Establishment Macroeconomists Tell Fed To Ease Off  (!)

That many think the US Federal Reserve should reconsider its plans to raise interest rates and reduce the size of its balance sheet is not surprising.

What is eyebrow-raising is that many mainstream, or “establishment” economists are also warning the Fed that it may be going too far in its preemptive strikes against inflation.

For example, Joachim Fels, global economic adviser at Pimco (the world’s largest bond manager) said at a Reuters Global Investment 2019 Outlook Summit in mid-November that rate hikes risk pushing 2-year Treasury yields higher than those on longer-term bonds, which many investors regard as a totem for recession.

“The biggest risk is the Fed moving too fast, the Fed moving above neutral,” said Fels. “The issue is nobody really knows where that neutral rate of interest is.”

Then we have John Lonski, chief economist, Moody’s Capital Markets Research, almost pining for a less-active Fed in the Nov. 15 issue of Moody’s “Weekly Market Outlook.”

“As long as the dollar exchange rate does not weaken appreciably and inflation expectations are well contained, the FOMC very much has the option of normalizing monetary policy at a more measured pace. Yes, the FOMC will probably hike fed funds’ midpoint to 2.375% at its December 19 meeting,” observed Lonski. “However, the December 19 policy statement might indicate the Fed’s willingness to take a more gradual approach to policy normalization in deference to slumping industrial commodity prices, weakness abroad, and the continued containment of inflation expectations.”

And this from CNBC: Lyn Graham-Taylor, senior fixed-income strategist at Rabobank, told CNBC’s “Street Signs” on Thursday (Nov. 15) that President Donald Trump may have a point in his lamentations about Fed policy.

“We think the Fed will ultimately push the U.S. into recession by following this path,” the analyst said.

So What?

This may, in fact, be a  “So what?” The Fed is made up of central bankers, and a good case can be that independent and institutionalized central bankers are heavily socialized to internal goals and norms. And there are always policy disagreements outside the Fed, in Econo-land.

But as an anecdotal observation, it seems to me that before 2008 and even for many years after, mainstream institutional macroeconomists had to issue declarations in favor of tighter money, balanced federal budgets and a stronger dollar.

Of course, in some ways these clarion calls were code words for “less social welfare spending” and a lazy conflating of fiscal and monetary policies, but nevertheless such posturing was near de rigueur—much to the dismay of Market Monetarists, who also did not favor federal deficits or expansive social welfare programs but wanted a balanced monetary policy that targeted growth in nominal GDP.

But of late, evidently, establishment economists do not fear alienating customer bases by calling on the Fed to ease off its tight-money drive.

Conclusion

It is too soon to tell if this new attitude towards more-balanced monetary policies among establishment macroeconomists is broad and deep, and then if it will influence Fed policy.

But we may be seeing a welcome changing of the monetary-policy guards. For decades upon decades, the “tight-money” crowd has ruled in monetary-policy roosts, always against the (now receding) backdrop of the higher inflation rates of the 1970s. Many a sermon has thundered down from the very pinnacles of righteousness, often concluding with the admonition that “inflation is theft”—not just a macroeconomic issue, but a moral perversion.

Who knows how much real output has been left on the table in appeasing tight-money totems?

Maybe a better day is ahead.

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