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Has The Fed Drawn Precisely and Exactly the Wrong Lessons From 2008?

One might think so from reading the buzz-causing Some Implications of Uncertainty and Misperception for Monetary Policy just issued by the US Federal Reserve. Briefly, the Fed staffers posit, “because monetary policy acts with a lag, waiting for inflation to materialize before reacting is undesirable, particularly when economic conditions are such that outsized deviations of inflation from its target are a plausible outcome.” “Outsized deviations”!  We are but fleeting moments from that old standby, “runaway inflation.” I rather suspect this new Fed study is but a sophisticated version of the Inflation Boogeyman, and another paean to the usual central-banker tight-money… Read More

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Is the US Economy really “Booming”?

Bloomberg’s Noah Smith, while rarely worth reading, is usually among the least-bad writers at what once was a serious financial news outlet. However, his post on Bloomberg last week: “Why the US economy is having a boom” is wrong enough to call for a response. In this post, Smith makes the case that the US economy is having a boom, and then goes on to detail what lies behind this boom. Before going through his case, let’s start by asking the question: “Is the US economy in a boom?” The word “boom” evokes some temporary period of above-average economic growth. The Roaring… Read More

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“Foggy Recollections”

Cecchetti & Shoenholtz remember the 10th anniversary of Lehman: The most intense period of the broadest and deepest disruption of U.S. and European finance since the Great Depression began with the failure of Lehman Brothers on September 15, 2008… In our view, three, interrelated policy responses proved critical in arresting the crisis and promoting recovery. First was the Fed’s aggressive monetary stimulus(!), including the introduction of unconventional policy tools, such as quantitative easing, targeted asset purchases, and forward guidance, at the effective lower bound for interest rates. After Lehman, within its mandate, the Fed did “whatever it took” to end… Read More

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The importance of (nominal stability) locking in full employment for the long haul

Josh Bivens and Ben Zipperer just released a paper with the title above, minus “nominal stability”. The point I want to make is that if the Fed focuses on nominal stability (instead of any other target), the economy will likely operate much closer to “full employment”. The second point of the paper´s summary is: Equitable wage growth is linked with extended low unemployment. Since 1979, the only period of strong across-the-board wage growth occurred in the late 1990s and early 2000s, which was also the only period of extended low unemployment in recent decades. This coincidence of extended labor market… Read More

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Unit Labor Costs Falling Again In US

The Bureau of Labor Statistics reported Wednesday that unit labor costs fell 0.9% in Q2, and are up 1.9% from a year earlier. Unit labor costs are a drag on the Federal Reserve’s 2.0% PCE inflation target. Not only that, but unit labor costs are now up only 7.8% from nearly 10 years ago. The 2010s are not the 1990s, that now-forgotten Alan Greenspan-epic of low inflation and high productivity growth. However, it makes sense that the captains of industry invest in new plant and equipment when they think sales are forthcoming to validate the risk. True, the last 10… Read More

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The Fed´s unending search for “ammunition”

From Brad DeLong, who doesn´t think the economy is “solid”: Economic developments over the past 20 years have taught – or ought to have taught – the US Federal Reserve four lessons. Yet the Fed’s current policy posture raises the question of whether it has internalized any of them. The first lesson is that, at least as long as the current interest-rate configuration is sustained, the proper inflation target for the Fed should be 4% per year, rather than 2%. A higher target is essential in order to have enough room to make the cuts in short-term safe nominal interest… Read More

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Sunday remininses: John Taylor on NGDP Level Targeting

In the first edition of his Macroeconomics textbook (1986), on page 137, we read: The underlying objective of policy is to maintain a steady or stable level of aggregate demand. The importance of a stable aggregate demand is one that has been recognized by most economists since the 1930s. Even economists who normally differ on other issues agree on the principle that it is desirable to maintain a stable growth of aggregate demand. The chart below is a replica of his chart (pg 136), discussing the appropriate response to an aggregate demand shock, induced by a rise in money demand… Read More

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As reported here, recently the IMF posited a “Minsky Moment” is pending in the US, due to current-account trade deficits. The foreign-capital inflows are bloating US asset values into a towering house of cards which could soon tumble on the next windy day. In this regard, the IMF links arms with the tenacious tight-money crowd, which has a default position that loose money has bloated US asset values into a skyscraper anchored in quicksand. After the Pending Financial Debacle Having hunkered down in my hardened financial bunker, I read with interest a N. Gregory Mankiw New York Times op-ed regarding… Read More

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FOMC Statement: the key change

Contrary to Trump, Fed selected words are carefully screened. Therefore, this change in wording could be significant: The June Statement said: …economic activity has been rising at a solid rate. In July that changed to: …economic activity has been rising at a strong rate. In one of the next meetings this year, will the wording change to …the rise in economic activity has continued to strengthen. If it does, (Trump-style) BEWARE! The Fed can say what it wants, and as the charts show, their “foundation” can be very shaky. If over the last 12 years the economy has been “promoted”… Read More

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The International Monetary Fund just issued a tome written in the indecipherable international-ese favored by global economic organizations, but warning darkly about “imbalances.” Here is the latest view from the IMF: “Large and sustained excess external imbalances in the world’s key economies—amid policy actions detrimental to external balances—pose risks to global stability.” Over the medium term, sustained [current account trade] deficits, leading to widening debtor positions in key economies, could constrain global growth and possibly result in sharp and disruptive currency and asset price adjustments.” In English, for American readers, this translates as: “Dudes, the US is running huge and… Read More

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