New Economic Challenges and the Fed's Monetary Policy Review
federalreserve.gov
federalreserve.gov
What other tools do they have besides setting interest rates? They keep alluding to these tools but do not explicitly say what they are. Should we expect another round of quantitative easing?
https://www.cnbc.com/2020/04/06/yellen-says-the-fed-doesnt-n...
Which is something that pumping $3 trillion into M2 will certainly achieve.
https://fred.stlouisfed.org/series/M2
What else it will achieve is another matter entirely
Also, this administration has been very active in getting money into the hands of the consumers directly. And also trying to shift work away from China back to the states
And welcome to Hacker News.
Trump got elected because of the working class who typically don’t see the light of increasing stock market. May be they should and may be having some kind of mandatory 401k match the administration was proposing at some point would help them but by and large they don’t.
China is one area I think he has been more consistent with. But the market largely doesn’t benefit from that. That’s why market cheered when the trade deal was signed and now Wall St is largely behind Biden camp hoping the status quo persists. If anything stock market wants to see rising China and stable relationships even though it might hurt long term bottom line and jobs here in US.
Are his dovish views all that different from his predecessors, Janet Yellen or "Helicopter Ben" Bernanke?
You seem to be insinuating that he is an undeserving lackey, something like a Betsy DeVos. But I just don't see the evidence for that.
The quality essentially required of a reserve currency being that it doesn't do this.
Definitely popcorn time - also don't own long date low interest rate bonds time. Which would be most of them. Oops.
It's a place that requires economic as well as poetic expertise.
But now due to a very florid interpretation of the CARES Act [0], the US Fed has decided it is legal to buy both corporate debt and stocks[1].
This helps explain why the market is on such a bull run. The Fed has said they will be bailing out 401ks. The republicans (who would normally abhor this type of fiscal overreach) are delighted and the democrats don't know enough to read the writing on the wall.
[0] https://www.bloomberg.com/opinion/articles/2020-06-18/fed-se... [1] https://www.forbes.com/sites/kevincoldiron/2020/07/18/the-fe...
Try to, we're going to try to print our way out of it.
All floating currencies can do the same.
The issue is that the non government sector tends to hoard money rather than spending it.
The left want to confiscate those savings. The right try to mask them by pushing more and more people into debt.
The other option is that you realise net savings are largely inert in aggregate and essentially act like a tax.
Then you just accommodate them
My understanding of why the US can print money without regard for consequences is because there are always "buyers" for US dollars, b/c countries need US Dollars to carry out business (e.g. China in order to maintain their export driven economy or the fact that the USD is used as the standard unit of currency in international markets for commodities such as gold and petroleum). Yes, there are technically other currencies that are part of the foreign exchange reserves, but none as prevalent as the USD.
As I understand it, this demand for US dollars is what allows USD to remain the dominant reserve currency and why when the US prints money it does not result in catastrophic inflation. If a country like Argentina tries to do what the US does it won't work out, because there is no demand for Argentinian dollars.
The conclusion I'm left with is that the balance sheet is largely irrelevant until the demand for US Dollar decreases. The real question in my mind is exactly what would cause that to occur? Most everything I read is that the network effect of the USD causes everyone to continue to use it, but perhaps something like a war between the US and China might be a precipitating event to decreased demand?
I agree if I change this to: the conclusion I'm left with is that the balance sheet is largely irrelevant (towards any inflationary terms) until the demand for US Dollar denominated debt decreases and is followed by increasing money supply without the increase in debt (government $ denom, corporate $ denom, and individual $ denom on net) and without increasing derivatives notional outstanding on that debt.
> The real question in my mind is exactly what would cause that to occur?
When intl banks get more comfortable with issuing debt (secured and unsecured) in non USD terms, I then would expect demand for USD fall as well so long the US maintains a trade deficit.
With the sunset of LIBOR in 2021, I expect things to pick up more on this front (Not everyone thinks SOFR is sufficient or lacks collateral to participate to the degree they currently need), though that's not stopping banks and OTC market making entities in various derivatives that extend credit in some form, including the use of cryptocurrencies.
A big problem with EM's is a lack of acceptable collateral backing the debt (arguably, this is the issue with the current global monetary system), investors wouldn't mind argentinian debt if they could have those debts backed by sufficient collateral in the event of default (sans the IMF bailout assumption of course, though some creditors continue to get hosed every time the default).
My understanding is that the modern monetary theorists have an argument as to why this hyperinflation won't happen in a country with monetary sovereignty. (All the famous historical examples of hyperinflation involve countries that do not control their own currency.)
Damned if I can find a good basic text explaining the MMT argument. Naked Capitalism makes some great allusions but seems like you need to already be on their team to understand their arguments.
Seems pretty important to understand this stuff as we are all modern monetary theorists now whether we like it or not.
Have you ever held a $100 note in your hand? If you have you have necessarily caused $100 of "debt" to the nation - because you haven't immediately spent it as soon as you received it.
If you'd spent it, it would be taxed as it moves and would rapidly become a $20, then a $10 and so on.
There are lots of reasons why you, and everybody else doing the same, hasn't spent that $100 yet.
What everybody gets excited about and calls "debt" is essentially the world's working capital.
The MMT view shift is straightforward. Stop calling it "debt", and call it what it is on the other side of the balance sheet "savings" or "assets". Then all becomes clear.
That's the usual view.
It isn't correct.
The US "prints" money because foreign US dollar earners don't spend all they earn. They "save". Which takes the dollars out of circulation.
And they do that largely because they end up on the asset side of some bank somewhere who then discounts them into the local currency.
That process locks the dollars (or dollar financial asset like a Treasury) in place. To get rid of the dollars they have to get rid of the local currency too.
All you can do is offset the net non-government savings (which includes foreigners. They are little different in the MMT view). Any more and you get inflation.
Argentina not only can do it, that is exactly what they do do as a necessary function of the way a banking system works. Balance sheets expand and contract through the day.
Again to the extent that there is excess saving in ARS, the government sector could offset that by simply hiring the resulting unemployed and paying them.
That there is unemployed tells you that there is excess saving. As Warren Mosler would say "if there are unemployed then we are overtaxed for the size of government we have".
As a countries population and prosperity grow, increasing money supply is expected. The US does not in large quantities print inflationary dollars, they print borrowed dollars. This is a subtle difference, but it is has profound implications. When the borrowed dollars are paid back, the money can be destroyed. Inflationary dollars by definition do not carry this trait.
Inflationary dollars, which the US generally does not use this a lot, are dollars that the Fed would print and then give away. One way this is done is by paying interest on reserves, but this is not really a significant amount of money. In fact, I'd argue that we don't have enough inflationary dollars right now.
If the US was printing to pay back our debt; we don't do this, we borrow more, hence the increasing national debt, and also the reason that people keep giving the US money; we would see consumer inflationary effects. If the Fed just printed money and sent checks to people, again we'd see consumer inflationary effects. We generally don't do these things, instead we either borrow money or we take collateral and provide loans.
This doesn't mean that there aren't other effects in the economy by creating cheap borrowed money, but day-to-day hyper-inflation is not it.
Not trying to troll, just trying to get a handle on the basics here.
We are also experiencing supply and demand shocks, so we are experiencing higher prices in certain goods, but this is not inflation, we would expect that prices would return to normal when the constraint of the virus is removed.
I have a hypothesis that modern supply chains combined with weak labor make consumer inflation basically a thing of the past and we worry far too much about inflation that won't materialize in our normally operating global economy.
What are you suggesting exactly here? That the Fed is hell-bent on inducing general inflation, even at the cost of skyrocketing asset values?
Once the central bank hits zero, asset prices return to their market clearing prices as participants chase yield
Probably a little of both, but it is an interesting time in economics for sure.
By the 10 %? By the people entering pension?
I will be K shaped, the rich get richer, pension people will be able to "enjoy" there pension and the poor wont be able to afford rent. Since big corps and funds will invest in housing to "save" money.
At the national level, both sides tend to claim one ideal and ignore it whenever they get into office in order to pay back their base - Republicans give tax breaks to the already-wealthy, Democrats tend to rain cash down on academia, school unions, legal industry, etc.
At the state and locality level, it's generally the rule that more conservative states and counties are in better fiscal shape, and that's with typically far lower taxes.
Only because the federal government redistributes wealth from coastal states to interior ones.
https://www.forbes.com/sites/shaharziv/2020/05/12/blue-state...
That’s why we are where we are.
This idea sprung up in the 1960s and took hold in the 1970s because some people couldn’t answer the inflation question that was a result of the failure of Bretton Woods and the oil shock.
We’re about the see another paradigm shift away from Central Banks as Wizard of Oz.
Hence the rise in interest in Modern Money Theory which puts the central bank Debt toy away and concentrates on what actually matters - ensuring everybody has an opportunity to contribute and gets an income from doing that.
I guess the rest boils down to "don't panic, we're not getting crazy here."
* they are not reducing interest rates further below their current levels (although no mention of raising them anytime soon)
* they are going to use "other tools" to stimulate the economy (QE?)
We could see a huge run up of property values as people shift to taking advantage of real estate leverage and tax advantages coupled with literally free money.
What you may be referring to are the parameters of a "conforming" home mortgage loan.
https://en.wikipedia.org/wiki/Conforming_loan
Conforming loans are subsidized by the US federal government because the US federal government buys them and so funding for them is basically limitless.
Mortgage rates for conforming loans are a few points higher than fed rate. That’s cause the government owns the actual loan.
> The Federal Reserve took the historic step on Wednesday of setting an inflation target, a victory for Chairman Ben Bernanke that brings the Fed in line with many of the world’s other major central banks.
Source: https://www.reuters.com/article/us-usa-fed-inflation-target-...
Has Bernanke issued a mea culpa, yet?
> To date, we have chosen not to formulate explicit inflation targets, in part, out of concern that they could inhibit the effective pursuit of our goal.
https://www.federalreserve.gov/boarddocs/speeches/2005/20050...
And in 2001:
> A specific numerical inflation target would represent an unhelpful and false precision
https://www.nytimes.com/2001/10/12/business/greenspan-reject...
One of the arguments against inflation targeting, whether implicit or explicit, is that it invites asset bubbles--financial markets know that so long as the CPI[1] doesn't budge, they can go wild. But that's a somewhat different debate.
I think the basic argument against explicit targeting is that it hinders the Feds flexibility. With implicit targeting there's a degree of uncertainty and so markets arguably respond better to abrupt or unexpected changes; whereas with explicit targeting the Fed has to be more careful and gentle because markets will more heavily leverage against that fixed number.
[1] Or whatever measure they use; I don't know if it's CPI specifically.
> One of the arguments against inflation targeting, whether implicit or explicit, is that it invites asset bubbles--financial markets know that so long as the CPI[1] doesn't budge, they can go wild. But that's a somewhat different debate.
Basel III introduced a 'discretionary counter-cyclical buffer' on capital requirements to enable central banks to better manage asset bubbles, while still focusing on price stability with the cash rate.
> I think the basic argument against explicit targeting is that it hinders the Feds flexibility. With implicit targeting there's a degree of uncertainty and so markets arguably respond better to abrupt or unexpected changes; whereas with explicit targeting the Fed has to be more careful and gentle because markets will more heavily leverage against that fixed number.
Central banks strive to keep inflation at the target band on average, over the long term. It doesn't stop them from taking quick and decisive action in a crisis. A cursory study of the bank's actions (under Bernanke) at the outset of the GFC will affirm this.
https://en.wikipedia.org/wiki/Basel_III#Capital_requirements
I didn't know this, and it runs against the "growing wealth inequality" narrative. Or maybe it's possible that wealth inequality is increasingly driven by factors other than race.
"In earlier decades when the Phillips curve was steeper, inflation tended to rise noticeably in response to a strengthening labor market"
It doesn't really matter much to the market if people are employed or not. Purchasing power is not vested in the people with a W-2.
There are two things happening at the same time. The bottom is doing a little better than they were (lower poverty rate, lower unemployment, education gains, and even income improvement). At the same time, the top is doing amazing. So you get two different narratives that are both true.
There is growing inequality.
The bottom is doing better.
You shouldn't ignore either one. If you fixate too much on inequality, you can push the bottom back down (everyone has nothing is very equal). If you ignore the inequality, society starts to crack.
The rich are getting richer and the poor are getting richer.
Arguing about what emotionally charged wording to use to describe it is not a discussion about facts though.
> the differentials between these rates and the white unemployment rate narrowed to their lowest levels on record
Which means that wealth inequality (difference between top and bottom) is NOT increasing, but is decreasing. This contradicts your claim that the top is getting ahead and increasing the gap to the bottom.
So yes, it does run against the "growing wealth inequality" narrative.
Day 1: John has $10 and Joe has $100
Day 5: John has $11 and Joe has $250
Day 100: John has $15 and Joe has $1000
They certainly both have more than before, but one of them is much better off (especially if there is some form of inflation in play).
Also, blue collar wages have been largely stagnant or declining when measured against inflation (a very important point) since ~1980 while conversely white collar job incomes have been ballooning against the same measure. In particular, Executive compensation is utterly off the charts comparatively. When tax discount structures that vastly favor investment income over real wages is taken into account, the gains become even more stark (that is, the amount of income that can be retained v must be spent or is taxed).
As an American who knows nothing about monitor policy or the process by which it is developed, just how much public comment from an average American was considered or even put forward? Could someone comment on that aspect?
Based on this, i think one of the main issues is the 'average american' wouldn't be able to successfully interact with a body that expresses itself in such an obfuscated manner.
I'll go as far as saying the obfuscation is utterly deliberate.
Let's rewrite it from:
> We began this public review in early 2019 to assess the monetary policy strategy, tools, and communications that would best foster achievement of our congressionally assigned goals of maximum employment and price stability over the years ahead in service to the American people.
To:
"""
We began this public review in early 2019. The goal was to assess items relating to monetary policy ("Monetary Policy" has to do with the creation and management of money at a national level).
Those monetary policy items under review were the:
- strategy.
- tools.
- communications.
The goals of the policy review, which were assigned by congress, were:
- maximum employment.
- price stability going forward, for years to come, in service to the American people.
"""
I believe nothing has been lost from the original text, and that this is far easier to read and understand.
...as you have found, this is not true.
An important pillar of the review was the Fed Listens initiative. Fourteen Fed Listens events held around the country in 2019 engaged a wide range of organizations—employee groups and union members, small business owners, residents of low- and moderate-income communities, workforce development organizations and community colleges, retirees, and others—to hear about how monetary policy affects peoples’ daily lives and livelihoods. A fifteenth event was held in May 2020 to hear about the effects of the COVID-19 pandemic on communities around the United States. These events provided valuable feedback on monetary policy. Information about each of the events is provided below. The box on the right contains links to a report on the Fed Listens initiative and to one of the events, a flagship research conference held in June 2019.”
You can google for the link.
All those trillions of dollars are going to show up somewhere.
https://www.bls.gov/news.release/cpi.nr0.htm
Inflation happens when people decide to spend and the supply isn't there to support it, but there's nothing inevitable about discretionary spending. In some countries in some crises, people react by spending more (panic buying) but in the US, typical behavior in uncertain times seems to be to spend less. (After stocking up on groceries and toilet paper.)
Although, I have read articles that certain real estate markets seem to be hot?
This is what happens in case of “market equilibrium in perfect competiton”, not IRL because supply is almost unlimited in practice for the US for manufactured goods (because most things are imported, and paid in USD).
In practice, inflation happens when retailers decide to raise their prices! It can either be because they must do it (because international currency price variation for instance, or oil market price) or because they see an opportunity to make profits by doing so.
Imports aren't magic. You will at least have to wait for cargo ships to cross the ocean (unless air freight makes sense). For mask manufacturing there were lots of other bottlenecks.
Of course in the longer run (months or years), things are different, but it still takes time to ramp up, and how long it will take isn't something you can answer in the abstract, using armchair reasoning.
If you look at two hundred years of US history, you won't explain inflation back shortage of supply.
History is complicated with lots of different effects, but saying that supply has nothing to do with price changes means you aren't paying attention.
You know that inflation is seasonally adjusted right?
> Also, oil prices are certainly affected by changes in the supply of oil […] but saying that supply has nothing to do with price changes
Ok fair, my sentence was a bit unclear, but I was reacting to this:
> Inflation happens when people decide to spend and the supply isn't there to support it
So what I meant when I said ”you won't explain inflation with [there was a typo here btw] shortage of supply” was more precisely: “inflation is almost never caused by fixed supply + increasing demand” (which was the initial point I was responding to)
But I'm not sure I want to defend any particular theory of what usually causes inflation. My main point was that inflation (rising average prices) doesn't seem to be inevitable with increased money supply, as simple theories will have it.
I don't know if you want to continue talking, but I'm curious about something: you seem to be pretty certain you know what has usually caused inflation in US history, but you haven't said what what you think about that?
Now their message is "Keeping low interest rates and doing QE is okay because prices are only a little unstable."
I commonly hear that blockchain-based currencies can be a good replacement for fiat currencies. But current examples of blockchain-currencies are either company-sponsored or community-based. This again puts a big weight on a single actor. I'd rather trust the admin of money to a government than a company or a community of anonymous economists/technologists.
Finally, the ability go debase (I assume you mean devaluating) a currency is (arguably) a desirable characteristic. During crises, responsibly devaluating a currency can help a country's economy.
By what metric?
>Finally, the ability go debase (I assume you mean devaluating) a currency is (arguably) a desirable characteristic. During crises, responsibly devaluating a currency can help a country's economy.
I'm skeptical that any benefit this brings outweighs the catastrophic damage it causes when misused. E.g. Weimar Germany, Zimbabwe.
Can someone explain what this graph tells us?
From the Fed itself:
So if you're a bank you basically are given free money by the government.
Didn't they remove all reserve requirements back on March 15? I thought a 0 requirement would cause a bigger than 8.5X multiple with enough time (all else equal).
The entire press release is worth a read, but I want to specifically call out the above quote. I think looking into these two statistics can form the basis for useful discussion.
Unemployment rate being "below estimated sustainable levels" has multiple interpretations, some charitable, some less so. One is that the current economy is better at allocating people to their jobs. This isn't a theory, just a hypothesis. Gig economy work, increases in highly skilled workers (Who traditionally have had lower unemployment than less-educated cohorts [0]) might be drivers that could reduce the friction of getting a job for contemporary workers.
To add another possible hypothesis, it could be that people are just hedging. If a large enough cohort of people feel unsafe or want to adjust their job risk profile, they might choose to commit to employment prior to a downturn. If people are hedging, we might even see a decrease in real wage as people value the (weak, but albeit better than nothing) insurance they get instead of being valued entirely by their market rate wage.
The labor force participation component, frankly, I'm confused on. The Bureau of Labor statics release clearly shows labor participation has been and is still falling (Covid blip aside, 5 year time window irrespective) [1]. Their footnote calls out the 25-54 year old bracket, which is apparently participating more. I can see why they say that the labor force participation rising is unexpected, I certainly don't see it.
To advance a different thesis, it is entirely possible that as people retire, a less than whole percent of their roles are being filled by people in this younger cohort, who can now more easily participate due to less labor being available for existing companies. This would align more with the BLS and Federal Reserve numbers, as we have, by percentage, more aged individuals (Who are the primary non-participants) in addition to growth in a cohort who we would expect to fill those rolls moving forward.
[0] https://www.bls.gov/charts/employment-situation/unemployment...
[1] https://www.bls.gov/charts/employment-situation/civilian-lab...
https://nplusonemag.com/issue-34/reviews/other-peoples-blood...
i look forward to 2035 and warming myself up by burning trash bags full of trumpbux in an oil drum underneath an empty freeway overpass.