When you're talking about market sentiment, it's natural to get whiplash. Then there' s market sentiment about Fed policy for which this is doubly true. Yesterday I did a post about how according to CNBC, Wall Street was unhappy because Yellen won't raise interest rates quickly enough.
http://diaryofarepublicanhater.blogspot.com/2015/02/stephen-williamson-vs-laurence-mishkin.html
Usually the market is assumed to like it when the Fed is slow to raise rates. I mean how many times have we seen the market sell off sharply over the last 7 years when the market interprets some extraneous comment as meaning that the Fed is going to raise interest rates soon?
Now today, the market is up and the reason given is that it liked what Yellen had to say in front of Congress.
"U.S. stocks traded near highs on Tuesday as the first of Fed Chair Janet Yellen's two-day congressional testimonies indicated that a rate hike would come later rather than sooner.
http://www.cnbc.com/id/102450322
You see why I say it gives you whiplash? That CNBC piece yesterday made it sound like 'Wall Street' wants the Fed to raise rates but this CNBC piece today makes is sound like the market is rallying because Yellen has assured us that she won't raise rates until June at the earliest or September at the latest.
Greg left an interesting comment in my piece linked to above yesterday about Warren Mosler who argues that a rate cut actually depresses income. More whiplash as the conventional-New Keynesain is conventional wisdom today-wisdom holds that a rate cut raises income.
"Interestingly, this has been Moslers position as well. Lowering interest rates lowers the incomes generated from bonds and anything which lowers incomes becomes deflationary. Yes this has been somewhat offset by gains in stock prices but stock prices cannot make up for all the income losses from bonds. One reason is that if you want to realize your income gains from stock price increases you have to sell your stocks...... which puts downward pressure on stock prices."
I'm a bit perplexed as I told Greg. I mean it seems to me that there are multiple effects in cutting or raising nominal interest rates and either action will have some effects that can be said to raise income and some that can be said to decrease it.
I mean you could say that we should raise rates as this will increase the yield to savers which will increase their income but that would also be at the expense of investors and debtors and would decrease theirs so that you kind of have to look at the net effect.
As to what Stephen Williamson or Mosler are saying, my best guess is that higher interest rates are associated with higher growth and inflation but the rates are effects and the growth and inflation are the cause rather than the reverse. Again, it's just a guess.
Monetary policy gives you whiplash. I still think that Laurence Mishin may be right and that there is-obviously-not the slightest inflation threat, and that he may be right in his argument that we're nowhere near full employment and that therefore we should leave rates lower for longer.
"The most important economic policy decisions being made about job growth in the next few years are those of the Federal Reserve Board as it determines the scale and pace at which it raises interest rates. Let’s be clear that the decision to raise interest rates is a decision to slow the economy and weaken job and wage growth. There are many false concerns about accelerating wage growth and exploding inflation based on the mistaken sense that we are at or near full employment. Policymakers should not seek to slow the economy until wage growth is comfortably running at the 3.5 to 4.0 percent rate, the wage growth consistent with a 2 percent inflation target (since trend productivity is 1.5 to 2.0 percent, wage growth 2 percentage points faster than this yields rising unit labor costs, and therefore inflation, of 2 percent). The key danger is slowing the economy too soon rather than too late."
I agree with Sumner's benefactor Ken Duda-he's asked me to call him Ken-that we should not let the perfect be the enemy of the good and so I have no objections to moving from inflation targeting to NGDP level targeting-unless someone can show me how this would lead to a worse outcome than following the Taylor Rule the last 7 years.
Though no one can say I haven't' always been a Sumner skeptic, I can't see why NGDPLT isn't a step up over inflation targeting.
Yellen also came out strongly against Audit the Fed. I've never been a big fan of Audit the Fed, partly because I wasn't too impressed by the kinds of people that like the idea-Teabaggers like Ron Paul on the Right and Firebaggers like Jane Hamsher on the Left.
I've also been skeptical that a Fed audit would do much. Still, as categorical as Yellen is makes you wonder-clearly she seems to think it would give away some trade secrets?
"Federal Reserve Chairwoman Janet Yellen on Tuesday said she “strongly opposed” a proposal to subject the central bank’s monetary policy decisions to additional lawmaker scrutiny.
http://diaryofarepublicanhater.blogspot.com/2015/02/stephen-williamson-vs-laurence-mishkin.html
Usually the market is assumed to like it when the Fed is slow to raise rates. I mean how many times have we seen the market sell off sharply over the last 7 years when the market interprets some extraneous comment as meaning that the Fed is going to raise interest rates soon?
Now today, the market is up and the reason given is that it liked what Yellen had to say in front of Congress.
"U.S. stocks traded near highs on Tuesday as the first of Fed Chair Janet Yellen's two-day congressional testimonies indicated that a rate hike would come later rather than sooner.
"It's certainly got something for everyone on the market today. It's right down in the middle of the fairway and leaves the window open for a June or September (rate hike)," said Art Hogan, chief market strategist at Wunderlich Securities."
http://www.cnbc.com/id/102450322
You see why I say it gives you whiplash? That CNBC piece yesterday made it sound like 'Wall Street' wants the Fed to raise rates but this CNBC piece today makes is sound like the market is rallying because Yellen has assured us that she won't raise rates until June at the earliest or September at the latest.
Greg left an interesting comment in my piece linked to above yesterday about Warren Mosler who argues that a rate cut actually depresses income. More whiplash as the conventional-New Keynesain is conventional wisdom today-wisdom holds that a rate cut raises income.
"Interestingly, this has been Moslers position as well. Lowering interest rates lowers the incomes generated from bonds and anything which lowers incomes becomes deflationary. Yes this has been somewhat offset by gains in stock prices but stock prices cannot make up for all the income losses from bonds. One reason is that if you want to realize your income gains from stock price increases you have to sell your stocks...... which puts downward pressure on stock prices."
I'm a bit perplexed as I told Greg. I mean it seems to me that there are multiple effects in cutting or raising nominal interest rates and either action will have some effects that can be said to raise income and some that can be said to decrease it.
I mean you could say that we should raise rates as this will increase the yield to savers which will increase their income but that would also be at the expense of investors and debtors and would decrease theirs so that you kind of have to look at the net effect.
As to what Stephen Williamson or Mosler are saying, my best guess is that higher interest rates are associated with higher growth and inflation but the rates are effects and the growth and inflation are the cause rather than the reverse. Again, it's just a guess.
Monetary policy gives you whiplash. I still think that Laurence Mishin may be right and that there is-obviously-not the slightest inflation threat, and that he may be right in his argument that we're nowhere near full employment and that therefore we should leave rates lower for longer.
"The most important economic policy decisions being made about job growth in the next few years are those of the Federal Reserve Board as it determines the scale and pace at which it raises interest rates. Let’s be clear that the decision to raise interest rates is a decision to slow the economy and weaken job and wage growth. There are many false concerns about accelerating wage growth and exploding inflation based on the mistaken sense that we are at or near full employment. Policymakers should not seek to slow the economy until wage growth is comfortably running at the 3.5 to 4.0 percent rate, the wage growth consistent with a 2 percent inflation target (since trend productivity is 1.5 to 2.0 percent, wage growth 2 percentage points faster than this yields rising unit labor costs, and therefore inflation, of 2 percent). The key danger is slowing the economy too soon rather than too late."
I agree with Sumner's benefactor Ken Duda-he's asked me to call him Ken-that we should not let the perfect be the enemy of the good and so I have no objections to moving from inflation targeting to NGDP level targeting-unless someone can show me how this would lead to a worse outcome than following the Taylor Rule the last 7 years.
Though no one can say I haven't' always been a Sumner skeptic, I can't see why NGDPLT isn't a step up over inflation targeting.
Yellen also came out strongly against Audit the Fed. I've never been a big fan of Audit the Fed, partly because I wasn't too impressed by the kinds of people that like the idea-Teabaggers like Ron Paul on the Right and Firebaggers like Jane Hamsher on the Left.
I've also been skeptical that a Fed audit would do much. Still, as categorical as Yellen is makes you wonder-clearly she seems to think it would give away some trade secrets?
"Federal Reserve Chairwoman Janet Yellen on Tuesday said she “strongly opposed” a proposal to subject the central bank’s monetary policy decisions to additional lawmaker scrutiny.
The bill, known as “Audit the Fed,” would politicize monetary policy and subject the Fed to short-term political pressure that could threaten its independence, Ms. Yellen said at her semiannual testimony before the Senate Banking Committee."
“Academic studies establish beyond a shadow of a doubt that independent central banks perform better,” she said.
"Ms. Yellen said history suggests that political pressure interfered with the Fed’s monetary-policy decision making during the early 1970s when the country was facing high inflation."
“I really wonder whether or not the Volcker Fed would have had the courage to take the hard decisions that were necessary to bring down inflation and get that finally under control,” Ms. Yellen said. “I wonder if that would have happened with [Government Accountability Office] reviews, in real time, of monetary policy decision making.”
http://blogs.wsj.com/economics/2015/02/24/yellen-strongly-opposed-to-audit-the-fed-bill/
So, it's all about Fed independence. It's interesting that she suggests that auditing the Fed would lead to such major policy shifts. As someone who to this day isn't sure that I consider the Volcker disinflation the D-Day that it is considered by conventional wisdom, maybe that wouldn't be such a bad thing. If you want to understand the issue that everyone admits is a problem today-wage stagnation-I think you have to start with the Volcker disinflation.
Neither Britain nor Canada have our Fed independence and their monetary policy seems ok.
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