Saturday, January 28, 2012

Lacker Dissent

Jeffrey Lacker explains his dissent on the recent FOMC decision in this press release. He says:
"I dissented because I do not believe economic conditions are likely to warrant an exceptionally low federal funds rate for so long. I expect that as economic expansion continues, even if only at a moderate pace, the federal funds rate will need to rise in order to prevent the emergence of inflationary pressures. This increase in interest rates is likely to be necessary before late 2014.

"In addition, the Summary of Economic Projections (SEP) now contains detailed information on the forecasts of Federal Reserve governors and Reserve Bank presidents for the evolution of economic conditions and the federal funds rate under appropriate policy. My dissent also reflected the view that statements about the future path of interest rates are inherently forecasts and are therefore better addressed in the SEP than in the Committee's policy statement.
His reasoning, which I agree with, is that the Fed is going to get itself in trouble by making the commitment that it did, and that any useful foreward guidance we might get from the policy statement is already in the SEP, without the bad commitment.

55 comments:

  1. Lacker expects "that as economic expansion continues, even if only at a moderate pace, the federal funds rate will need to rise in order to prevent the emergence of inflationary pressures." This sounds NK Tayloresque.

    There is another, NC Fisherine, possibility. As the economic expansion continues, and with the nominal policy rate stuck at zero until at least the end of 2014, expected inflation will drop in order to make room for a gradually higher market clearing real rate of interest.

    Does the experience in Japan suggest that one also should have the other possible outcome in mind?

    ReplyDelete
    Replies
    1. Your NC story is what Bullard was talking about here:

      http://research.stlouisfed.org/econ/bullard/pdf/SevenFacesFinalJul28.pdf

      He has some references to the literature.

      In most models it is clear that if you hold the nominal interest rate at zero forever, that there has to be a deflation. I have a model where that's not true. In fact, you can have a zero nominal interest rate forever, and that can be consistent with any inflation rate.

      I don't think Lacker is necessarily Tayloresque. What he says is consistent with the way I think about it, which does not involve Taylor in the least.

      Delete
  2. I'll look closer at the third - NM Williamsonian - alternative. Can you please link to the paper?

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  3. This comment has been removed by the author.

    ReplyDelete
  4. I have a model ...

    Applying that model to 2005/2009, what did the model predict when the Fed tightened with private debt at 300% (+/-) of GDP?

    Looking ahead to 2013/14, since private debt will still be 300% of GDP (+/-), does your model predict the same result as what we experienced in 2008/09, if the Fed were to tighten.

    If not why haven't you corrected this obvious "design flaw?"

    IOW Lacker is, at best, a Bourbon, never learning, etc.

    Or said differently, given that only the level of private debt matters, until we do something about private debt levels, who is kidding who?

    ReplyDelete
  5. This morning I had an opportunity to read a very interesting essay, This Time It is Different, by Steve Roth over at AngryBearBlog.com

    Using the work or Keen and others, Roth shows that we have (as most of us on the street have known) been in a depression since 2001, with spending supported by home equity withdrawals.

    Roth's view is that the prosperity of the 1990s left us without enough money, which was papered over by the massive increase in private debt.

    Very interesting stuff, with broader and deeper insights than found here.

    I have always approached the problem from a different perspective. Being a true Keynesian, I have always favored paying down gov't debt during any period of prosperity. However, with a deep understanding of private banking, I have also understood that such would work only if the private banking system was extremely broad, deep, and especially robust and aggressive in making loans in the the face of losses. Having to take on full reponsibilty for creating all the money needed by a rapidly growing economy through private debt is an undertaking of vast proportions and responsibility.

    ReplyDelete
  6. "However, with a deep understanding of private banking..."

    That's funny. I've been reading your comments, and you seem to be a rather shallow and confused person.

    ReplyDelete
    Replies
    1. I think JLD has confused "deep" with "dense." Maybe he is just a really bad speller.

      Delete
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