Thursday, December 13, 2012

Options on interpreting the Fed announcement

If you iterpret 6.5 percent as an unemployment target, then (as Larry Ball explains) the Fed is proposing to be looser than the Taylor Rule dictates, but (IMO) it is being "loose" only because it is adopting a bad target that is 1.3 percent above the CBO estimated NAIRU. So you have thrown policy rules out the window and adopted a too conservative target. And that's before we get even into the fact that their inflation target is just a little above current inflation forecasts. So that seems "tight" in terms of the target and dangerous in terms of the departure from policy rules.

But of course you don't have to read this as a "target" (although I feel better calling it that the other day, now that I see that Ball is also talking about it like a target). As Brad DeLong points out, there is good reason to think about it as a "threshold". But that seems troubling to me too. I had originally figured something like a NAIRU was their implicit target and something like the announced inflation target was their inflation target (maybe this was naive - I'm not a professional "Fed watcher" or anything). So I read 6.5 percent as a threshold as saying "this is where we are going to start losing the will to solve the problem". And I don't think that's a naive concern - it comes from observing how they've behaved through the whole crisis. And if I see it this way - if this seems like a let down to me from the last announcement and essentially a 6.5 percent target, then others will too.

I agree with David Glasner's assessment: "Williamson is convinced that the labor market is now roughly in equilibrium, so that monetary expansion would lead us away from, not toward, equilibrium. Perhaps it would, but most informed observers simply don’t share Williamson’s intuition that the current state of the economy is not that far from equilibrium. Unless you buy that far-from-self-evident premise, the case for monetary expansion is hard to dispute... The Fed is moving in the right direction, but is only taking baby steps."

Woodford does not think it's the right number either.


  1. One has to wonder, why aren't we hearing the kinds of "monetary policy is out of bullets" talk NOW that we were hearing from the likes of Krugman and Delong in 2008/09 when rates were actually higher?

    And why is the fed STILL paying interest on reserves if their goal is expansionary policy? That part looks like a crony bank bailout to me, which I guess is consistent with Bernanke's view of protecting the banks at all cost to maintain the "credit channel".

    I don't think it's crazy to imagine that we're currently up against structural unemployment due at least in part to the issues raised courageously by Casey Mulligan. Policy has made wages MORE sticky downward, not less. This tendency to rely on a macro framework that's all about sticky wages and then make them MORE sticky is one of the reasons I question the seriousness of the Keynesians in power (that and the attempts to hike taxes now, of course).

    1. John, we have been over how ignorant this "they said monetary policy won't work" a million times on here. Maybe you weren't there for those discussions, but all I can say is: "asked and answered".

      Read what they actually wrote, please.

      The claims were that you can't reduce interest rates and get stimulus from that channel. Conventional monetary policy is out the window, which is not to say that monetary policy is.

      "Courageous" is not a word that comes to mind when I think of Mulligan.

      The problem is not sticky wages.

      Anyway, this comment just drives the point home for me that you need to do a video advocating monetary stimulus. Do you have any plans for that?


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