What economists are is stupid. I've picked almost every top and bottom (except initially QE2) in history. Banks don't lend deposits period. Japan is a perfect example.
Since YoY of Marcus's preferred inflation number also stabilized in mid 2022 why does he favor an NGDP target over an inflation target, at least before we have an indicator of market expectations of NGDP as we do of inflation?
One might wonder if the Fed should dispense with its hoary and clunky machinery of eight policy meetings a year and stilted staff presentations and interest rate manipulations, and simply have a Fed Czar who can move quickly, and be booted if he is wrong. An accountable policy-maker, in other words.
Scott Sumner advises an automatic or betting-markets devised rate of interest, another interesting idea.
Another interesting idea: Should the Fed build it balance sheet now? I think so.
Wage increases, after productivity increases, are now in a very comfortable zone and have been for a while.
Maybe they ought to have weekly meetings, but more important is to get rid of the idea that movement of policy instruments should be monotonic except at "turning points." At any point the Fed ought to be poised to move its instruments as much toward stimulating more inflation (or NGDP) as less that is to say the expected value of the next move is zero. Each instrument setting should incorporate all the information available at that time.
Does anyone understand what applying double – entry bookkeeping on a National scale means? It means banks don’t lend deposits. All the accounting entries sum to zero. Loans/investments = deposits, exactly dollar for dollar.
So, all bank-held savings are lost to both consumption and investment. That solves all equations.
That, in my view, ought to depend on whether a larger balance sheet contributes to managing inflation (or Marcus's NGDP) in a way as to best facilitate the adjustment of relative prices in response to shocks in order to ensure that markets clear.
In the circular flow of income, you need higher and firmer real rates of interest for saver-holders. Then monetary savings need expeditiously activated into real investment outlets, aka, in the U.S. Golden Age in Capitalism.
I think the Fed, like the Bank of Japan, should add to its balance sheet, take advantage of the fact the investors globally are happy to take dollars for Treasuries.
The effect on US inflation of a building Fed balance sheet will be smallm and also on GDP growth. But adding to the Fed balance will deleverage US taxpayers and reassure Treasury holders that the remaining outstanding bonds can be paid.
That is what I believe this evening. Tomorrow is another day.
I fully agree about the risks of cutting too late. But the risk of cutting too soon are overestimated because the Fed implicitly assumes that one cut commits it to another. It should not. It could have cut last December and possibly re-increased in March/April and cut again now with a willingness to back track if inflation fails to fall as their model predicts.
Good situational awareness. Yes, it's like 2007. If the FED cuts rates, then stocks will rise even given a deceleration in the economy. If the FED holds steady, then downward pressure is exerted.
You want to ask an economist, not a banker. Where does money come from?
What economists are is stupid. I've picked almost every top and bottom (except initially QE2) in history. Banks don't lend deposits period. Japan is a perfect example.
Since YoY of Marcus's preferred inflation number also stabilized in mid 2022 why does he favor an NGDP target over an inflation target, at least before we have an indicator of market expectations of NGDP as we do of inflation?
Great post. The Fed is always late.
One might wonder if the Fed should dispense with its hoary and clunky machinery of eight policy meetings a year and stilted staff presentations and interest rate manipulations, and simply have a Fed Czar who can move quickly, and be booted if he is wrong. An accountable policy-maker, in other words.
Scott Sumner advises an automatic or betting-markets devised rate of interest, another interesting idea.
Another interesting idea: Should the Fed build it balance sheet now? I think so.
Wage increases, after productivity increases, are now in a very comfortable zone and have been for a while.
The Fed is, again, too late.
Maybe they ought to have weekly meetings, but more important is to get rid of the idea that movement of policy instruments should be monotonic except at "turning points." At any point the Fed ought to be poised to move its instruments as much toward stimulating more inflation (or NGDP) as less that is to say the expected value of the next move is zero. Each instrument setting should incorporate all the information available at that time.
I agree.
But also...maybe the Fed, like the Bank of Japan should build a huge balance sheet.
Does anyone understand what applying double – entry bookkeeping on a National scale means? It means banks don’t lend deposits. All the accounting entries sum to zero. Loans/investments = deposits, exactly dollar for dollar.
So, all bank-held savings are lost to both consumption and investment. That solves all equations.
That, in my view, ought to depend on whether a larger balance sheet contributes to managing inflation (or Marcus's NGDP) in a way as to best facilitate the adjustment of relative prices in response to shocks in order to ensure that markets clear.
Here is my view: World global capital markets are about $450 trillion in assets (bonds, stocks, property).
Buying a few trillion in US Treasuries does nothing, in fungible global capital markets.
But the QE does deleverage taxpayers, and decreases risks to Treasury buyers (thus lowering rates).
I might prefer roughly balanced federal budgets. I might prefer that I look like a young Cary Grant.
But given what we have...the Fed can build its balance sheet, without much effect---but there will be benefits for taxpayers.
In the circular flow of income, you need higher and firmer real rates of interest for saver-holders. Then monetary savings need expeditiously activated into real investment outlets, aka, in the U.S. Golden Age in Capitalism.
I do not understand your counterfactual. What is the A you want the Fed to do instead of B?
Well...not instead of.
I think the Fed, like the Bank of Japan, should add to its balance sheet, take advantage of the fact the investors globally are happy to take dollars for Treasuries.
The effect on US inflation of a building Fed balance sheet will be smallm and also on GDP growth. But adding to the Fed balance will deleverage US taxpayers and reassure Treasury holders that the remaining outstanding bonds can be paid.
That is what I believe this evening. Tomorrow is another day.
I fully agree about the risks of cutting too late. But the risk of cutting too soon are overestimated because the Fed implicitly assumes that one cut commits it to another. It should not. It could have cut last December and possibly re-increased in March/April and cut again now with a willingness to back track if inflation fails to fall as their model predicts.
Good situational awareness. Yes, it's like 2007. If the FED cuts rates, then stocks will rise even given a deceleration in the economy. If the FED holds steady, then downward pressure is exerted.