The WSJ’s incomparable Hilsenrath reports that:
The Fed is trying to ease financial conditions without taking the more controversial step of increasing the amount of money that it’s pumping into the financial system, since it will be using money already generated from other programs
The more potent step of launching a new round of bond purchases that would further expand the Fed’s $2.867 trillion balance sheet remains a possibility, but inflation likely would need to slow much further to spur Fed officials to take that step.
The FT’s excellent Harding spotted that the programme left no room for additional twisting if further easing is required.
The decision to launch such a large twist means that the Fed has almost no scope to increase the size of the policy further. If it wanted to ease monetary policy further in the future by buying more assets, it would probably have to increase the overall size of its balance sheet.
Given that i think the fed will ease further, this makes me pretty sure that the Fed’s next move is further balance sheet expansion. QE2 didn’t do much, this will do less – but Bernanke has committed to keep on trying.
They don’t need QE. They need monetary policy that provides a level nominal anchor. Anything else will be seen as “temporary”. And that means it won’t work.
The market response to Op Twist, seems to prove the point. I hope this is just a way point to a more muscular monetary policy setting.
You know this is where we part. I doubt there is much that can be done – but i think it is right to try. However i worry that US monetary expansion may lower real consumption wages via increasing commodity prices by much more than wages.
I agree they need permanant changes to get this baby going – but prefer different types of change. I would prefer increasing the retirement age and cutting other long term entitlement spending, and using the fiscal space opened up for tax reform and fiscal expansion (infrastructure in the US is awful).
They are in a liquidity trap. There is no interest rate that will increase investment and consumption enough to restore full employment. They need to work on the other side of that NPV calculation and increase expected future gains.
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I think the big idea is that in short run, NGDP and RGDP move together (Fisher?). If you push NGDP up, then you get RGDP up. So why not push NGDP up? The Fed – Bernanke – says they can do that. It’s not about interest rates – they are the cost of credit, not money. Namely, Bernanke always believed liquidity traps don’t impede monetary policy’s effective because the Fed controls money and money controls NGDP. So why is he doing so little, too slow? This is a point made by Sumner .
He also addresses the objection that an inflation targeting central bank would have been able to stimulate AD by cutting rates. He points out that inflation is sticky and that central banks, like the Fed, are ill disposed to cutting rates (their current policy instrument) to push inflation back up. That is, policy is asymmetric. If instead, the Fed were to adopt an inflation target based on inflation targeting, that would do the trick. They would have been able to push AD levers hard enough before things got messy. However, he views this as a difficult policy proposition (hence why it is asymmetric): the Fed would come under intense pressure (as it has) because it would be viewed as pushing up inflation. However, Sumner argues, that the Fed is really trying to push up NGDP (and hence RGDP – in short term). So why not get explicit about this and say they are targeting gross national income / value add / profits?
He also concedes that NGDP level targeting isn’t going to solve structural problems, but it might give nominal stability whilst structural problems are sorted out.
Sorry, for Sumner regurg. Had to do it so I could try to understand his argument. It’s not easy as I am stretching my high school/uni eco understanding to breaking point.
By the way, your policy prescriptions look good. But that isn’t going to solve short term problems. That is where NGDP level targeting comes in.
I wonder about government infrastructure spending. Are they good value for money? Can they be good value for money? I mean that at an aggregate level / on average?
The man addresses the oil tax question
Oh and there’s this baby from Bernanke et al (1997), posted by commenter Marcus Nunes @ Sumner’s “Oil & Money don’t mix” post:
Scott. I´ve given you this before, but it´s become pertinent again! From Bernanke Gertler & Watson (97):
“Macroeconomic shocks such as oil price increases induce a systematic (endogenous) response of monetary policy. We develop a VAR-based technique for decomposing the total economic effects of a given exogenous shock into the portion attributable directly to the shock and the part arising from the policy response to the shock. Although the standard errors are large, in our application, we find that a substantial part of the recessionary impact of an oil price shock results from the endogenous tightening of monetary policy rather than from the increase in oil prices per se”.
Click to access RR97-25.PDF
So, deep down, he knows that targeting NGDP is a much “safer” proposition!
Curious. So what’s going on here?
Marty Wolf in FT:
> The striking fact, as Bill Martin at the Centre for Business Research in Cambridge has noted in an important paper, is that productivity slowdowns and output declines have occurred across the board. This makes it likely that the poor productivity reflects weak demand.
> Personally, I would favour the “helicopter money”, recommended by that radical economist, Milton Friedman. This would be a quasi-fiscal operation. Central bank money could pass via the government to the public at large. Alternatively, the government could fund itself from the central bank, directly. Better still, the government could increase its deficits, perhaps by slashing taxes, and taking needed funds from the central bank. Under any of these alternatives, the central bank would be behaving like any other bank, creating money in the act of lending.
If it comes to it, i favour transfers direct from the central bank to households. Governments are not so good at spending and it would speed household deleveraging in a direct way – more directly than lowering rates to spark refi.
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I agree with Mark Thoma
“. This shifts the duration of the balance sheet, but it does not change its size. I would have preferred balance sheet expansion, i.e. QE3, as that would have a much better chance of helping the economy. But the inflation hawks on the committee will not tolerate further expansion in the balance sheet due to worries about inflation.
2. It’s not big enough.
3. Even if it causes rates to fall, will consumers and businesses respond?
That is, this might help some, but not enough to solve our employment crisis — not by any means. Thus, this does not alleviate the need for Congress to implement serious job creation programs as soon as possible.
The unemployment crisis needs to be attacked vigorously, and we need aggressive action from both monetary and fiscal policymakers. But neither the Fed nor Congress has the will to do more than half-hearted measures at this point, and even that might be too much for Congress.
I wish the people making these decisions had to face what households struggling to find a job endure daily — the world policymakers see from their insulated shell is very different from the world of the unemployed. Maybe then they’d finally get it and, more importantly, do what needs to be done.”
The Fed (and everybody else in the US) are starting to accept the “new normal” and that there’s not much they can do to change the situation. At this stage they can QE as much as they want, but it;s an old trick.
The unemployment rate will stay high, possibly for a generation. This has nothing to do with monetary policy. US companies will keep making record profits. USD will stay relatively weak. Inflation will be low. Interest rates too. People have decided to spend only money they have and to pay down debt. There’s nothing the Fed can do about that.
QE2 proved there is nothing worse than trying to create inflation via monetary policy in an economy that does not want it. That kill the small recovery the US was trying to have. The economy will come back. Slowly. Debt induced growth rate are a thing of the past, and maybe of the future, but only once the existing debt has been repaid.
The weak recovery has been snafued by the stimulus running out. The US government , like the OZ Government, is taking growth out of GDP however unlike us they do not have anything like a strong recovery.
I do agree monetary policy can’t do much now and it is up to fiscal policy.
Fancy aping Japan
Ah, you are right, we need perennial stimulus.
Surely you must combine fiscal stimulus with long term reform? This is where i think Krugman is wrong. The debt downrgade hurt demand, as ordinary folks understood ‘bad’ and lowered their expectations as a result. More of that is not going to help.
So, what money will you use for more fiscal stimulus and how will the government repay the money back? More taxes? What if more fiscal stimulus will not “stimulate” sustainable economic growth and at the end of the stimulus the government only has more debt to repay and no economic growth to show? What makes you sure that it will work? Italian public debt sounds familiar? What happened to the US stimulus programs of 2010? Did they fail? Why? The “lost decade” in Japan is really that bad? People there are not doing too bad: the unemployment rate in Japan was reported at 4.7 percent in July of 2011.
Surely you’ve given up on these nutty ideas of higher inflation, lower unemployment and rate hikes now?
I tried to say as much in my labour market analysis.
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the problem last time was that every State was cutting back when the Federal government was stimulating thus we merely saw Unemployment stabilizing.
They need to do more.
you reduce the deficit when the economy improves otherwise you get what Europe has got and what almost every academic paper shows Austerity introduced when the economy is poor makes it worse
“”you reduce the deficit when the economy improves”
There you have it. That does NOT happen. Everybody is scared to “kill” the improving economy then. And after that, when the economy sprints, why would you reduce your deficit, when GDP is growing nicely and the debt is easy to repay? Why cut entitlements, introduce new taxes, when everybody is doing well? That is exactly the point. The inability of governments to manage debt. It never shrinks. That’s why, while everybody understands the point of austerity dragging on an already weak economy, more should have been done when the economy was booming. There’s a point where you just have to swallow the medicine and that naturally happens when you are doing bad, not when you are healthy and running. It’s human nature and part of what creates economic cycles. Too much debt is a trap almost impossible to escape once we become addicted to it, and especially governments!
I agree with this — what the crisis exposes most of all is the general lack of prudence in the good times. The profession and politicians are guilty most of all of this. You cannot see the future, but you can make hay while the sun shines.
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on the value of infrastructure this paer is worth a read
US Department of the Treasury with the Council of Economic Advisers, “An Economic Analysis of Infrastructure Investment,” (2010).
I got this from a Saul Eslake paper form the Gratten Institute
The US auctioned 11bn of 10yr TIPS at a real yield of 7.8bps last night. That is a low hurdle rate… Surely there is something that works at that level?
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Thanks for reference. When a paper starts with: “On Labor Day, President Obama announced a bold plan to renew and expand” I wonder about the credibility of the analysis presented. BTW – that would be my response had it read: “On Labor Day, President Romney [I wish! Anything except that clown Perry!] announced a bold plan to renew and expand.”
Ireland is not out of it yet. GDP only rose because of net exports. Domestic Demand still fell.
GDP is still much further south than before the GFC
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