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.
Category Archives: Federal Reserve
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.
Guest Contribution: “Central Banks: From Triumph to Crisis and The Road Ahead”
Today we are pleased to present a guest contribution written by Pierre Siklos, Professor of Economics at Wilfrid Laurier University.
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.
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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President Trump’s GDP Forecast
From CNBC:
I really believe it," Trump said in an interview with Fox News. "We're saying 3 (percent) but I say 4 over the next few years. And I say there's no reason we shouldn't be able to get at some point into the future to 5 and above.