Somewhat alarmed at the Federal Reserve's standing pat on January 31, 2024A first draft of a column for Project Syndicate; the economy appears to be at cruising speed: full employment, low...
Your comment seems correct. I especially like your thoughts regarding how the internet has substantially reduced the cost of finding and hiring employees (and employers).
I tend to believe that the Fed is concerned about capital markets, leverage and asset prices and is focused on avoiding a repeat of 2008. But maybe they are concerned about something else? It seems bad for the message to be unclear.
The way to avoid repeating 2008 is to avoid repeating 2008 when the Fed delayed dropping the EFFR to ~0 from August to December and did not begin QE (in inadequate, self limited amounts) until January.
As a long-time sailor, I was subliminally horrified by that AI generated image of the sailboat. It’s full of aberrations that made my hair stand on end.
The waves show the wind coming from the bottom left, and the wake of the boat shows it having gone insanely close to the lee shore of the island.
On the other hand, the sails are bending to the wind coming from the upper right, mysteriously.
Hard to tell, though, because the three foresails do not make sense -- are there three or just two? Is the middle sail set on the same stay as the leeward one? How is the uppermost sail flying inside the others?
Why is the mainsail part brown, part white? Brown sails exist, but not part.
There is a clutter of ropes at the outer end of the boom, are they sheets? Can’t be stays... Never seen such a thing.
The bowsprit is just glued to the front, needs to be attached to the deck, or below deck.
The shape of the boat is very much like a modern ship, doesn’t fit the traditional rig.
The house is composed of several pieces that don’t fit, with weird windows that don’t align.
In general, there is no sensible scale: how big is this boat?
There are dark things standing on the deck, especially at the rear. Are they people, casually drawn? Are they equipment, wrapped in tarps?
And the water: in the upper part (either downwind or upwind of the boat depending on which direction it is blowing), the water is calm, with no trace of the white capped waves near the boat. So is this a calm day but the boat was suddenly hit with a local squall? Very dangerous in among a cluster of skerries.
Thanks for figuring out just what was wrong with that picture. For some reason, I tend to recognize AI products by their intense glibness. They seem fine at first glance, but then they start getting weirder with time.
(AI makes me wonder if the Cubists were ahead of their time.)
On the Beveridge curve issue, if I may: Say that the steady-state or equilibrium condition, vacancy rate = unemployment rate, yields a 4.1% or 4.2% unemployment. Inflation has been very close to 2% , even less, over several near-term horizons (9-month, 6-month and 3-month annualized rates, for instance). And that has been occuring when unemployment has been 3.7% roughly. If someone is thinking that an unemployment of 4.1%-4.2% would be necessary to reduce wage pressures further, then aren't they sort-of also saying that we should wait for persistent dis-inflation below 2% as well? That seems nuts.
There's a big asymmetry in the Fed's application of its rules. High unemployment is tolerable for any length of time. Anything beyond the most moderate inflation must be hammered into dust.
I think the Fed is worried about an asset bubble. It does not want to make it worse. Keeping "r" higher for longer is an insurance policy against a really nasty crash that would hurt the real economy in which case they'd have to cut rates rapidly.
The Fed worried about an asset bubble well into the 1930s. I remember reading, on a historical project, all sorts of scare articles. There was a terrifying mass of money sitting in banks collecting 0.8% on Treasury debt, and the Fed was sure that it was going to enable new asset bubbles as in the 1920s. The solution to the problem of the 1920s was increased government spending and debt, but that was counter to ideology. It took World War II to get governments to borrow and spend sufficiently.
The Fed in 1929 was worried about an asset bubble and see what it got them.
If there is an "asset bubble crash," the Fed has the tools to ensure that does not undermine its inflation and employment targets. It refused to use them in2008, but hopefully it has learned a thing or two in the interim.
"I can see no significant private-sector forces at work working to imminently weaken demand in a way that would compel recession
And neither does anybody else."
Compel, no, but your "somewhat alarmed" could become shared by investors/the stock market. And notwithstanding what it say, the Powell Fed does not turn on a dime.
TIPS is also somewhat alarmed. It dropped 7 bp today. The 5-year TIPS is at and expectation of 2.17% CPI cf 2.35% equivalent of the Fed's target 2.00 PCE. The drop tells me traders are factoring in more tail risk of recession.
I think it could use more definition of the neutral rate; long-term, how long term? Also has the Fed just been lucky so far that high rates haven't impaired the economy because of the easy corporate credit from the new private credit channel, and from high growth from state and local government, which I think lagged resumption after COVID compared to the private sector.
It is difficult to imagine that anyone else could have said it better.
The financial news media such as Bloomberg's editorial -- and talking heads on Bloomberg TV -- yesterday look pathetic in comparison. It is alarming that central banks in the North Atlantic region are letting this dis-inflation play out further. If it does, they'll have a whole set of other issues to worry about. Why get there?
Of course there is the theory that the Fed has always favored high interest rates before an election with an incumbent Democrat.
What's the record on this?
More concerning was Powell throwing cold water on a March reduction. This is "forward guidance" at its worst.
A friend of mine said, "Powell sounded neither bullish, nor bearish. He sounded sheepish."
Your comment seems correct. I especially like your thoughts regarding how the internet has substantially reduced the cost of finding and hiring employees (and employers).
I tend to believe that the Fed is concerned about capital markets, leverage and asset prices and is focused on avoiding a repeat of 2008. But maybe they are concerned about something else? It seems bad for the message to be unclear.
The way to avoid repeating 2008 is to avoid repeating 2008 when the Fed delayed dropping the EFFR to ~0 from August to December and did not begin QE (in inadequate, self limited amounts) until January.
As a long-time sailor, I was subliminally horrified by that AI generated image of the sailboat. It’s full of aberrations that made my hair stand on end.
The waves show the wind coming from the bottom left, and the wake of the boat shows it having gone insanely close to the lee shore of the island.
On the other hand, the sails are bending to the wind coming from the upper right, mysteriously.
Hard to tell, though, because the three foresails do not make sense -- are there three or just two? Is the middle sail set on the same stay as the leeward one? How is the uppermost sail flying inside the others?
Why is the mainsail part brown, part white? Brown sails exist, but not part.
There is a clutter of ropes at the outer end of the boom, are they sheets? Can’t be stays... Never seen such a thing.
The bowsprit is just glued to the front, needs to be attached to the deck, or below deck.
The shape of the boat is very much like a modern ship, doesn’t fit the traditional rig.
The house is composed of several pieces that don’t fit, with weird windows that don’t align.
In general, there is no sensible scale: how big is this boat?
There are dark things standing on the deck, especially at the rear. Are they people, casually drawn? Are they equipment, wrapped in tarps?
And the water: in the upper part (either downwind or upwind of the boat depending on which direction it is blowing), the water is calm, with no trace of the white capped waves near the boat. So is this a calm day but the boat was suddenly hit with a local squall? Very dangerous in among a cluster of skerries.
Thanks for figuring out just what was wrong with that picture. For some reason, I tend to recognize AI products by their intense glibness. They seem fine at first glance, but then they start getting weirder with time.
(AI makes me wonder if the Cubists were ahead of their time.)
On the Beveridge curve issue, if I may: Say that the steady-state or equilibrium condition, vacancy rate = unemployment rate, yields a 4.1% or 4.2% unemployment. Inflation has been very close to 2% , even less, over several near-term horizons (9-month, 6-month and 3-month annualized rates, for instance). And that has been occuring when unemployment has been 3.7% roughly. If someone is thinking that an unemployment of 4.1%-4.2% would be necessary to reduce wage pressures further, then aren't they sort-of also saying that we should wait for persistent dis-inflation below 2% as well? That seems nuts.
There's a big asymmetry in the Fed's application of its rules. High unemployment is tolerable for any length of time. Anything beyond the most moderate inflation must be hammered into dust.
I think the Fed is worried about an asset bubble. It does not want to make it worse. Keeping "r" higher for longer is an insurance policy against a really nasty crash that would hurt the real economy in which case they'd have to cut rates rapidly.
The Fed worried about an asset bubble well into the 1930s. I remember reading, on a historical project, all sorts of scare articles. There was a terrifying mass of money sitting in banks collecting 0.8% on Treasury debt, and the Fed was sure that it was going to enable new asset bubbles as in the 1920s. The solution to the problem of the 1920s was increased government spending and debt, but that was counter to ideology. It took World War II to get governments to borrow and spend sufficiently.
The Fed in 1929 was worried about an asset bubble and see what it got them.
If there is an "asset bubble crash," the Fed has the tools to ensure that does not undermine its inflation and employment targets. It refused to use them in2008, but hopefully it has learned a thing or two in the interim.
"I can see no significant private-sector forces at work working to imminently weaken demand in a way that would compel recession
And neither does anybody else."
Compel, no, but your "somewhat alarmed" could become shared by investors/the stock market. And notwithstanding what it say, the Powell Fed does not turn on a dime.
TIPS is also somewhat alarmed. It dropped 7 bp today. The 5-year TIPS is at and expectation of 2.17% CPI cf 2.35% equivalent of the Fed's target 2.00 PCE. The drop tells me traders are factoring in more tail risk of recession.
I think it could use more definition of the neutral rate; long-term, how long term? Also has the Fed just been lucky so far that high rates haven't impaired the economy because of the easy corporate credit from the new private credit channel, and from high growth from state and local government, which I think lagged resumption after COVID compared to the private sector.
Professor DeLong, This alarming article about the national debt would be a good subject for your blog or podcast: https://fortune.com/2024/01/31/nassim-nicholas-taleb-black-swan-author-national-debt-death-spiral/#amp_tf=From%20%251%24s&aoh=17067553955087&csi=0&referrer=https%3A%2F%2Fwww.google.com&share=https%3A%2F%2Ffortune.com%2F2024%2F01%2F31%2Fnassim-nicholas-taleb-black-swan-author-national-debt-death-spiral%2F
Alarmed at the Fed:
It is difficult to imagine that anyone else could have said it better.
The financial news media such as Bloomberg's editorial -- and talking heads on Bloomberg TV -- yesterday look pathetic in comparison. It is alarming that central banks in the North Atlantic region are letting this dis-inflation play out further. If it does, they'll have a whole set of other issues to worry about. Why get there?