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Fed Thread - What matters from what @federalreserve Chair Powell did and did not say today @KansasCityFed
1) The process of doing the review was as important as the results of the review
The trust bought in from Congress and interested public made room for current policies (1/n)
1) The process of doing the review was as important as the results of the review
The trust bought in from Congress and interested public made room for current policies (1/n)
Fed Thread
2) The substance of the review was rightly framed as catching Fed strategy up to economic realities
Notably, flat Ph. Curve, lower trend growth rate, very sticky inflation expectations, rising Labor Force Participation pre-COVID (2/n)
2) The substance of the review was rightly framed as catching Fed strategy up to economic realities
Notably, flat Ph. Curve, lower trend growth rate, very sticky inflation expectations, rising Labor Force Participation pre-COVID (2/n)
Some of us had asked Fed to take these realities into account a while ago to dial back on pre-empting inflation and err in favor of going for lower unemployment
See me and @D_Blanchflower 2014 on underestimating labor market slack https://www.piie.com/publications/policy-briefs/wages-and-labor-market-slack-making-dual-mandate-operational-draft
(2a/n)
See me and @D_Blanchflower 2014 on underestimating labor market slack https://www.piie.com/publications/policy-briefs/wages-and-labor-market-slack-making-dual-mandate-operational-draft
(2a/n)
Or see me and @jzettelmeyer 2017 on slowing productivity growth https://www.piie.com/events/policy-implications-sustained-low-productivity-growth
Fed Thread
3) So this adapting Fed's medium term strategy to current economic reality is welcome.
It means the earlier FOMC was wrong to have raised rates in 2015-18, and particularly to have focused on U* rather than LFP, and to have tried to set simple policy rules
(3/n)
3) So this adapting Fed's medium term strategy to current economic reality is welcome.
It means the earlier FOMC was wrong to have raised rates in 2015-18, and particularly to have focused on U* rather than LFP, and to have tried to set simple policy rules
(3/n)
Full credit to Vice Chair Clarida for starting a process against excessively pre-emptive policies on inflation right from the start of his term (Oct 2018) and his taking up this review process to make the changes (with other FOMC members of course) https://www.piie.com/events/outlook-us-economy-and-monetary-policy
Full credit to Chair Powell in his first Jackson Hole speech two years ago laying the ground work against setting the course of policy too deeply dependent upon the rules to follow theoretical, not directly observable, "stars" r* and U* https://www.federalreserve.gov/newsevents/speech/powell20180824a.htm
Fed Thread
4) The short-term impact of this policy shift will be minimal. We saw the 30-year and 10-year Treasury interest rates move a decent amount up after Powell's speech by intra-day standards, but a trivially in macroeconomic terms, or compared to the fall this year (4/n)
4) The short-term impact of this policy shift will be minimal. We saw the 30-year and 10-year Treasury interest rates move a decent amount up after Powell's speech by intra-day standards, but a trivially in macroeconomic terms, or compared to the fall this year (4/n)
Fed Thread
5) So I was delighted that Powell basically omitted any mention of forward guidance in his speech. That would have distracted from the main message, and would have disappointed. FG cannot raise inflation when there are real factors pushing it down (5/n)
5) So I was delighted that Powell basically omitted any mention of forward guidance in his speech. That would have distracted from the main message, and would have disappointed. FG cannot raise inflation when there are real factors pushing it down (5/n)
The one time I spoke on the @KansasCityFed Jackson Hole program, rather than being just an attendee, in 2012, I explained why forward guidance is largely useless. At best, it couldn't hurt, so next FOMC will probably say something about it, but ignore it.
https://www.kansascityfed.org/publicat/sympos/2012/Posen_final.pdf
https://www.kansascityfed.org/publicat/sympos/2012/Posen_final.pdf
Fed Thread
6) Yes, his whole thrust is dovish, but reality based. The fact that interest rates and currencies didn't move much at all is consistent w (albeit doesn't prove) that the Phillips curve is flat, that inflation expectations are sticky, and that long term FG fails (6/n)
6) Yes, his whole thrust is dovish, but reality based. The fact that interest rates and currencies didn't move much at all is consistent w (albeit doesn't prove) that the Phillips curve is flat, that inflation expectations are sticky, and that long term FG fails (6/n)
Fed Thread
7) Another key omission is no mention of the balance sheet at all. Which is right imo, just another tool, not a source of threat or concern in and of itself, and certainly not a first order strategic concern.
Mechanistic monetarism is misleading
https://www.bankofengland.co.uk/-/media/boe/files/speech/2009/getting-credit-flowing-a-non-monetarist-approach-to-quantitative-easing.pdf
7) Another key omission is no mention of the balance sheet at all. Which is right imo, just another tool, not a source of threat or concern in and of itself, and certainly not a first order strategic concern.
Mechanistic monetarism is misleading
https://www.bankofengland.co.uk/-/media/boe/files/speech/2009/getting-credit-flowing-a-non-monetarist-approach-to-quantitative-easing.pdf
Fed Thread
8) What about financial stability? There are FOMC members who still believe that low short-term rates increase risks on net. Now others who are inflation hawks will cover their views by citing financial stability when it is time to call for rate hikes, too.
(8/n)
8) What about financial stability? There are FOMC members who still believe that low short-term rates increase risks on net. Now others who are inflation hawks will cover their views by citing financial stability when it is time to call for rate hikes, too.
(8/n)
Fed Thread
9) wrt Powell's speech today, the point is that financial stability did not get elevated as an ongoing strategic goal, and pushing for maximum employment got upgraded.
That wisely reflects the reality that rates are low bc of reduced private risk appetite (9/n)
9) wrt Powell's speech today, the point is that financial stability did not get elevated as an ongoing strategic goal, and pushing for maximum employment got upgraded.
That wisely reflects the reality that rates are low bc of reduced private risk appetite (9/n)
10) Going for maximum employment as opposed to deviations from FOMC assessment of U* is the biggest dovish shift. We all know that in the past deviations were treated asymmetrically, too low unemployment was more worried about than too high. Furthermore...
(10/n)
(10/n)
10a) Going for maximum employment also implies an experimental approach to finding out when labor market tightening shows up in inflation, instead of pre-emptively trying to guess how low U* is (and usually underestimating labor market slack due to such a narrow focus)
10b) This was a somewhat costly mistake in 2015-2018, but also showed up 20 years earlier when Dem appointee doves Blinder, Mayer, and Yellen as BOG members argued for raising rates when unemployment got 'too low' in the mid-1990s. Examples in other economies abound.
Robert Solow argued for experimenting to see how low unemployment could go (debating against John Taylor and his eponymous rule) back in 1997, and in contrast to those FOMC members then https://mitpress.mit.edu/books/inflation-unemployment-and-monetary-policy
My former @PIIE colleague @AngelUbide made a similar argument in his book The Paradox of Risk in 2017 to be opportunistic in reflation https://www.piie.com/bookstore/paradox-risk-leaving-monetary-policy-comfort-zone
Fed Thread
12) Putting it all together, what I think Chair Powell accomplished in his speech, and in the new Strategic Framework it conveyed (tx Clarida, Brainard, Rosengren) was finally to catch the Fed's strategy with today's realities and lessons learnt from the last 20 years
12) Putting it all together, what I think Chair Powell accomplished in his speech, and in the new Strategic Framework it conveyed (tx Clarida, Brainard, Rosengren) was finally to catch the Fed's strategy with today's realities and lessons learnt from the last 20 years
12a) as I put it when on BOE MPC back in June 2011, what we are experiencing is Not That '70's Show
In particular, inflation expectations are incredibly well anchored at low levels
And workers have little bargaining power to force wage increases
https://www.bankofengland.co.uk/-/media/boe/files/speech/2011/not-that-70s-show-speech-by-adam-posen-presentation.pdf
In particular, inflation expectations are incredibly well anchored at low levels
And workers have little bargaining power to force wage increases
https://www.bankofengland.co.uk/-/media/boe/files/speech/2011/not-that-70s-show-speech-by-adam-posen-presentation.pdf
13) Thanks to Chair Powell and the FOMC for letting empirical reality drive the strategic rethink. We wrote Inflation Targeting (1999) in response to specific circumstances, and monetary strategy should adapt to lasting changes in the economic environment https://press.princeton.edu/books/paperback/9780691086897/inflation-targeting
14) Credit as well to Chair Powell and the FOMC for the transparent open process by which they made decisions about those strategic choices. That is how they have the political room for them, even though the shift constitutes a move to greater discretion.
14a) As Thomas Laubach and I argued, Disciplined Discretion is a successful framework, using flexibility and transparency get political buy in. Great accomplishment for the Fed using so many new tools, a year ago attacked by POTUS, to have this much trust.
https://www.newyorkfed.org/medialibrary/media/research/staff_reports/research_papers/9707.pdf
https://www.newyorkfed.org/medialibrary/media/research/staff_reports/research_papers/9707.pdf
15) So join Fed Vice Chair Richard Clarida and me @PIIE for the next stage of understanding the Fed's new strategic framework for Monetary Policy Mon 31 Aug 9am ET https://www.piie.com/events/fed-vice-chair-richard-h-clarida-us-monetary-policy
