Like Kevin, I've been guzzling the Scott Sumner Kool-Aid for a while so I try not to obsess over the Fed funds rate at any particular moment. I've also managed to tune out the yammering on some media sites about how a 30 year mortgage rate of 6% dooms the housing market for the next decade.
When I need to convince myself that Erdmann or Sumner are making sense I look at interest rates during the 1990's and cross reference it with Housing Starts during that period. I don't see Doomsday in any of those charts. And, if our PCE continues its current trend it will align with the first part of that decade quite neatly. I know, I know....past performance, etc...
This is the best treatment I have read yet on the current inflation picture. Of course, Erdmann is without peer on housing issues.
In retrospect, while everyone likes to beat up on the Fed, and I largely agree they can ease up....the Fed and the ECB faced a novel and uncertain situation through the pandemic years, with rapidly evolving and undulating government policies regarding many aspects of the economy.
In the US, we got through the pandemic years more or less OK, and damages done were done by others than the Fed.
Sure, I do not like inflation above 4%. But people had to be fed, housed and hospitalized even if they were tossed out of work by government diktat.
Side note: Japan and China are headed back to no inflation already.
Side, side note: Without anyone noticing, Bank Indonesia directly bought bonds from the Indonesian government to get through the pandemic recession. The Indonesian rupiah is appreciating again. Would it have been better for Indonesians to borrow $50 billion on international debt markets and now be indebted?
Big, big question: In the US and Western economies, we rely on bank lending to boost or contract the money supply. We have to work through the clunky Fed-commercial banking system to effect monetary policy. This is regarded as a sacrosanct premise.
But...are money-financed fiscal programs an option? A better option?
During the pandemic loose monetary policy and low rates were used as reasons to engage in very reckless spending. After all, its free money. It also hid a lot of the costs of COVID lockdowns, which later showed up as inflation.
Had the Fed not accommodated COVID policy it might have put more political pressure on policy makers. Lockdowns ended sooner. Fewer pork spending bills. Let's try and remember that the American Rescue Plan and the Inflation Reduction Act passed on incredibly narrow margins, that's trillions of dollars.
We can argue if the Fed's independence truly would have protected it if the policy was "end this COVID bullshit or the economy implodes", but it would have been the correct moral choice and ultimately led to a better outcome for everyone (most COVID nonsense having been senseless nonsense).
And yeah they kept the foot on the gas too long, they could have seen inflation sooner and acted.
IMHO, my layman's view is the best thing to do on COVID-19 was protect, isolate the vulnerable, then develop vaccines for the vulnerable, and keep going. Make as little changes to commerce as possible.
But---the Fed was not making fiscal and regulatory policies.
Was the Fed too easy? Maybe so. But there is such a thing as social fabric, and keeping people employed is important to that. You know how long-term unemployed voters tend to vote?
People were forced out of work by government diktat. Lockdowns and closures were supposed to last for a few weeks, then extended, seems like forever. This happened everywhere in the developed world (curiously, Africa had low C-19 rates). Central banks were making policy for a directionless ship.
Frankly, the peevish fixation on inflation in macroeconomic circles has always puzzled me. The 2% religion.
My guess is inflation will come back down, and has already in Japan and China. The problem areas are Europe (which is in a war) and North America.
The latest US PPI was 2.3% on year.
If inflation is under 4%, then fine. Then slowly work it back down to the 2% to 3% range.
Believe it or not, even more important than inflation is prosperity.
Pandemic lockdowns were harsh because the government could send checks without facing the bill up front. If they had to face the bill up front they would have dialed back the lockdowns (and if they didn’t the public would have forced them to).
We talk about price signals, the public can’t judge a policy if the price signal of that policy is hidden from them.
Destroying the economy and trying to inflate it away doesn’t create prosperity.
Bottom line, the fed shouldn’t try to accommodate reckless governement policy because they get the vibe that it’s what their team wants.
The Federal Reserve can't control interest rates to the degree that they have any significant impact on federal interest expense.
ZIR is not a P. The Fed only ended up there because that's where the neutral rate was. The Fed has no practical mechanism for pushing interest rates far above where they have been and pinning them there. You're ascribing powers to them that simply don't describe the world we live in.
In September 2008, for instance, the Fed plunged us into deflation just trying to peg the short term rate to 2%. That was too high, and they never could even hit their target, even though they engaged in unprecedented activities trying to. There is no reason to think 2020 was any different. Thank goodness they didn't try to do it again.
May 12, 2023·edited May 12, 2023Liked by Kevin Erdmann
Well, this is a gigantic topic, and likely will not be resolved today and here.
I wonder a lot about QE in a world with globalized capital markets with $400 trillion or so in assets, being bonds, stock and property.
If capital markets are truly globalized, what does the Fed buying a few trillion in bonds really do? It deleverages US taxpayers, if we assume the Fed is part of the federal government.
QE strikes me as trying to inflate a balloon by lowering global air pressure. It may be a good idea as it offers a way to reduce taxpayer indebtedness without cost. Not a PC topic.
The really interesting story is Japan. I still have yet to read an explanation about Japan that makes sense, from the perspective of orthodox macroeconomics.
Exploding land values in Western nations is another topic that needs explaining. London, NYC, anywhere in the Wets Coast, anywhere in Canada, Singapore, Australia, Hong Kong---suddenly everyone is house poor.
But in deficit-soaked Japan, where interest rates are held near zero, housing is actually affordable, especially outside Tokyo.
But, as the French economist said, "What you say may be true in fact. But, more importantly, is it true in theory?"
I think QE managed with interest on reserves is a form of financial repression inducing banks to replace private lending with public lending. The Fed acts as intermediary between excess reserves and treasuries and determines the quantity of public lending with the amount of reserves it maintains.
Like Kevin, I've been guzzling the Scott Sumner Kool-Aid for a while so I try not to obsess over the Fed funds rate at any particular moment. I've also managed to tune out the yammering on some media sites about how a 30 year mortgage rate of 6% dooms the housing market for the next decade.
When I need to convince myself that Erdmann or Sumner are making sense I look at interest rates during the 1990's and cross reference it with Housing Starts during that period. I don't see Doomsday in any of those charts. And, if our PCE continues its current trend it will align with the first part of that decade quite neatly. I know, I know....past performance, etc...
This is the best treatment I have read yet on the current inflation picture. Of course, Erdmann is without peer on housing issues.
In retrospect, while everyone likes to beat up on the Fed, and I largely agree they can ease up....the Fed and the ECB faced a novel and uncertain situation through the pandemic years, with rapidly evolving and undulating government policies regarding many aspects of the economy.
In the US, we got through the pandemic years more or less OK, and damages done were done by others than the Fed.
Sure, I do not like inflation above 4%. But people had to be fed, housed and hospitalized even if they were tossed out of work by government diktat.
Side note: Japan and China are headed back to no inflation already.
Side, side note: Without anyone noticing, Bank Indonesia directly bought bonds from the Indonesian government to get through the pandemic recession. The Indonesian rupiah is appreciating again. Would it have been better for Indonesians to borrow $50 billion on international debt markets and now be indebted?
Big, big question: In the US and Western economies, we rely on bank lending to boost or contract the money supply. We have to work through the clunky Fed-commercial banking system to effect monetary policy. This is regarded as a sacrosanct premise.
But...are money-financed fiscal programs an option? A better option?
During the pandemic loose monetary policy and low rates were used as reasons to engage in very reckless spending. After all, its free money. It also hid a lot of the costs of COVID lockdowns, which later showed up as inflation.
Had the Fed not accommodated COVID policy it might have put more political pressure on policy makers. Lockdowns ended sooner. Fewer pork spending bills. Let's try and remember that the American Rescue Plan and the Inflation Reduction Act passed on incredibly narrow margins, that's trillions of dollars.
https://www.covidmoneytracker.org
We can argue if the Fed's independence truly would have protected it if the policy was "end this COVID bullshit or the economy implodes", but it would have been the correct moral choice and ultimately led to a better outcome for everyone (most COVID nonsense having been senseless nonsense).
And yeah they kept the foot on the gas too long, they could have seen inflation sooner and acted.
IMHO, my layman's view is the best thing to do on COVID-19 was protect, isolate the vulnerable, then develop vaccines for the vulnerable, and keep going. Make as little changes to commerce as possible.
But---the Fed was not making fiscal and regulatory policies.
Was the Fed too easy? Maybe so. But there is such a thing as social fabric, and keeping people employed is important to that. You know how long-term unemployed voters tend to vote?
People were forced out of work by government diktat. Lockdowns and closures were supposed to last for a few weeks, then extended, seems like forever. This happened everywhere in the developed world (curiously, Africa had low C-19 rates). Central banks were making policy for a directionless ship.
Frankly, the peevish fixation on inflation in macroeconomic circles has always puzzled me. The 2% religion.
My guess is inflation will come back down, and has already in Japan and China. The problem areas are Europe (which is in a war) and North America.
The latest US PPI was 2.3% on year.
If inflation is under 4%, then fine. Then slowly work it back down to the 2% to 3% range.
Believe it or not, even more important than inflation is prosperity.
Pandemic lockdowns were harsh because the government could send checks without facing the bill up front. If they had to face the bill up front they would have dialed back the lockdowns (and if they didn’t the public would have forced them to).
We talk about price signals, the public can’t judge a policy if the price signal of that policy is hidden from them.
Destroying the economy and trying to inflate it away doesn’t create prosperity.
Bottom line, the fed shouldn’t try to accommodate reckless governement policy because they get the vibe that it’s what their team wants.
The Federal Reserve can't control interest rates to the degree that they have any significant impact on federal interest expense.
ZIR is not a P. The Fed only ended up there because that's where the neutral rate was. The Fed has no practical mechanism for pushing interest rates far above where they have been and pinning them there. You're ascribing powers to them that simply don't describe the world we live in.
In September 2008, for instance, the Fed plunged us into deflation just trying to peg the short term rate to 2%. That was too high, and they never could even hit their target, even though they engaged in unprecedented activities trying to. There is no reason to think 2020 was any different. Thank goodness they didn't try to do it again.
Well, this is a gigantic topic, and likely will not be resolved today and here.
I wonder a lot about QE in a world with globalized capital markets with $400 trillion or so in assets, being bonds, stock and property.
If capital markets are truly globalized, what does the Fed buying a few trillion in bonds really do? It deleverages US taxpayers, if we assume the Fed is part of the federal government.
QE strikes me as trying to inflate a balloon by lowering global air pressure. It may be a good idea as it offers a way to reduce taxpayer indebtedness without cost. Not a PC topic.
The really interesting story is Japan. I still have yet to read an explanation about Japan that makes sense, from the perspective of orthodox macroeconomics.
Exploding land values in Western nations is another topic that needs explaining. London, NYC, anywhere in the Wets Coast, anywhere in Canada, Singapore, Australia, Hong Kong---suddenly everyone is house poor.
But in deficit-soaked Japan, where interest rates are held near zero, housing is actually affordable, especially outside Tokyo.
But, as the French economist said, "What you say may be true in fact. But, more importantly, is it true in theory?"
Here is an interesting paper:
https://www.imf.org/external/np/res/seminars/2015/arc/pdf/adair.pdf
I think there is merit to this paper.
I think QE managed with interest on reserves is a form of financial repression inducing banks to replace private lending with public lending. The Fed acts as intermediary between excess reserves and treasuries and determines the quantity of public lending with the amount of reserves it maintains.