FOMC Watch

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… Read More

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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… Read More

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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… Read More

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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… Read More

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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,… Read More

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In the early part of the month there were tentative signs that the Fed would do something.  Bill Dudley, of the New York Fed, recognized that growth was weak and monetary policy only moderately accommodative. On August 15, John Williams of the San Francisco Fed published “Monetary Policy in a Low R-star World”: [M]onetary policy frameworks should be critically reevaluated to identify potential improvements in the context of a low r-star. Although targeting a low inflation rate generally has been successful at taming inflation in the past, it is not as well-suited for a low r-star era. There is simply… Read More

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