Joined: 28 Dec 2005
|Posted: Fri Nov 27, 2015 7:52 am Post subject: Monetary Policy - Obama's Terrorist Policy
Since assets = liabilities, when reverse repos increase, the liability isnít just increased. Another liability decreases (deposits), since assets are unchanged.
Given lags in the adjustment process with an expected small and slow tightening cycle (e.g. 0.75% Fed Funds Rate at the end of 2016), from a highly accommodated stance, itís not unreasonable to begin the ďlift-offĒ in December.
Typically, the Fed takes a cautious stance. The labor market has been strengthening, although it still has a long way to go, and inflation expectations can change quickly (including if markets believe the Fed is falling behind the curve).
Anyway, the mainstream doesnít believe another round of QE is necessary, at this point, and tightening is just a matter of timing and magnitude.
Menzie Chinn, the Fed has kept inflation expectations low, e.g. in 2007 when monetary policy was restrictive. So, it should begin tightening soon.
Also, Greenspan was great at jawboning.
In the 1990s, Greenspan believed the economy could grow faster without sparking inflation. He was right.
And, in the downturn after 2000, Greenspan lowered the Fed Funds Rate to 1%, which was exceptionally accommodative at the time. He was right about that too.
Then we had QEs.
So, you can say the Fed is too quick to jump the gun and lower rates too.
Itís possible, the Fed has done an excellent job preempting inflation over the past 30 years.
Once the Fed is behind the curve, more tightening is needed, than otherwise, to slow inflation.
If there isnít accelerating and slowing inflation, then why are there tightening and easing cycles to maintain price stability by central banks?
And, regarding your prior post, Carson may win just to move race relations forward after Obama setting them back 50 years.
What about this chart, which shows it can move quickly sometimes:
If the Fed loses credibility targeting 2% inflation. it would be expensive regaining that credibility.
Anyway, the Fed has been trying to raise nominal growth (see Fedís balance sheet).
There must be other factors weighing on growth.
As Bob Brinker said: ďThe Federal Reserve is the only operation in Washington doing its job.Ē
I think, the labor market has changed too much in recent years for adaptive expectations to hold in the accelerationist model.
Itís uncertain how much of the change in the labor market is permanent or temporary.
Anyway, a small and slow monetary tightening may have a negligible effect on employment.
How much of the cumulative output gap is the result of monetary policy and how much is the result of Washington politicians?
And, how long can this expansion last, given itís now the fourth longest in U.S. history?
Over the past few years, weíve allowed terrorist factions to grow strong, while people against the terrorists are fleeing or being slaughtered.
Given successive terrorist attacks recently, an attack on the U.S. may be enough to tip the country into recession and the U.S. is in a very weak position now to deal with a recession.
I think, the Fed telegraphing a small and slow tightening cycle can raise optimism and reduce uncertainty.
It wonít be like the 2004-06 tightening cycle when the Fed Funds Rate was raised 1/4 point at each meeting, from 1% to 5 1/4%.
Also, I think, markets will be comforted the Fedís balance sheet will shrink and the Fed will be in a better position to deal with the next recession.
Moreover, I think, markets already have confidence in how the Fed responded to economic conditions, at least since the 2007 peak, and that confidence will continue.
Baffling, you seem to believe a recession is around the corner.
What if the labor market continues to strengthen or improve and inflation accelerates?
Then, the Fed, given lags in the adjustment process, will need to raise rates sharply and quickly, from a very low level.
If it doesnít and falls further behind the curve, expect a further plunge in optimism and a further spike in uncertainty.
Whether thatís a fully rational market adjustment is a question for which only time will give the answer. But I will offer the view, based on the market reaction so far, that if the Fedís objective in raising rates is to lower U.S. inflation and GDP, it seems to have taken a significant step in that direction.
Perhaps, the market reaction is the expectation of stronger U.S. growth.
And, the market tends to overreact.
A Federal Funds Rate of 0.25% is still highly accommodative.
I think, in the end, the result on U.S. growth is uncertain or small.
We had a profits boom with weak GDP growth and we can have a profits recession with stronger GDP growth.
The oil glut, which is promoting U.S. consumption, will eventually end, putting downward pressure on the dollar.
And, if the labor market strengthens, we may soon see wages rising faster.
Just because inflation is low now doesnít mean itíll be low in the future.
If you believe raising the Fed Funds Rate to 0.25%, at this point, is excessive, maybe you believe another round of QE is needed instead.
The December Fed hike helped create stability investing in emerging markets, because;
1. An unexpected tightening is less likely when the Fed is ahead of the curve.
2. Fewer tightenings are needed when the Fed stays ahead of the curve.
3. The market is expecting a Fed Funds Rate of 1.25% to 1.50% by the end of 2016, which seems too high given current and expected economic conditions.
JBH, what you fail to realize is the Fed and the bankers raised living standards for the U.S. masses tremendously.
You cited 1971 as a turning point. Yet, the Fed prevented a deep depression in the 1970s, then achieved strong disinflationary growth, and then made the current depression less severe.
You can praise the Fedís performance later.
JBH, the 1970s was a long-wave bust cycle, similar to the 1930s. When the last of the Baby-Boomers (born between 1946-64) reach 65 in 2029, another long-wave bust cycle will likely take place.
In the 1970s, the Fed promoted nominal growth, which raised real growth, along with dealing with shocks to the system. The inflationary growth of the 1970s replaced a potential deep depression similar to the 1930s.
And, you cite the Gini coefficient, since 1971. It should be noted, while there was tremendous upward income mobility in the U.S., particularly by the middle class, since 1971, there was also tremendous immigration from dirt poor countries. So, of course income inequality would increase. However, thereís much less consumption inequality compared to income inequality.
JBH, a deep depression will reduce wealth inequality. However, itís much better to maintain sustainable growth (of goods & services), which is optimal growth, even if it means higher asset prices.
Tens of millions of poor immigrants and their children have high marginal propensities to consume. So, of course, they wonít save much to build wealth. Low interest rates causes dissaving, which raises income = consumption + saving.
Politicians want to constrain the Fedís discretion, on monetary policy, although the Fed has become better at smoothing-out business cycles.
The economy would be much better if politicians give professional economists more power or control over fiscal and other significant economic policies instead.
A diverse group of politicians has much less understanding of the benefits and consequences of a particular economic policy, including how that policy would interact in the economy than a diverse group of economists.
Of course, there would be differences in value judgements. However, Iím sure, the economists would hammer out much better or more appropriate policies.