some risk of being deflationary, but it is no way necessary for the most powerful bank in the United States to have $1.5 trillion in reserves to secure lending. If the Federal Reserve NEEDS $1.5 trillion “to lend,” then what is the purpose of even having this institution? They have the authority, after all, to create reserves out of thin air by typing some harmless numbers into a computer. We know this because they have done it before. And please don’t bother with the asset swap argument. If this is the case, then how does the Federal Reserve attains it’s assets? By working? No. Most likely it just sells securities and treasuries it has which it purchased in the past with money it never had.
Having said that, I don’t get too involved in the Fed’s number crunching computer analysis. I, instead, choose to go by it’s policies.