A disturbing position for me to find myself in. Usually I have views of likely actions on the part of the FOMC. My views may be wrong ex post, but they are views and well-reasoned views. This week...
"Federal Reserve communications policies need to change to get the Fed out of the box it has trapped itself in."
Absolutely. I listened to Joe Weisthenal and Tracy Alloway interview Adam Posen on the Jackson Hole conference, in which Posen expressed the not entirely coherent view that policy rate changes take a long time to act etc and also that the Fed could not afford to cut by 50bp because that would promise a future of more cuts. He might be right about how the market interprets the Fed, but if that is the situation, it is ... I believe the technical term is "crazypants"? You can't brake hard because doing so would promise to brake even harder, and you can't step on the gas because *that* would promise even more gas! That is how you crash the car.
The elephant in the room is that there is currently a Democratic President and a Democratic presidential candidate with a good chance of winning in November. That is one of the factors in the Fed's decision not to cut rates, but of course neither the BOG nor the communication dept can ever talk about that.
Possibly. It has happened before, e.g. with the Comey letter. There is a tendency in all quarters to punch Democrats as a signal of "seriousness". But I would not care to impute a mental state to Powell without some positive evidence.
I have no reservations about my "not entirely coherent" remark because it is a publicly expressed position that:
1) Rate policy acts with a long and variable lag, and yet
2) Rates ought not to be *reduced* without clear signs of economic weakness (i.e. unless it is already too late according to point 1), and
3) A rate change greater than 25bp is supposed to be a signal of the *urgency* of the situation, rather than a signal of where the Fed thinks r* is. That is, one should not reduce rates until it is urgent, but on no account should one reduce rates by 50bp because that would signal urgency.
I think this is a highly unsatisfactory state of affairs and would much prefer Brad's bloodless control theory model of rate changes.
This has convinced me it will be 50 because 1) the Fed doesn't like to surprise the market and I think uses Timiraos to manage expectations, and 2) Esther George is usually hawkish, yet she's open to 50.
So maybe it is 50 now, but manage future expectations to a series of 25's.
Average future nominal Federal Funds rate at 2.5%, average future Ten-Year Treasury bond at 3.5%, average future Ten-Year Treasury TIPS at 1.5%, with wide error bands around all three of those medium-term average values. And then it will change again... Brad
"Federal Reserve communications policies need to change to get the Fed out of the box it has trapped itself in."
Absolutely. I listened to Joe Weisthenal and Tracy Alloway interview Adam Posen on the Jackson Hole conference, in which Posen expressed the not entirely coherent view that policy rate changes take a long time to act etc and also that the Fed could not afford to cut by 50bp because that would promise a future of more cuts. He might be right about how the market interprets the Fed, but if that is the situation, it is ... I believe the technical term is "crazypants"? You can't brake hard because doing so would promise to brake even harder, and you can't step on the gas because *that* would promise even more gas! That is how you crash the car.
The elephant in the room is that there is currently a Democratic President and a Democratic presidential candidate with a good chance of winning in November. That is one of the factors in the Fed's decision not to cut rates, but of course neither the BOG nor the communication dept can ever talk about that.
Possibly. It has happened before, e.g. with the Comey letter. There is a tendency in all quarters to punch Democrats as a signal of "seriousness". But I would not care to impute a mental state to Powell without some positive evidence.
I have no reservations about my "not entirely coherent" remark because it is a publicly expressed position that:
1) Rate policy acts with a long and variable lag, and yet
2) Rates ought not to be *reduced* without clear signs of economic weakness (i.e. unless it is already too late according to point 1), and
3) A rate change greater than 25bp is supposed to be a signal of the *urgency* of the situation, rather than a signal of where the Fed thinks r* is. That is, one should not reduce rates until it is urgent, but on no account should one reduce rates by 50bp because that would signal urgency.
I think this is a highly unsatisfactory state of affairs and would much prefer Brad's bloodless control theory model of rate changes.
This has convinced me it will be 50 because 1) the Fed doesn't like to surprise the market and I think uses Timiraos to manage expectations, and 2) Esther George is usually hawkish, yet she's open to 50.
So maybe it is 50 now, but manage future expectations to a series of 25's.
Brad. Thanks for this. What is your best guess of long term r*?
Average future nominal Federal Funds rate at 2.5%, average future Ten-Year Treasury bond at 3.5%, average future Ten-Year Treasury TIPS at 1.5%, with wide error bands around all three of those medium-term average values. And then it will change again... Brad