I had an interesting discussion on a range of topics with David Beckworth which you can
listen to as a podcast from Macro Musings.
Category Archives: Federal Reserve
A skeptical view of the impact of the Fed’s balance sheet
That’s the title of a paper with David Greenlaw, Managing Director of Morgan Stanley, Ethan Harris, head of global economics research at Bank of America Merrill Lynch, and Kenneth West, professor of economics at the University of Wisconsin, which we presented at the U.S. Monetary Policy Forum annual conference in New York on Friday.
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Janet Yellen: A True Public Servant
Janet Yellen ended her term as Chair of the Federal Reserve today.
Source: Federal Reserve
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Guest Contribution: “Three Candidates for Fed Vice-Chair”
Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers.
Guest Contribution: “The Choice of Candidates for Next Fed Chair”
Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers. A shorter version appeared in Project Syndicate.
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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Charlottesville, Eye Contact, and the Fed Chair Post
Is this how we should be choosing the Fed Chair? From WaPo:
Reappoint Janet Yellen as Fed chair
Four years ago, I made the case why Janet Yellen would make an excellent chair of the Federal Reserve. As testimony to the power of our mighty blog, President Obama followed our advice and nominated her for a four-year term. So I thought I’d call attention now to a few of the reasons why President Trump should ask Yellen to serve a second term.
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“What’s the Problem with Low Inflation?”
That’s the title of a new EconoFact article by Michael Klein.
Today’s low inflation has some economists puzzled. The Federal Reserve has persistently undershot its inflation target of 2 percent since 2012, when it established this level of inflation as one of its policy goals.
…
Low inflation can be a signal of economic problems because it may be associated with weakness in the economy. When unemployment is high or consumer confidence low, people and businesses may be less willing to make investments and spend on consumption, and this lower demand keeps them from bidding up prices.…
There have been calls for the Federal Reserve to raise interest rates because the ongoing recovery from the Great Recession represents the third-longest recovery on record and the current low unemployment rate would usually lead the Federal Reserve to set its policy course towards preventing the economy from overheating. It is striking, however, that this recovery has not been accompanied by increasing inflation, even with unemployment rates of 4.3 percent in June and July, the lowest string of two-month unemployment rates in more than 15 years.
This figure from the article highlights the anomalous nature of recent inflation behavior.
Source: Klein.
What are the prospects for accelerated inflation? The market’s expectation inferred from Treasury spreads is shown below:
Figure 1: Five year nominal Treasury yield minus five year TIPS yield, % (blue). July 2017 observation (dark blue +). Source: Federal Reserve Board.
As noted, such quiescent current and expected inflation at (what is widely acknowledged to be) near full employment does pose something of a mystery.
In the past, I’ve argued that the inflation target should be higher than the current 2%. [1] [2] I still believe that’s the case.