Author Archives: James_Hamilton

Another event to study

One of the ways economists have tried to estimate the effects of the Fed’s program of large-scale asset purchases (LSAP) is using event studies of how the market responds in the thirty minutes following Fed statements of changes in the program. Yesterday’s announcement from the Federal Reserve that it is starting a gradual process of reducing its balance sheet gives us one new data point for such efforts.
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The great unwind begins

The Federal Reserve announced today that it will begin reducing the size of its balance sheet next month in very modest and deliberate steps. One reason the Fed is moving so slowly is that they don’t want a repeat of the May 2013 taper tantrum, in which a surprise hint that the Fed might slow the rate at which it would be growing its balance sheet led to a spike up in long-term interest rates. But there may also be another reason why the Fed is contracting its balance sheet so cautiously.
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Are we in a new inflation regime?

Federal Reserve Bank of Chicago President Charles Evans got some attention recently with the following statement:

In a world of global competition and new technology, I think competition is coming from new places. New partners are choosing to merge and sort of changing the marketplace and [bringing] more competitive pressures on price margins…If that’s the case, and I think that’s just speculative at this point, then it means that we need even more accommodation to get inflation up.

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Fed balance-sheet reduction not scaring anyone

Today the Federal Reserve announced that it is increasing its target for the fed funds rate to a new range of 1 to 1.25%, a development that surprised no one. But something that was not heralded in advance was the announcement that the Fed intends to “begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated.” The Fed spelled out in detail exactly what that will entail. Sometime later this year, the Fed will begin limiting the amount of maturing Treasury securities and mortgage-backed securities that it reinvests, initially bringing its balance sheet down by $10 billion each month as its holdings are redeemed. Those amounts will gradually increase each month until after a year balance-sheet reduction reaches a pace of $50 billion per month. That compares with a net increase of $100B/month on the way up during QE1. Given current Fed security holdings of $4.2 trillion, this would reduce the Fed’s security holdings by about 14% per year once it gets into full swing.
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Treasury debt held by the public

How much does the U.S. government owe? The number that is subject to the recurrent debt-ceiling wrangling includes intra-government debts that the Treasury is imputed to owe to other Federal government operations. For example, Social Security taxes have historically exceeded benefits paid out. The surplus was used to pay for other government programs, and the Social Security Trust Fund was credited with corresponding holdings of U.S. Treasury securities representing the accumulated value of those surpluses. Many of us think of this as an I.O.U. that the government issued to itself. Economists usually subtract those intra-government debts when talking about the size of the federal debt, relying instead on the Treasury’s measure of debt held by the public. Although many of us have made use of the latter numbers in academic research, policy analysis, and lectures to our students, those data are also getting less reliable in recent years.
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China’s tetralemma

Many countries have three policy objectives: (1) being able to set their own monetary policy, in order to keep their own inflation and unemployment at desired levels; (2) having a stable exchange rate, in order to avoid disruptive shifts in exports or imports; and (3) allowing free capital flows, in order to help the country’s citizens and firms find the most efficient sources and uses of capital. But the famous policy trilemma of international economics claims that any country is going to be forced to give up on one of those three goals.
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