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The Fed Has Been Getting (Mostly) Tighter For 40 Years

Well, that’s the conclusion of three U.S. Federal Reserve-Richmond economists in one of the most interesting papers of the year, or maybe any year, on monetary policy. Investors take note—this explains why bonds have had an epic bull run. In a paper provocatively entitled The Burns Disinflation of 1974, the authors, Thomas A. Lubik, Christian Matthes and Tim Sablik examine Fed policy, particularly the Fed funds rate, viewed through the lens of a measure similar to a “Taylor Rule.” This is what they found: The Fed has been generally tightening the screws—that is, running a higher Fed funds rate in… Read More

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For example: Indeed, Alex Tabarrok, an economist at George Mason University, argues that it’s “crazy” to believe that a lack of demand explains the slow (in fact, absence of) recovery. “The time period in which monetary policy would have been effective is long over,” he says. Once an economy reaches full employment, he argues, there’s no way for increased spending to boost economic output — you’d just get more inflation instead. And the US unemployment rate is currently 4.9 percent, near historic lows, a sign that a shortage of demand might not be a problem right now. Or Mark Zandi, chief… Read More

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Central bankers love giving advice to politicians but can't take it

William Dudley followed Janet Yellen in urging politicians to do much more to encourage growth. Mark Carney did the same. They all want a fairer society and a more productive one and, and, and … They are like the worst sort of kids. Always wanting more but never contributing much themselves. Dudley: “…there is considerable work to do over the longer term to improve our nation’s productive capacity and foster an environment in which the gains are spread more evenly.  But he also echoed Yellen’s warning to Trump and his government to not grow the deficit as the Fed believes… Read More

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From the “Long Boom” to the “Long Depression”

Narayana Kocherlakota asks: “Why do so many Americans feel dissatisfied about the economic state of their nation? One simple chart offers a lot of insight.” The chart is a version of the one below. Before someone says Ha! but relative to the “Roaring 60s”, the “Great Moderation”/” Long Boom” was also a depression, let us note that the “Roaring 60s” was not sustainable, as it shaped the “Great Inflation”. And note that contrary to what the head of Mexico´s Central Bank and future head of the BIS, Augustin Carstens, argues: “Monetary policy has been bearing a significant part of the… Read More

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The month of Trump

The market moves since election day are big, but not new. They are mostly the acceleration of a trend that was under way since mid-year. But the acceleration is telling us something about the President-elect. According to Mark Lilla, a Columbia University political scientist and historian and author of “The Shipwrecked Mind: On Political Reaction” (2016), Trump differs from other present-day reactionaries like Erdogan, Modi and Le Pen. They´re all geared by nostalgia, for example, “Make America Great Again”. While Erdogan, Modi and Le Pen offer a precise image of where they want to return to. Trump doesn´t. He reminds… Read More

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The Fed must get ahead of the market

As a great monetary theorist once put it, ‘Policy is about getting ahead of expectations’. If you want to get short term rates back to normal, you’re going to have to get ahead of the markets, get the economy really moving. This is the only way to do it.  As things stand today, there’s little scope for further rate hikes. It’s essential that we know what the correct path to sustainably higher short term interest rates looks like, because there are many false paths, and the Fed will be under intense pressure to raise rates soon. Many have been pushing… Read More

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UK NGDP responds to easier monetary policy, pulling up RGDP

We will never know what would have happened if Mark Carney instead of having his one moment of clear-sightedness had decided to defend the pound and prevent its dramatic fall post the Brexit vote. Carney did well in the putative crisis demonstrating the immense power of central banks for good, rather than the evil we sometimes see. Ad in the fact that they can achieve these goals mostly with guidance rather than action is also very satisfying. The fact that the soon to be Chancellor of the Exchequer Phillip Hammond also sang from the same song sheet, “the initial response to… Read More

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The Euro-ization of US growth

Convergence takes many forms. One of the most remarkable is the convergence of both US nominal growth and real growth rates to those of the Euro Area. It has been coming for some time as the Fed has tightened monetary policy since ending QE3 and continually threatened to raise, and sometimes has raised, rates. And is about to do so again, to prove the credibility of the upward trajectory of its interest rate projections. Movement in the Fed’s target level of rates is not usually indicative of loose or tight money. The trend in expected NGDP growth tells us the… Read More

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The libertarian outfit Cato Institute has the worthy goal of more human freedom, and on most economic issues its outlook is commendable—after all, who is not for less taxes and regulations? But come monetary policy, the regrettable dark side of the Cato force comes out: Central banks should be tighter, they say. Cato Institute held its 34th Annual Monetary Conference Nov. 17, and the keynote speaker, former Fedster Thomas Hoenig, delivered this message, according to Cato coverage:  “A consistent easing bias in monetary policy since the enactment of the Humphrey-Hawkins dual mandate has pushed interest rates down and led to… Read More

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What if I told you there was a central banker who “brilliantly” defeated the Great Depression in his homeland, while the rest of the developed world moldered? So said former Fed Chair Ben Bernanke. What if I further told you there is not a single study or even reference to that brilliant central banker in the entire online U.S. Federal Reserve archives, and only one passing mention in a 13-year-old Bernanke speech—and that lecture delivered in the banker’s homeland, not in the U.S? The above facts speak to remarkably deep and complete institutional bias, hubris and ossification at the Fed.… Read More

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