Pages

Tuesday, March 3, 2015

Is Janet Yellen About to Take Us Off the 'Zero Lower Bound?'

     I deliberately put it this way as the debate over the liquidity trap has been so fraught. A piece today in CNBC has a Wall Street investor worrying that Yellen is going to finally raise rates in June and the market won't be ready for it. 

     The smart money thinks the Federal Reserve will finally begin to increase interest rates early this summer. The question is how much market turmoil the move will cause. Janet Yellen's Fed will finally increase the cost of borrowing money in June, according to remarks made by top BlackRock bond investor Rick Rieder and prominent hedge fund managers Jamie Dinan and Kyle Bass at a New York charity event Monday night.

     "Bass, head of Hayman Capital Management in Dallas, said the market isn't fully prepared."

     "I think when she moves, it's going to cause a problem," Bass said at the Portfolios with Purpose awards night during a panel discussion moderated by CNBC's Scott Wapner.

     "Bass said employment rates were strong but predicted a rate hike would slow economic activity if moved more than 100 basis points, or 1 percent. He noted that Hayman had "reduced risk pretty substantially" to U.S. securities in the last couple of months given that expectation."
     
     http://www.cnbc.com/id/102472705 
    "Of course, we;ll see if she raises rates then-from what I understand the 'smart money' is kind of divided on whether she does it in June or say August. What we've seen lately is some large debates on what the impact will be of raising rates. Sumner seems not to have a real problem with it-of course, he argues that interest rates aren''t the way to judge monetary policy. 
    Krugman recnetly criticized the zeal among the Right wing inlfaitonphobes to see them raised. 
    http://krugman.blogs.nytimes.com/2015/03/01/the-strange-urge-to-raise-rates/?_r=0
    You have people who say rates should be raised as we're close to full employment now and people saying we actually have a long way to go till we reach full employment. 
   http://diaryofarepublicanhater.blogspot.com/2015/02/stephen-williamson-vs-laurence-mishkin.html
    Then we have the notable position of Stephen Williamson who goes further than just saying we've hit full employment so we can/should raise rates lest 'stagflation' raises it's unsightly head, but that somehow if you understand the Fisher Equation, raising interest rates will actually be a good thing as it will raise inflaiton. 
    "If I think about policy in terms of pegging a short-term nominal interest rate, I understand that, if the nominal interest rate goes down, and stays there, that the short run effect is more inflation (that’s the liquidity effect at work), but in the long run the Fisher effect takes over, and inflation actually goes down. Again, the liquidity effect ultimately dissipates. So, suppose we have been at the ZLB for a long time. The liquidity effect has dissipated, and the inflation rate is too low. How do I get the inflation rate up? I certainly can’t rely on a short-run liquidity effect, as the nominal interest rate can’t go down. There’s nowhere to go but up, and to rely on the long-run Fisher effect to take over ultimately. Of course, you may have to bear the effects of even lower inflation in the short run because of the liquidity effect."
     http://diaryofarepublicanhater.blogspot.com/2015/02/stephen-williamson-vs-laurence-mishkin.html
     So what about the MMT position? I've read enough Mosler the last day or two to think I have his view down. He says that changing the interest rates have no income effect just a distributional effect-it benefits some groups and hurts others. In addition, higher interest rates benefit the 'rentier class' ergo, rates should be left zero permanently. 
     Also, he calls for getting rid of all Treasury securities longer than 3 months. 
      P.S. One thing I hate about posting on Blogger is the way the margins are so hard to keep uniform. I have no desire to pay for MS Windows but why does everytime I cut and paste something it changes the margin and I can't figure out how to change it back?
     I've thought about at some point changing over to Wordpress. 

     

16 comments:

  1. I think most in the MMT camp are of the mind that changing rates is overrated, unless it is extreme changes like Volkers increase to high teens. Most argue that rates should be permanent near zero but if a positive rate is to be paid a better policy would be to just pick a rate and keep it there forever.

    Keeping the CB rate constant in no means dictates that private banks will not fluctuate their rates.

    ReplyDelete
  2. Well just going by Mosler-as I've read a lot of him the last few days-he seems to prefer zero but says that changing the rate is an allocation issue-it helps some at the expense of others.

    Like right now I think Mosler would agree nothing good would come by raising it as it's close to zero now.

    ReplyDelete
  3. Now QE it seems from what I've read the consensus is rather skeptical

    ReplyDelete
  4. By the way Greg, I wanted to ask you: what is your objection to NGDP targets again? I remember part of it-that NGDP is not really any different as GDP is based on inflation?

    Still wouldn't NGDP be preferable to inflation targeting? NGDP would focus on growth as well as inflation. My point is not that it's the best policy but isn't it preferable to inflation targeting?

    ReplyDelete
  5. My objection to NGDP targets are the same as my objection to Dow level targets would be. Short of buying every stock on the Dow for a specific price and then trading those stocks with themselves every week in order to keep the price where they want it, how exactly would the Fed be able to target the Dow.

    One advantage of Dow target is that the number is updated by the millisecond and actually trackable and there is already an existing working futures market. No such thing exists for NGDP.

    My opinion on the term NGDP is another issue because "N" is a term that implies a fudge for inflation....... but inflation is also a derived value not really directly measurable or managed. The whole concept of inflation has a monetarist bias currently. I say just drop the whole nominal term and just say GDP.

    ReplyDelete
  6. Again my question was not about the ideal policy but given the choice between NGDP and inflation targeting.

    In any case, the premise of NGDP is that you can target both inflation and GDP which is superior to focusing on just one or the other.

    ReplyDelete
  7. If you wanted to target the Dow you could just target the index rather than every single stock. In any case, buying every single stock would be doable for the Fed at least as there are only 30 stocks.

    ReplyDelete
  8. Regarding the question of the interest rate-here is Mosler. Here he's pretty clear that he thinks the 'natural rate of interest is zero'

    http://www.cfeps.org/pubs/wp-pdf/WP37-MoslerForstater.pdf

    ReplyDelete
  9. I cant say if targeting NGDP is better than inflation. If the means of targeting NGDP could be elucidated it would be possible to judge. No one has come up with the means. The big problem to me is how often, and how accurate, GDP numbers are reported. I think its a little bit of a copout to just say "well anything would be an improvement over inflation targeting since they cant hit their targets" because we don't even know if there is a way to measure whether they are hitting an NGDP target in a timely enough manner to matter.

    ReplyDelete
  10. I didn't say anything about whether or not anyone can hit a target. I'm just saying in principle if I had a choice between targeting inflation or targeting inflation and GDP I might take the latter.

    Whether or not they can hit the target I'm certainly not here to argue.

    ReplyDelete
  11. Obviously there are problems with Sumner's transmission mechanism that always adds up to nothing but 'expectations'

    ReplyDelete
  12. Ultimately I guess I simply think that NGDP and inflation aren't that different of targets. They don't have a difference that matters as much as Sumner/Duda etc think it does. They are just changing the "name" of the target and Sumner will then conclude inflation a non thing.

    The only truly different target from today is an explicit unemployment target, which can only be solved with a JG policy. Put the offer out there and everyone who doesn't take it is no longer "unemployed", they are simply choosing idleness.

    ReplyDelete
  13. So for you there's a first best policy and that's it. Nothing else helps at all.

    I'm not going to say I'm sure about there being no difference between an inflation target and a inflation and GDP target.

    Now if the question is how to hit the target, well that's a reasonable question but that's another discussion.

    ReplyDelete
    Replies
    1. There is a first best target I think, and a number of policy choices to get there. I think we should target stability in wages to avoid large swings in consumption levels. We are a consumption driven economy and we have to recognize and be comfortable with that fact. Many, like Warstler, have made comments which suggest that they think consumption is bad, which is why they support consumption taxes on the middle class etc. Of course this is a morality play, where consumption is "spending" and the opposite of the virtuous "saving". But most investment happens in areas where entrepreneurs see a high number of consumers.

      Negative income taxes and wage subsidies are wage stability policies that have previously been favored by many on the right (still are in many cases) I just happen to think that the best wage stability policy should be done through a job stability policy.

      I don't see much difference between an NGDP target and inflation target other than in what the CB is announcing to be caring about. How they get there is not any different so far as I can tell. I realize many are exploring new tools but I think those tools are dead end............ we will see. Its still "expectations fairies" as far as the eye can see from where I sit.

      I think monetary policy has helped as much as it can, interest rates are low and the CB shown they will be buyer of last resort to unload financial companies of worthless assets if need be. Banks balance sheets are repaired and more and more workers have repaired theirs as well. Too many just aren't going to take on more debt unless they get more income, they aren't going to use their current income to take on cheaper debt. Monetary policy is all about getting people "borrowing" again and not having the govt "spending" more.

      Delete
  14. Yeah my point about first vs. second best policies is that at the end of the day we live in a world of politics. In politics there's rarely room for purists who only accept the first best option.

    Again, I would support a JG but assuming that's not going to happen any time soon-if you want it to happen soon elect more Democrats-I would be willing to try other measures that at least I don't see how'd they'd be harmful-as to an NGDP target that doesn't have to come with monetary offset.

    I don't agree that we can or should try to do it just with monetary policy like Sumner but I do agree we're not going to get any more fiscal help in the current climate-the only good thing is that austerity has been ramped down since 2013.

    I disagree with Sumner a lot but I can admit that he has a point that focusing on an employment target can be a problem-at least if you have too high a target.

    Like the view of many conventional economists and market participants right now is that we're at or close to full employment. In this case the inflation target helps as it's beneath target it's easy to show those calling for tighter monetary policy that there is still certainly 'slack' in the economy-otherwise inflation wouldn't be so low.

    I think it's probably a mistake to raise rates even now and I don't think Mosler would support that or thinks it' doesn't matter.

    He's said repeatedly that the natural rate of interest is zero.

    http://www.cfeps.org/pubs/wp-pdf/WP37-MoslerForstater.pdf

    Nor is he the only MMTer to believe this. Check out Bill Mitchell who's another leading MMTer.

    http://bilbo.economicoutlook.net/blog/?p=4656

    Here is Mitchell:

    "The media is increasingly reporting that the RBA will hike interest rates by the end of 2009. I consider this to be a nonsensical suggestion given that unemployment and underemployment will still be rising and it is unclear whether employment growth will be anything than near zero at that time. From a theoretical perspective, at the root of all the conjecture, whether the journalists actually realise it or not, is a concept called the “neutral rate of interest”, which is just another neo-liberal smokescreen. That is what this blog is about."

    Here is MIke Sanowski

    http://monetaryrealism.com/the-natural-rate-of-interest/

    ReplyDelete
  15. My point about purists extends to a lot of people both on the Left and the Right. I mean Ken Duda admits to me that part of Sumner's problem has been making the Perfect-at least in this mind- the enemy of the Good-.

    Morgan Warstler's proposals are at least interesting-again, I said interesting not that I advocate it 100%. But that's again the problem: he basically says we have to do it all his way or not at all. LIke how Friedman walked away from a negative income tax as liberals didn't agree to end UI and the minimum wage.

    Some on the MMT side can sound a little like this to-I mean not willing to compromise. In a way such an attitude makes sense: I mean is you think you're right and the other guys are wrong they should just do what you propose and get nothing that they want.

    In a political world this isn't how it works. Obviously the classic example of this attitude I'm criticizing is the Tea Party House.

    ReplyDelete