I Wish the Fed Would Stop Toying with Us

We know they are anxious to raise rates. Fed officials keep talking about how they’ll act aggressively when the time comes, and hint that it might be sooner that we expected. What better time than now? It would give Obama a chance to do another $800,000,000,000 fiscal stimulus, to once again “save or create” 3.5 million jobs. The BLS just reported the rate of job loss, which had been slowing, is now accelerating again. There were 200,001 jobs lost in August, and 263,000 lost in September. Unemployment rose to 9.8%, and is headed over 10% next year. Manufacturing orders were expected to be up 0.7% and instead fell by 0.8%. Now’s the time! Oh, and weekly unemployment claims were also worse that expected. And it looks like the UAW, oops, I mean GM and Chrysler will need another bailout; expect an announcement one day after the midterm elections. And to top it all off, here’s what the Wall Street Journal says about the new President of the Minneapolis Fed, who will soon be determining our monetary policy:

In this paper, presented at the International Monetary Fund in April, Mr. Kocherlakota argued in a very theoretical paper that instead of cutting interest rates when the housing bubble burst, the Fed should have raised them.

When I tried opening the link my computer froze up. I’m hoping he said the Fed should have adopted an expansionary monetary policy aimed at boosting NGDP growth to 5%, in the hope that higher inflation and real growth expectations would also raise nominal interest rates. But somehow I have a feeling that’s not what the WSJ meant by “the Fed should have raised them.” Let me know if anyone is able to ascertain the reason behind his policy advice. BTW, I do know that Kocherlakota is a very distinguished economist. And I know that you can’t rely on press reports like the following tidbit from the WSJ:

The Minneapolis Fed has hired a very unconventional University of Minnesota professor to serve as its new president. Narayana Kocherlakota served as chairman of Minnesota’s economics department for three years. He’s written lots of out-of-the-box papers, including this one in which he argues that money is a primitive form of memory whose main purpose is to help individuals and businesses keep track of their transactions.

If they described my research it would sound equally silly. The only thing that has me slightly worried is this:

The brainy Ben Bernanke might have somebody in the room who is as smart as him. The new guy graduated from Princeton when he was 19 years old.

One of those guys . . .

Part 2

Another thing that bugs me is when they describe FOMC members as “doves” and “hawks.” Being an inflation dove or hawk should be an immediate disqualification from being on the FOMC. The only issue should be whether they are competent or not. It is not the Fed’s job to determine the goals of monetary policy. Congress needs to decide what sort of rate of inflation constitutes “price stability.” That doesn’t necessarily mean the Fed should engage in inflation targeting, there are lots of other options like the Taylor Rule, or NGDP growth targeting, but Congress really should come up with some sort of definition for price stability. If not, the Fed should decide on it through a vote, which would be completely separate from the day-to-day decisions about monetary policy. Once the vote is taken, everyone should fall into line like a good soldier. It doesn’t matter whether a US military officer thinks the Iraq War was a good idea, their job is to carry out policy. The same should be true of FOMC members. I am neither an inflation hawk nor dove. If I was on the FOMC and Congress voted for a 2% NGDP growth target, I’d look for ways to gradually tighten monetary policy.

Part 3

People keep telling me how popular my blog has become, but I still think it is only popular within a very narrow demographic. Here is a NYT story talking about negative interest rates on reserves. The point of the story is . . . well, I’m not quite sure. They say that contrary to popular impression the goal of the policy is not to make market interest rates negative. So far, so good. And what is the goal of the policy? The NYT forgets to answer that question. I didn’t go to journalism school, but isn’t “why” one of the questions that you are supposed to address? They could have just asked me. (BTW, the goal is to raise the money multiplier.) HT: Tyler Cowen


I still don’t have an Intrade account, although they keep insisting I do. As a result I was not able to bet on Brazil today, despite being strangely confident that they would win. BTW, remember when we were told that the US was unpopular because of President Bush? I suppose there was a grain of truth, but really, would you cancel a holiday on the Amalfi Coast because Berlusconi was president of Italy? Anyway, now we have a President who is loved by everyone overseas. He goes to Copenhagen to persuade the IOC to put the Olympics in Chicago. We are heavily favored to win. And we end up in 4th place out of 4 cities, behind even Tokyo? How does something like that happen?

Part 5

I love hot weather. But now climate experts are suggesting that there may be one or two decades of cold weather before the heat arrives. Great, so I get to suffer the adverse economic consequences of futilely trying to stave off global warming, only to drop dead right before it warms up. And I live in Boston.

Just shoot me.

PS. For you libertarians, some humor from a Yahoo article discussing America’s richest cities:

The fact that residents of these wealth centers bring in over $100,000 per year is hardly surprising. Some of these places create wealth, like Washington, where the U.S. government is a robust employer, or San Jose, a tech-industry hot spot. Others, like the Bridgeport area, are where powerful executives make their home–and bring their paychecks–after a long week in the big city.

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About Scott Sumner 492 Articles

Affiliation: Bentley University

Scott Sumner has taught economics at Bentley University for the past 27 years.

He earned a BA in economics at Wisconsin and a PhD at University of Chicago.

Professor Sumner's current research topics include monetary policy targets and the Great Depression. His areas of interest are macroeconomics, monetary theory and policy, and history of economic thought.

Professor Sumner has published articles in the Journal of Political Economy, the Journal of Money, Credit and Banking, and the Bulletin of Economic Research.

Visit: TheMoneyIllusion

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