A more hawkish Fed meeting communiqué than I confess I had expected to see today; as I say over and over again, optimal control theory tells us that when you are near target your control should be...
I don't understand how the 10-year inflation-indexed rate (and even the 30-year) varies so much in response to short-term adjustments to the Federal Funds Rate. But it certainly seems to do so.
As Alan Blinder always says, it trades as if it has a duration of one year. Substanial overreaction and then mean reversion. Some of it is that the marginal agent setting the yield changes over time...
I suspect the Fed's hidden agenda is trying to mitigate "irrational exuberance" in the stock market. The stock market is way overvalued but anyone who bets on this has been burned numerous times since 2020. But just as a blind pig sometimes finds an acorn, at some point the bears will be proved right.
I don't know how to work it into your points but I'd like to emphasize that the 2% _flexible_ inflation target is
a) not a ceiling that the Fed sometimes does and sometimes does not remain below,
b) not a stand-in for the _true_ goal of zero. "Make me chase but no yet."
c) not backward looking; the intermediate goal is always a forward looking average, not more or less depending on whether in the past it was higher or lower,
d) sometimes over target inflation IS the temporary objective, the way the Fed facilitates relative price changes when some prices are downwardly sticky. That is what "flexible" means.
[The correct metaphor is the pedal held down hard to get back onto the highway. Tire marks means the pedal was held a little too hard.]
And additionally to plug:
1. Treasury issue of more, shorter tenor TIPS
2. Treasury issue of a "Trillionth." [I do not know it needs to issue in various tenors.]
3. BLS to collect actual WAGE data, not disaggregated unit values of average compensation.
I don't understand how the 10-year inflation-indexed rate (and even the 30-year) varies so much in response to short-term adjustments to the Federal Funds Rate. But it certainly seems to do so.
As Alan Blinder always says, it trades as if it has a duration of one year. Substanial overreaction and then mean reversion. Some of it is that the marginal agent setting the yield changes over time...
Is there any good way of determining r* when financial markets are little more than casinos?
No!
I suspect the Fed's hidden agenda is trying to mitigate "irrational exuberance" in the stock market. The stock market is way overvalued but anyone who bets on this has been burned numerous times since 2020. But just as a blind pig sometimes finds an acorn, at some point the bears will be proved right.
Maybe. Fed staff and Fed watchers I have talked to do not raise that as a concern... Brad
I don't know how to work it into your points but I'd like to emphasize that the 2% _flexible_ inflation target is
a) not a ceiling that the Fed sometimes does and sometimes does not remain below,
b) not a stand-in for the _true_ goal of zero. "Make me chase but no yet."
c) not backward looking; the intermediate goal is always a forward looking average, not more or less depending on whether in the past it was higher or lower,
d) sometimes over target inflation IS the temporary objective, the way the Fed facilitates relative price changes when some prices are downwardly sticky. That is what "flexible" means.
[The correct metaphor is the pedal held down hard to get back onto the highway. Tire marks means the pedal was held a little too hard.]
And additionally to plug:
1. Treasury issue of more, shorter tenor TIPS
2. Treasury issue of a "Trillionth." [I do not know it needs to issue in various tenors.]
3. BLS to collect actual WAGE data, not disaggregated unit values of average compensation.
Good suggestions... Brad
Bravo. Seems like your good work here is sustainably underpriced !
:-)
What does moving "sustainably" toward 2% mean? How the hell are we not there already?
Indeed. This is my question! Brad