FOMC Watch

In her opening remarks at the Boston Fed Conference on “The Elusive ‘Great’ Recovery: Causes and Implications for Future Business Cycle Dynamics“, Janet Yellen poses a few questions. Two of those stand out. The first question I would like to pose concerns the distinction between aggregate supply and aggregate demand: Are there circumstances in which changes in aggregate demand can have an appreciable, persistent effect on aggregate supply? Prior to the Great Recession, most economists would probably have answered this question with a qualified “no.” They would have broadly agreed with Robert Solow that economic output over the longer term is primarily…...

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Fischer's Bromdes

Fischer goes on about the usual FOMC memes that the labor market is strengthening, that real growth has recently been low because of inventory corrections, that inflation is below target because of the strong dollar and weak oil prices, but that given the strengthening labor market and as the rise in the dollar and fall in oil prices dissipate, inflation will climb back to 2%. That sets the stage for him to talk about monetary policy: Given that generally positive view of the economic outlook, one might ask, why did we not raise the federal funds rate at our September meeting?…...

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In a country a long way away a dove turned into a hawk. Charles Evans has been consistently on the side of the doves for many years, although he did blot that record with a vote to raise rate in December 2015. In his extremely long speech in New Zealand yesterday he was dovish: Most worrisome to me is the possibility that inflation expectations in the U.S. might be drifting lower. … If we were going to see a quick return to 2 percent inflation, I would have expected to have already heard hints bubbling up from among my contacts. But in remarks to…...

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Paul Romer recently lamented on the current crisis in macroeconomics. The money quote to excusing the pun was that:  Macroeconomic theorists dismiss mere facts by feigning an obtuse ignorance about such simple assertions as “tight monetary policy can cause a recession.” Stanley Fischer, Deputy Governor of the Federal Reserve, is one such theorist Romer had in mind. His recent speech on Low Interest Rates is faintly astonishing in not once suggesting that low interest rates might be caused by tight monetary policy. As usual, with the central bank-sponsored macroeconomic groupthink everything is to blame for persistently low interest rates except…...

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Today: Though her speech to the House of Representatives’ Financial Service Committee avoided remarks on monetary policy, Yellen admitted in the Q&A period that if job creation continued at its current pace it could lead to overheating of the American economy which in turn would require a more rapid removal of accommodative monetary policy. In November 1996: In spite of all that is going right in the American economy, I too remain concerned about the outlook. I agree with the staff that we may well be living on borrowed time and that inflation will eventually accelerate if the unemployment rate remains…...

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In a speech called “Why Study Economics” to students at Howard University Stanley Fischer attempted to shed some light on a key macro issue. He failed. Illustrating his own confusion about macroeconomics, despite years and years of study, and despite hundreds of research papers, some of which were authored by him. “Why is participation in our nation’s labor force declining? … Economists are examining a number of reasons why prime-age males are falling out of the labor force. Here there are differences among economists. Some economists have emphasized the role of public assistance programs, such as disability insurance. Some evidence…...

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The September meeting released a new set of projections from FOMC members for the Real GDP growth, the unemployment rate, PCE inflation, core PCE inflation and the expected path of the Fed funds rate. Real GDP is expected to be around 2%, unemployment to remain below 5%. PCE inflation is expected to accelerate from the current 1% to 2% and remain there. The chart is almost comical. The 2% projections look like a ceiling, and are a ceiling. If the projections breached 2% the FOMC would be tightening, no doubt at all. They want to tighten now but common sense…...

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NB I only use the word hawk for wanting tighter monetary policy at the moment. I would be hawkish if nominal growth had been running well above 5% for a few years. Dovish only means wanting neutral or looser monetary policy at the moment. These terms are completely relative to current or expected conditions. And always will be. 7-3, close, but not that close The FOMC meeting was very notable for the “dissent” of three regional Presidents. That is three of the four who have a vote in the FOMC. It is quite a powerful bloc. If the fourth regional Fed voter,…...

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