John Williams on monetary policy and the current economic outlook

I moderated a discussion this morning with John Williams, president of the Federal Reserve Bank of New York, in which John shared his perspectives on monetary policy and the current economic outlook. You can watch on Youtube (conversation begins at 44 minutes in).

27 thoughts on “John Williams on monetary policy and the current economic outlook

  1. pgl

    Will take a look at this later. Right now I’m watching Trump and the Finnish President talk to the press. Early Trump embarrassed all of us including this poor fellow from Finland with a raging rant as to how the Democrats are being so mean to Trump. Snore.

    Now Trump was bashing the EU for the fact that we have a trade deficit with them. I guess no one on his economic team told him about how we are running a trade deficit with Finland. OK Finland is a small nation so we imported just over $7.1 billion of goods from them last year. But our exports to Finland were less than $1.9 billion last year. Does the Idiot in Chief know that? It seems not.

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  2. Barkley Rosser

    Thanks for posting this, Jim. It is quite long so I have not watched all of it. But what I saw is informative and insightful. Especially interesting given that some have been criticizing Williams recently over the NY Fed’s handling of the upheavals in the repo markets.

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  3. don

    Forward guidance – I think if the next downturn is not insubstantial, to be effective, forward guidance will need to consist of the fed convincing us that they would b a little irresponsible about inflation in the future. I think Japan was unable to accomplish this feat.

    QE – I think a major part of the effectiveness of QE comes from the effect on dollar exchange rates. But in the current state of the global economy, this might produce feedback effects that could more than offset any initial favorable effects on the domestic economy. For example, by bringing about the long-overdue collapse of the euro common currency experiment.

    Why don’t we have someone who sounds like this guy among the candidates for U.S. president? I think Jefferson, Adams or Madison might have filled the bill. So what explains the awful crops of recent choices?

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    1. Steven Kopits

      I think Don highlights a number of issues:

      “…forward guidance will need to consist of the fed convincing us that they would b a little irresponsible about inflation in the future…”

      How can the Fed accomplish this at the ZLB? There’s only one way: MMT. I would be looking at it, that’s for sure. The downsides of money printing are not lost on me — I am just finishing up a paper on Iran’s next likely steps, and US sanctions appear to have set off a wave of hyperinflation there, with housing prices doubling even as the economy is collapsing. It’s pure Argentina. Nevertheless, although Williams talks a lot about QE, it has been only marginally effective, by the Fed’s own analyses, as I recall. If you want effective monetary policy at the ZLB, then, best I can tell, you have to print money until you get inflation into sufficiently positive territory to make interest rate policy viable. I would be at least looking at money printing as a conceptual part of the toolkit, even if I didn’t intend to use it.

      “Why don’t we have someone who sounds like this guy among the candidates for U.S. president? I think Jefferson, Adams or Madison might have filled the bill. So what explains the awful crops of recent choices?”

      I am quite concerned about the decline in the technocracy overall. Not just at the Fed, but all over, including the EIA and Congress itself.

      Williams makes some statements about the volume of data the Fed is seeing and tentative steps with NLP and other means to analyze some of this stuff. In my opinion, the Fed needs code breakers, or more specifically, capabilities in analyzing metadata, that is, not the content of the data itself, but the nature of the data as it connects to various nodes. There is enough data commercially available and through national banking systems that that the Fed should be able to monitor GDP on a daily basis at a sub-national level across the globe. To process that data to make it usable for economists, you need expertise in signals intelligence, not econometrics, that is, the Fed needs a metadata front end to complement its back end in econometrics and related analysis.

      The leading US expert on this topic seems to be a guy named WIlliam Binney. https://en.wikipedia.org/wiki/William_Binney_(intelligence_official)
      I can recommend the movie about his role at the NSA, on Amazon Prime, entitled “An Honest American”, which is very helpful in understanding what metadata is, as well as what Eisenhower meant by beware the military industrial complex.

      I am concerned, both at the EIA and the Fed, that data sourcing is vastly under-funded. The Fed remains, as a practical matter, the world’s central bank. Small decisions at the Fed can be worth tens, not infrequently hundreds, of billions of dollars across the globe. The Fed should have the very best data. It should lead in macro data analysis, with an explicit mission to be the very best institution at this function in the world.

      Our democracy is unquestionably living through a difficult time, regressing back to being something of a provincial and closed-minded political culture. Turning that around should be an important political goal.

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  4. 2slugbaits

    I didn’t know “tweetful” was a word, but I like it.

    I didn’t find his justification for a 2 percent target entirely convincing. He basically said zero percent was too low and 4 percent was too high, then shrugged his shoulders and came up with 2 percent as a compromise. He gave very good reasons why zero was too low, but finessed his way around why it shouldn’t be 4 percent. The comment about inflation hurting the poor is problematic at best. If you look at inflation from the mid-1980s through the early 2000s, it was almost always well above 2 percent and frequently above 3 percent. But most people view economic growth in those years as being pretty good. A better answer would have been to admit that the actual inflation level of 4 percent is no big deal. What people worry about is accelerating inflation, and the target inflation rate ought to be just below that threshold where inflation starts to accelerate. Also, I didn’t buy his argument that 2 percent must be right because other countries have studied this issue and come to the same conclusion for a 2 percent target. I suspect that most countries simply played follow-the-leader and adopted 2 percent because we adopted 2 percent.

    I liked the way he addressed the trade uncertainty question. His citing Brexit really supported his argument.

    The question on the recent liquidity crunch was a good one. Unfortunately, I didn’t get the sense that even he entirely believed his own answer. He sort of threw out a bunch of stuff and said it was all just a coincidence and a perfect storm. The problem is that we’ve had those same coincidences and perfect storm systems before without the same result. Not to be too suspicious, but he didn’t give me a lot of assurance that there might have been something a bit more nefarious going on; e.g., a very major and systemic bank that was unable to meet liquidity demands and the Fed not wanting to alarm the public. Adding fuel to those suspicions was later, when he was asked what kept him awake at night, he said keeping money moving around. That sounds a lot like a liquidity crunch. His answer to the liquidity crunch question certainly did nothing to make me sleep any sounder tonight.

    He gave a very good answer on the financial stability question. I totally bought it.

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    1. Barkley Rosser

      2slug,

      The matter of the recent liquidity crunch is exactly where Williams has been criticized. However, he has my sympathy in tat as near as I can tell nobody saw this one coming, at least nobody who is speaking publicly. This is a contrast with 2008 when quite a few people saw it coming and called it pretty closely, including me. On this one, I was definitely among the many, maybe all, who did not see it coming. If there is somebody who saw it, they are probably working for a bank or hedge fund and made money off it and are keeping quiet about it.

      As it is, indeed the likely channel is larger banks, given that many are pointing to Basel III Accord limits that only apply to large banks. But what really went on with this remains not fully clear.

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        1. Moses Herzog

          Fool that I am, I was under the impression that there was a group (although maybe a small minority group) screaming pretty loudly and over an extended period of (YEARS) about capital ratios at banks needing to be higher, and that regulations (that don’t get watered down each and every time the economy is buzzing along nicely) tied to capital ratio requirements at banks could help solve this issue. I think two of them are running for President right now. Would you like to see the dates on my blog posts discussing that topic?? Because I don’t toot my blogging horn like Steven Kopits does here, as I believe it’s a tad on the tacky and cloddish side. I can give you a hint and tell you it’s dated before your paper. But I am sad to inform you it states the obvious and is not in long equation form (nothing against long equations per se).

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          1. Barkley Rosser

            Fool that you are indeed, Moses. If the people dragging in the matter of the Basel III Accords are right, which is not at all clear, then the problem regarding capital requirements is not that they have been too low, but that for the big banks they may have gotten set too high, which then aggravated this end-of-quarter spike in demand for repos.

            But as I noted in my reply to JDH, there seem to be some loose ends regarding our full understanding of these matters at this time.

          2. Moses Herzog

            @ Barkley
            The Basel III capital requirements have been set for how long now?? And the increased (“emergency”??) demand for repos started when?? Are any light bulbs “going off” in your head there for you Barkley?? Let me know.

            When did you start regurgitating TBTF banker schlock??

          3. Barkley Rosser

            Moses,

            Again, I am not one pushing this Basel III Accord argument, simply noting that some serious people are pushing it. The answer to your point that the accords have been in place for awhile is that they have only come to pinch now because of the Fed’s gradual drawdown of its balance sheet, which, according to them, finally reached a critical point where it finally led to a squeeze on the big banks that these particular Basel III limits apply to.

            As it is, in fact I do not find this argument completely satisfactory, although it cannot just be ruled out of hand with a handwave. So this leaves us with still not really knowing why this hit now, and Williams’s answer ceertainly does not fully answer it.

            However, again, it is not the matter you so proudly raised of limits being too low. That would not cause this sort of problem. Limits being too low is more generally associated with banks making too many bad loans that come to blow up. That was a problem over a decade ago when we had the crisis that led to the Great Recession. But that is not what is going on now, which remains at least somewhat mysterious.

            And, also, as I noted in my remarks to Jim, this matter of the end of quarter spike in demand is something that has been around much longer than the Basel III Accords, which are not really all that old. But this end of quarter matter is one that says if one is getting into a situation where one might have a liquidity crunch, that is a time when one is more likely to see it happen than other times. It does not explain the underlying reason why one is getting into a situation where a liquidity crunch is more likely in general to happen, which is the big unanswered question.

          4. Moses Herzog

            @ Barkley
            The need for Repos happened mid-month, not end of the quarter as it is more apt to do. This is one of the reasons it got financial markets’ attention, and why the commotion. 98% of people following financial markets and banks noticed the mid-month timing. Which pretty much shows how closely you pay attention to ANYTHING. I have a word to describe a person such as this. It rhymes with “rum grass”.

            I advise people of the Virginia region to learn to keep their mouth (keyboard) shut about subjects you’re apparently not even following in an attempt to impress people, because it usually has the reverse effect.

          5. Barkley Rosser

            Uh oh, Moses. I think you are going to need to let go of this one. You are just digging yourself deeper into a hole you initially dug yourself into with your completely irrelevant and incorrect claim that somehow this had something to do with banks having overly low capital requirements when in fact the underlying problem may be just the opposite: overly high capital requirements, possibly due to the Basel III Accords, although that is not clear. I only reported that argument, did not fully support it, although I think it might be a partial factor.

            Now you are ridiculing the end-of-quarter argument, although that puts you on the opposite side of Jim Hamilton (see pp. 10-11 of his paper he linked to just above). As it is, I see nobody, not some nonexistent “98%,” saying this was scary because it was mid-month rather than end-of-month. It is completely reasonable that those making end-of-quarter adjustments would move to do so a bit before the end of the quarter. The various entities want to have their portfolio adjustments fully done prior to the end of the quarter when they have to make reports on their situations.

            A pretty good discussion of what went down is 9/23 Fortune article by Alexander Saeedy, which mentions the need for corporations to make tax payments, a part of the end-of-quarter hussle. It also mentions that much of the trouble was hitting the largest banks, which fits the Basel III Accords story, although that is not mentioned specifically in the article. Another factor mentioned in the article is that increased debt issuance by Treasury to finance Trump’s increased deficits has also been draining liquidity from the system. There most certainly is no mention of any problems due to bad loans having been made due to way too low capital requirements for banks, your pet theory.

            Link to this is fortune.com/2019/09/23/repo-market-big-deal-400-billion-bailout-unnerving .

            If that does not work, just try googling the issue. Your argument shows up nowhere. What is most prominent is that ultimately nobody is really sure what is going on with this or why, which is indeed why people have gotten on Williams’s case, thinking he should know the answer. But as 2slugbaits notes, and I think Jim Hamilton agrees, Williams does not and nobody really does, which is indeed why this is “unnerving,” as Saeedy puts it.

            In any case, your comments on this have been only useless and misleading, of no positive use whatsoever. You need to drop it.

        2. Barkley Rosser

          Jim,

          Excellent paper and you were on a lot of this there. I even see on pp. 10-11 a hint of a warning that there could be a problem at the end of a quarter due to a spike in repo demand that you noted many were not taking seriuosly. I did not see any discussion of the role of the Basel III Accord limits, although maybe I missed it, and maybe you disagree with those who think that is a factor here. But you certainly get credit for noting the possibility of a problem in the repo markets at the end of a quarter.

          Regarding the matter of people criticizing Williams, quite likely unfairly, is that of course his shop was the entity that intervened to stabilize things when the repo markets went blooey. So lots of people think that he and his crew should have been more prepared for this, and maybe those critics are right. Perhaps they should have been more prepared for an and of quarter demand spike, as you noted could be a problem. But it seems that there is more going on here and that we really do not have a handle on all this, and I think that it is sufficiently complicated that people should not be getting on Williams’s case too hard under the circumstances.

          Of course, as it is, this looks like the end of the drawing down of the Fed balance sheet. Indeed, Jim, you also noted that it might be hard to have a “smooth transition” to the old normal, as I think you put it.

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          1. Barkley Rosser

            A bit more, Jim, after congratulating you again on picking up that the repo markets might get dicey.

            I note that this matter of end of quarter settlements has long been a time when financial markets have from time to time shown temporary instabilities. So it is not surprising that if there are/were going to be problems for the repo market, that is an obvious time for it to happen. But, the question is, given that we have not had such problems in recent years, why now?

          2. baffling

            in the fed’s defense, not sure if they should really be preemptive about some of the end of quarter issues. as long as they are ready to intervene effectively as needed, most free market folks should hope the fed stays out until they need to be involved in such situations. i think their preparedness was pretty good. no financial crisis evolved. financial entities need to better prepare themselves for contingencies, rather than rely on the fed as savior.

          3. 2slugbaits

            Barkley Rosser I should be clear. I’m not criticizing him for not seeing the liquidity crunch coming. I’m simply saying that I didn’t find his explanation as to why it happened especially convincing. It seemed like a lot of hand waving. And if you pressed him hard, I suspect that he would have to admit that he himself doesn’t find his explanation entirely satisfactory. Quite likely a case of “I don’t know why it happened.” And an honest answer like that would be okay with me.

    1. Willie

      As strictly an outhouse economist, I don’t see why China wouldn’t be big enough to both lead the global economy into a recession and then back out. It could be more of a destabilizing force that you might think, because it is fairly opaque in spite of its size. It could turn due to a policy mistake in some ministry somewhere, and once it turns, it won’t have the same kind of shock absorbers that a more open economy has.

      By shock absorbers, I mean open regulatory agencies, a relatively predictable regulatory environment, fairly broad stock ownership, relatively unconcentrated markets. The US is hardly perfect in any of these ways, but it’s currently better than China, so far as I can tell.

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    2. baffling

      steven, IF china is big enough to take down the global economy (and hence the US economy), why do we appear to be following policy that is trying to do just that to the chinese economy? that appears to be the rhetoric coming from the white house-we will continue to apply pressure to china until they bend and break. this would appear to be a self defeating policy approach?

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      1. Steven Kopits

        I am not a fan of trade wars, as you know. I don’t have a problem fighting China if it comes to that, but for what?

        There are only two things really at stake: the South China Sea and Hong Kong. Either China will become a proper hegemon, or it won’t. If it doesn’t, trade deals will be the least of our worries. If it does, then the trade things will get sorted out over time.

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  5. sammy

    Does anybody know why “liquidity has dried up in the bond market?” We need to address this rather than paper over it with pouring repos into the market, the equivalent of administering pain killers.

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  6. don

    Macro Man made an argument to explain the recent liquidity crunch that just didn’t seem to compute. He argued that we briefly slipped into the ‘corridor.’ But as I noted there, there still seems to be a huge amount of excess reserves in the system relative to the pre-recession baseline and I would be surprised if new regulations increased the cash demands by anything like enough to soak up the excess. Did the market for the excess reserves somehow fail? I remain bemused by the whole episode, unless there are some bad actors that nobody trusted…..

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  7. AS

    1. Did I hear Mr. Williams correctly say that he considers real interest rates to be in the 1/2 percent range now as compared to about 2.0% in the past?

    2. Also, now that the Fed has the experience and future intentions (as mentioned by Mr. Williams) to purchase short and long-term treasuries to drive-down interest rates, will we ever experience high rates as we saw during the 1970s and 1980s?

    3. Would purchase of treasuries drive-down interest rates even if we saw higher inflation, or would the increased monetary infusion make inflation worse?

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  8. Steven Kopits

    Here’s my next question: How does 14 consecutive months of declining auto sales in China pair with a 6% GDP growth rate? Can anyone find a precedent for any country at any time in any part of the world where these two indicators were moving in opposite directions like this?

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