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Tag Archives: FED

How will we know if average inflation targeting is working?

The Fed recently decided to switch to average inflation targeting, which means making up for past misses of its 2% inflation target by allowing temporary over or undershoots of inflation. So how will we know if it’s a success? I see two key criteria: 1. Does the new policy result in roughly 2% inflation over the long run? 2. Does it address the dual mandate by making inflation less cyclical? For example, during the 2010s, inflation mostly ranged from 1% to 2%,...

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Gold’s Gone Wild!

Headline’s gone wild today. For example, one public gold company CEO tweeted: “Today, some banks failed to deliver physical in the COMEX bar EFP. As a result, these banks suffered large losses…There remains a big shortage in physical in the COMEX denomination. So, rumors are, the COMEX will announce a force majeure…” Ignoring his sloppy understanding of the market and its terminology, this tweet gives us a sense that you better buy gold now before it’s too late. Or, consider this headline:...

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Is Fed policy “premised importantly” on market monetarism being true?

Market monetarists favor a policy regime where the instrument setting creates a policy stance that the financial markets believe will achieve the Fed’s policy goal. Thus, if the Fed’s goal is 2% inflation, then the monetary base (or the fed funds target) should be set at a level that the market believes will result in 2% inflation. Here’s Yahoo.com: Is the Federal Reserve beholden to short-term volatility in the financial markets? A handful of Fed-watchers argue that...

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Pushing Down Interest Rates in a Boom

Standard Keynesian theory claims that the government should stimulate the economy during a slump and cool it during a boom. Many objections exist to this interventionism, but there is apparently a new kind of interventionism concocted in the White House: stimulate the economy during a boom. Would this imply slowing it down during a recession? In Keynesian theory, one way to stimulate the economy is to lower interest rates by increasing the money supply. John Maynard...

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Changing places with Europe

During 2008-09, both the US and the Eurozone had deep recessions, with the Eurozone experiencing an especially sharp fall in NGDP growth. In both areas, the central bank should have cut rates into negative territory, but neither bank did so (at the time).Even so, there were clear differences in the response of the two central banks. The Fed reduced rates more aggressively (relative to the natural rate), and also did QE much earlier than the ECB. Some ECB officials...

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Does the Fed treat 2% inflation as a ceiling?

The Fed says no. Many Fed critics say yes. I say that it’s too soon to say. Let’s look at PCE inflation (the index targeted by the Fed) over the past 15 years: Inflation has exceeded 2% in seven years and fallen short in eight years.  That’s consistent with a symmetrical target.  So why do critics like David Beckworth argue that the Fed treats 2% as a ceiling? The real problem is quite recent.  The Fed has fallen short of 2% in 6 of the past 7 years, and 8 of the past...

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Shoot to kill: Power, precision, sufficiency and the appropriate target

Over at MoneyIllusion I have a new post advocating reforms that would boost the power of monetary policy. Here I’d like to put this in context, especially given that the Fed is planning to revisit its policy strategy this summer. A successful monetary policy has four elements: 1. An appropriate target: I favor NGDP level targeting, but the Fed’s current target (AD set at a level that leads to 2% PCE inflation and minimizes the employment/output gap) is not that bad,...

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Steve Moore for the Fed?

I’ll say this about the rumored choice of Steve Moore for the Federal Reserve Board; he’d be the first Trump pick that actually reflected President Trump’s views on monetary policy. And what are Trump’s views? 1. Favoring tighter money when a Democrat is president, and the economy is depressed and clearly needs easier money. 2. Favoring easier money when Trump is president, and the economy is booming and does not obviously need easier money. (You can argue it might...

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Please abolish the Fed’s balance sheet

I just spent the past few days at the annual economics meetings in Atlanta, in some ways a depressing experience.  (I arrived home with a cold.) I discovered that I’m not making any headway in convincing people of the importance of monetary offset of fiscal stimulus.  Even worse, there seems to be a growing consensus that monetary policy is ineffective at the zero bound.  I view this idea as not just wrong, but silly. Today I’m going to suggest a seemingly...

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Rising Rates Falling Assets, Report 30 Dec 2018

Last week, we wrote about the concept of discounting. This is how to assess the value of any asset that generates cash flow. You calculate a present value by discounting earnings for each future year. And the discount rate is the market interest rate. We said: “If the Fed can manipulate the rate of interest, then it can manipulate the value of everything… … There is no other rate to use, other than the market rate. You don’t know the right rate any better than the people who centrally plan...

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