They were smart insofar as they made a return to pre-pandemic unemployment a priority and repeatedly warned the world of Russia's invasion of Ukraine and unified almost all of Europe in the process against Russia with a combination of sanctions, military intelligence and arms and leadership (supporting the brilliant Zelenskiy) that thwarted to a great extent Russian energy hegemony on Europe. The $30 trillion bond market, the greatest bazaar of behavior and sentiment, reflected these strategic choices which DeLong and Krugman assessed accurately. John Taylor's response is incomprehensible when the bond market is the real time reality check and most legitimate reference of Fed confidence.
MW - I agree the bond market is the best indicator of future actions given the knowledge set available to the informed crowed, and will invest in line with that wisdom. While i understand the value you see in breaking Russia's hegemony on European energy markets the cost to tax payers in both the US and EU has been high and the cost to Ukrainians of their livelihood has been monumental, in line with the cost to the Iraqi's of US invasion.
Is there not room to think improved diplomacy in both cases could not have yielded similar outcomes for the global economy with out the cost of treasure (US/EU) and Blood (Ukrainians and Iraqi's)... I think so and as such see both efforts as monumental failures in terms of both treasure and blood. No?
Smith and Learner survey: What an enormous waste, a near criminal violation of the principle of comparative advantage to ask a bunch of economics to unconditionally predict what the Fed WILL do. They should rather have asked for conditional opinions of what the Fed SHOULD do. And even if this is meant as a way to convey a covert recommendation, "I know the Fed will do what it should do and that is X," they should still have been required to condition their covert recommendation.
Please see a 25-year chart of what is called the super-core services using the 3-month % change, annualized. It excludes the problematic/imputed shelter components from core Services (Services less energy). It grew at an annualized 3.0% rate in the three months through May (4.2% in the three months through April). The chart shows clearly that it is at the doorstep of what was the norm over the past 25 years. Meanwhile, it is worth reminding people that headline CPI was running at a 9% annual rate in June 2022. It has more than halved to 4.1% in mere eleven months! Average March-May unemployment rate was 3.5%. Over the last eleven months, the overall labor force participation rate has gone up from 62.1% to 62.6%. The participation rate for the 16-64 age group has climbed from about 73.9% to 74.8%, well past its pre-pandemic peak. For 25- to 54-year-olds, it is up from 82.4% to 83.4%, also past its pre-pandemic peak. The median duration of unemployment is about 8-9 weeks (was about 20 weeks roughly two years ago). What is not to like here? Yes, tighter credit standards since March 2023 can still be an issue. But it is worth remembering that before then, bank lending standards had been tightening quite a bit all along while there was good underlying progress. I remain an optimist, fingers crossed.
Jay Powell has pointed out that Fed Policy is not the only tool to impact economic growth and income distribution. What impact would policy meant to increase wages for working class Americans (increases in national min wage, stronger support for unions organizing etc...) have on inflation if enacted by congress? Perhaps a slight shift back to demand side policy away from supply side policy?
Picking and choosing inflation components can be a mug's game. But rent and Owner's Rent Equivalent are terribly lagged compared to any market measure, by at least a year due to survey construction - I think you know this. Maybe the lag helped delay the Fed's rate hikes.
Below is a link to CoreLogic's rent measures on single family houses, as opposed to apartments, which should be a good quality adjusted proxy for ORE. Rental inflation is NOT a problem. At some point inflation data is so bad that it should either be ignored or replaced. So it is with rent and ORE.
Removing the shelter component from inflation because it is terribly lagged and ORE is a mess in theory and practice, look at the Sticky CPI less food, energy, & shelter. The 3-mo annualized rate is 2.45%, and the trend is falling.
It would of course be deeply cynical to suggest that the Fed is waiting to see if Trump will be knocked out of the Republican Presidential primary by law or health, and if he is and a semi-sane Republican candidate takes the lead then it will proceed to cripple the economy to damage a Democratic President's re-election chances. The unwritten 3rd charge of the Federal Reserve.
John seems to be saying that the Fed can be credible ONLY if it can return ACTUAL inflation (not the bond market-based inflation expectations) to 2%. In his view, the bond market expectations alone may not be the right/appropriate judge of the Fed's credibility. The Fed will be credible only if it has delivered what the bond market expects, otherwise not. And we are not there yet. Is that a fair assessment of his view?
Follow up question for Taylor. Why does he think what has been done so far is NOT enough or even possibly too much to achieve 2.3% CPI target. How sure is he that he is right and TIPS is wrong?
“The relative-price movements—the responses of wages to labor shortage, and of prices to bottlenecks—we have seen since the start of 2001 are strongly, strongly positive-sum. They are necessary if the market economy is to do its von Hayekian crowdsourcing-solutions-to-resource-allocation job. The associated inflation that has accompanied those relative-price movements is zero-sum: it has not been a net loss to the country in real-income terms.”
I’ve seldom read anything on the subject with which I was in closer agreement. I’d be in perfect agreement if I believed that the observed inflation was the minimum necessary to achieve the von Hayekian work.
“And the bond market, at least, appears absolutely certain that the Federal Reserve has got this.”
My reading of TIPS is that bond market, at least, appears absolutely certain that the Federal Reserve has or will have gone too far and will induce a recession. I do not believe and do not believe that anyone else believes that CPI can average 2% over the next 5 years without an intervening recession. And even discounting this by taking the TIPS seriously not literally still has me worried. And MORE worrying is that the Fed does not appear to be worried.
“It can, after all, turn on a dime and move far and fast if news comes in that tells it that it is getting behind the curve—either in being caught too loose, or caught too tight, as far as monetary and financial conditions policy is concerned.”
The Fed does not appear to believe that it can. Announcing future setting of policy instruments is a particularly egregious symptom of this. The Fed apparently knew that it needed to start reducing inflation in November 2021, but it did not start raising the EFFR until March 2022.
“Everyone had thought that depositors would be willing to take a long view, and understand that the unrealized losses were overwhelmingly transitory blips that would be reversed for certain for assets held-to-maturity, and would probably be substantially reversed for assets held-for-sale.”
And everyone was right in the aggregate because depositors as a group cannot reduce their deposits. But the depositors of any one institution that decided to combine term transformation risk with interest rate risk, surely can and did.
"My reading of TIPS is that bond market, at least, appears absolutely certain that the Federal Reserve has or will have gone too far and will induce a recession"—that does seem likely
They were smart insofar as they made a return to pre-pandemic unemployment a priority and repeatedly warned the world of Russia's invasion of Ukraine and unified almost all of Europe in the process against Russia with a combination of sanctions, military intelligence and arms and leadership (supporting the brilliant Zelenskiy) that thwarted to a great extent Russian energy hegemony on Europe. The $30 trillion bond market, the greatest bazaar of behavior and sentiment, reflected these strategic choices which DeLong and Krugman assessed accurately. John Taylor's response is incomprehensible when the bond market is the real time reality check and most legitimate reference of Fed confidence.
MW - I agree the bond market is the best indicator of future actions given the knowledge set available to the informed crowed, and will invest in line with that wisdom. While i understand the value you see in breaking Russia's hegemony on European energy markets the cost to tax payers in both the US and EU has been high and the cost to Ukrainians of their livelihood has been monumental, in line with the cost to the Iraqi's of US invasion.
Is there not room to think improved diplomacy in both cases could not have yielded similar outcomes for the global economy with out the cost of treasure (US/EU) and Blood (Ukrainians and Iraqi's)... I think so and as such see both efforts as monumental failures in terms of both treasure and blood. No?
You are far kinder to people that keep banging the credibility drum than I would be in this situation.
Smith and Learner survey: What an enormous waste, a near criminal violation of the principle of comparative advantage to ask a bunch of economics to unconditionally predict what the Fed WILL do. They should rather have asked for conditional opinions of what the Fed SHOULD do. And even if this is meant as a way to convey a covert recommendation, "I know the Fed will do what it should do and that is X," they should still have been required to condition their covert recommendation.
TH - Totally makes sense.. And it could be a bit of a score card for FED Reputation as well.
Please see a 25-year chart of what is called the super-core services using the 3-month % change, annualized. It excludes the problematic/imputed shelter components from core Services (Services less energy). It grew at an annualized 3.0% rate in the three months through May (4.2% in the three months through April). The chart shows clearly that it is at the doorstep of what was the norm over the past 25 years. Meanwhile, it is worth reminding people that headline CPI was running at a 9% annual rate in June 2022. It has more than halved to 4.1% in mere eleven months! Average March-May unemployment rate was 3.5%. Over the last eleven months, the overall labor force participation rate has gone up from 62.1% to 62.6%. The participation rate for the 16-64 age group has climbed from about 73.9% to 74.8%, well past its pre-pandemic peak. For 25- to 54-year-olds, it is up from 82.4% to 83.4%, also past its pre-pandemic peak. The median duration of unemployment is about 8-9 weeks (was about 20 weeks roughly two years ago). What is not to like here? Yes, tighter credit standards since March 2023 can still be an issue. But it is worth remembering that before then, bank lending standards had been tightening quite a bit all along while there was good underlying progress. I remain an optimist, fingers crossed.
Jay Powell has pointed out that Fed Policy is not the only tool to impact economic growth and income distribution. What impact would policy meant to increase wages for working class Americans (increases in national min wage, stronger support for unions organizing etc...) have on inflation if enacted by congress? Perhaps a slight shift back to demand side policy away from supply side policy?
Picking and choosing inflation components can be a mug's game. But rent and Owner's Rent Equivalent are terribly lagged compared to any market measure, by at least a year due to survey construction - I think you know this. Maybe the lag helped delay the Fed's rate hikes.
Below is a link to CoreLogic's rent measures on single family houses, as opposed to apartments, which should be a good quality adjusted proxy for ORE. Rental inflation is NOT a problem. At some point inflation data is so bad that it should either be ignored or replaced. So it is with rent and ORE.
https://www.corelogic.com/intelligence/corelogic-annual-us-single-family-rent-growth-continues-downward-slide-in-march/?utm_source=substack&utm_medium=email
Removing the shelter component from inflation because it is terribly lagged and ORE is a mess in theory and practice, look at the Sticky CPI less food, energy, & shelter. The 3-mo annualized rate is 2.45%, and the trend is falling.
The one-month shelter change was not encouraging Yes, a deceleration in shelter inflation is probably coming. But it was not here last month. Not yet.
It would of course be deeply cynical to suggest that the Fed is waiting to see if Trump will be knocked out of the Republican Presidential primary by law or health, and if he is and a semi-sane Republican candidate takes the lead then it will proceed to cripple the economy to damage a Democratic President's re-election chances. The unwritten 3rd charge of the Federal Reserve.
John seems to be saying that the Fed can be credible ONLY if it can return ACTUAL inflation (not the bond market-based inflation expectations) to 2%. In his view, the bond market expectations alone may not be the right/appropriate judge of the Fed's credibility. The Fed will be credible only if it has delivered what the bond market expects, otherwise not. And we are not there yet. Is that a fair assessment of his view?
What fun to be a Medieval scribe commenting on the works of the Philosopher. :)
Follow up question for Taylor. Why does he think what has been done so far is NOT enough or even possibly too much to achieve 2.3% CPI target. How sure is he that he is right and TIPS is wrong?
“The relative-price movements—the responses of wages to labor shortage, and of prices to bottlenecks—we have seen since the start of 2001 are strongly, strongly positive-sum. They are necessary if the market economy is to do its von Hayekian crowdsourcing-solutions-to-resource-allocation job. The associated inflation that has accompanied those relative-price movements is zero-sum: it has not been a net loss to the country in real-income terms.”
I’ve seldom read anything on the subject with which I was in closer agreement. I’d be in perfect agreement if I believed that the observed inflation was the minimum necessary to achieve the von Hayekian work.
“And the bond market, at least, appears absolutely certain that the Federal Reserve has got this.”
My reading of TIPS is that bond market, at least, appears absolutely certain that the Federal Reserve has or will have gone too far and will induce a recession. I do not believe and do not believe that anyone else believes that CPI can average 2% over the next 5 years without an intervening recession. And even discounting this by taking the TIPS seriously not literally still has me worried. And MORE worrying is that the Fed does not appear to be worried.
“It can, after all, turn on a dime and move far and fast if news comes in that tells it that it is getting behind the curve—either in being caught too loose, or caught too tight, as far as monetary and financial conditions policy is concerned.”
The Fed does not appear to believe that it can. Announcing future setting of policy instruments is a particularly egregious symptom of this. The Fed apparently knew that it needed to start reducing inflation in November 2021, but it did not start raising the EFFR until March 2022.
“Everyone had thought that depositors would be willing to take a long view, and understand that the unrealized losses were overwhelmingly transitory blips that would be reversed for certain for assets held-to-maturity, and would probably be substantially reversed for assets held-for-sale.”
And everyone was right in the aggregate because depositors as a group cannot reduce their deposits. But the depositors of any one institution that decided to combine term transformation risk with interest rate risk, surely can and did.
"My reading of TIPS is that bond market, at least, appears absolutely certain that the Federal Reserve has or will have gone too far and will induce a recession"—that does seem likely
What fun when the Philosopher replies to the Medieval scribbler. :)