August 27, 2016

Barbera on NPR By Jon Faust

I hope you heard Bob Barbera on NPR’s marketplace yesterday (text|podcast). He was commenting on a proposal some folks are pushing to make the Fed fully public, with all the FOMC members being congressionally approved. The laudable goal is to make the Fed more responsive to the less fortunate in our society. Advocates of the plan note that other central banks such as the ECB and Bank of England do not have the sort of private-public mix that the Fed has.

Bob points out a little problem with the argument: if stimulating the economy is how the central banks could help the less fortunate in the period since the crisis, the Fed has been considerably more supportive than its fully public counterparts.

As usual, when Bob offers an opinion, there is a good deal of systematic reasoning supporting it. We’ve written about this a good deal, including in the Wall Street journal, and in my recent piece on transparency. The short version of the argument is that the Fed’s weird structure was a carefully designed political compromise—a compromise resting firmly on Madison and Hamilton’s reasoning about democracy. Democracies, they knew, had strong tendency toward self-destructive policies such as inflation.

So, you might ask, how do fully public central banks such as the Bank of England and ECB deal with the inflation problem? Not well for most of the post-WWII era. The U.K. and many of the countries making up the euro area suffered much higher and more persistent inflation in the 1970s and 1980s than did the U.S. (Fig. 1). The Fed didn’t do great, but it did better.

Fig. 1. The Great Inflation in 3 economies. Source: National agencies via Fred.

As the great inflation wound down, nations of Europe and elsewhere looked for a political structure that would counterbalance the inflationary tendencies. The solution? A central bank with a single mandate to control inflation—whether or not that was good for anyone including the least fortunate. Shackled by this mandate, the Bank of England and ECB were considerably more restrictive in the early period of the recovery from the financial crisis, and they arguably exacerbated the period of high unemployment relative to what happened in the U.S. Again, the Fed didn’t do great, but it did better.

Is the Fed structure ideal? Surely not; it certainly is peculiar.

But beware of naïve fixes: Eight times a week on Broadway, George Washington sings that governing is hard and Hamilton adds that independence is filled with contradictions.

Postscript: We have heard that Barbera was not the most prominent person making Fed news yesterday. Some of you heard my preview of Chair Yellen’s speech on thursday. As we’ll expand on in a coming post, the speech was very much what we anticipated based on the Fed’s consistent behavior over several years.

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August 1, 2016

19 members, 12 voters, 1 policy By Jon Faust

Note: This is the fifth post in a series entitled Understanding FOMC actions and communications (Hint: two separate topics).

Dante’s seventh ring of hell, as I recall, is being forced to serve on a large committee. But imagine that you come across a large committee that somehow functioned effectively. Implausible certainly, but if you force yourself to imagine a well-functioning committee, I think you’ll agree that you’ll need some special feature to account for this minor miracle.

The FOMC is a large committee that functions pretty well. You cannot understand FOMC choices without understanding how consensus develops, is maintained, and evolves. This is a feature, not a bug. (more…)

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July 23, 2016

Big (perhaps HUGE) Stimulus in 2017? By CFEGuru

By Bob Barbera, Jon Faust, and Jonathan Wright

Amid all the political craziness at home and around the world, you may not have noticed that one bit of traditional policy wisdom is making a comeback. The biggest development for 2017 could be that ‘austerity as stimulus’ is out and ‘stimulus as stimulus’ is back in a big way.[1]

Following the election in Japan, Prime Minisiter Abe has rejected the seldom-mentioned fourth arrow in his stimulus quiver—big tax increases immediately following conventional stimulus. Following the Brexit vote, new Prime Minister May has dropped the goal of fiscal surplus by 2020 and the Chancellor of the Exchequer has declared a readiness to reset U.K. fiscal policy. China never drank the austerity Kool-aid and continues to declare a willingness to blend fiscal stimulus with structural reform to attain its economic goals.

But most remarkable of all may be the U.S. Candidate Trump is promising large tax cuts. His spending plans are, to be generous, not entirely clear, but it is hard to imagine this populist demagogue not spreading the spending around. And good luck getting the Mexicans to pay for that wall. On the other hand, if the election is a win for the Democrats, which at this point appears to be the most likely outcome, we get a Democratic President and much less deadlocked Capitol Hill. In this case, we’ll very likely see large stimulus.[2]

The main scenario in which the U.S. does not join the shift to fiscal stimulus is if Hillary wins the presidency, but fiscal conservatives gain ground in the Congress. This scenario seems pretty unlikely to us.

Thus, for varied reasons, the U.S., China, the U.K., and Japan may all be set for additional stimulus. That covers pretty much everyone. Well, everyone except for the euro area—the economies that may be most in need of stimulus.

Fleshing Out U.S. Stimulus Chances

Political forecasters now give Trump somewhere between a 20% and 40% chance of winning in November. It is all but impossible to imagine a scenario in which Trump triumphs and the Senate falls into Democratic hands. Thus a Trump victory puts all of Washington into GOP hands. That translates to 20 to 40 percent chance of HUGE stimulus.

If Clinton wins, she is not guaranteed a situation that will allow her to enact legislation. But Republicans hold 24 of the 36 Senate seats up for reelection this coming November. Handicappers, at the moment suggest that the Senate looks like a toss-up, while the House is a long shot for the Democrats. But conditional on Hillary taking the White House, there are good odds on the Democrats taking the Senate and making significant gains in the House.

To us, this suggests that there are very strong odds that either Donald or Hillary will be in a position to deliver big fiscal stimulus of one kind or another. Clinton’s plans couple infrastructure spending with tax increases on the wealthy. Of course, a classic political route to Keynesian stimulus is to spend the money but skip the tax increases. But even if the tax increases happen, the net will be fiscal stimulus, so long as those paying the higher taxes have a low marginal propensity to consume.[3]

Overall then, the big economic trend is to fiscal stimulus. While our expertise runs more toward macroeconomics than politics, it is hard not to think that this shift toward fiscal stimulus is a consequence of difficult economic times for those of middle and lower incomes leading to political upheaval as reflected in Brexit and Trump, and then leading (perhaps surprisingly) back to a classic approach to jump starting economies. We’ll be discussing what this may mean for monetary policy in future posts.


1. As we published, we noted that Michael Mackenzie in the FT is also arguing that stimulus is in. [back]

2. Larry Summers, a key player in the Bill Clinton and Obama administrations has offered much commentary in the past few years arguing that only fiscal stimulus can lift the world out of its pallor. [back]

3. That, in turn, is highly likely, as any tax increases would be targeted to the best off. [back]

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July 18, 2016

Why has transparency been so damn confusing? By Jon Faust

The theme of our recent series of posts on understanding FOMC actions and communications has been the well-disguised, steady predictability of FOMC policy. The basic story is that policy is driven by a consensus on the FOMC. The consensus tends to evolve slowly and predictably, and for some time now, the consensus has behaved consistently as if driven by two principles:

So long as steady job market gains persist, continue a gradual, pre-announced removal of accommodation.

So long as inflation remains below target, take a tactical pause if credible evidence arises that the job gains might soon falter.

The factual record, I argued, is unambiguous: over the last three years, we’ve gotten normalization at a preannounced pace as in to the first principle, punctuated only by brief (so far) tactical pauses as under the second.[1]

But the fact that my low-drama story lines up with the facts doesn’t make it correct. And my story directly contradicts the popular narrative of a skittish, market-obsessed Fed flip-flopping at every opportunity. This is where the well-disguised part comes in.

Before continuing, however, I want to emphasize that I came to the views I’m describing during my years working on transparency and communications on behalf of the chairs Bernanke and Yellen—a job that ended about 2 years ago now. Yes, I did my small part in making the mess. But the FOMC members and Fed staffers like me also worked pretty hard to understand what was going wrong and attempting to improve the situation. This series of posts is essentially the lessons I took from these efforts. It would be inappropriate for me to say who among my former colleagues subscribes to these views, but I similarly don’t want to claim the ideas as my own. For now,[2] I’ll be deliberately and appropriately vague in saying that all the points I’m making were in the air at the Fed while I was there. In this post, I’ll sketch the basics, leaving details and support for subsequent posts.

The sketch goes like this. The 19 policymakers on the FOMC have, since the crisis held widely divergent views about policy.[3] Under the leadership of the Chair, these views somehow blend in a reasonably coherent compromise policy. That compromise by its very nature is fully embraced by no one. The vast bulk of FOMC communication (as a matter of policy) stresses the 19 views to the exclusion of the consensus. Individual FOMC members are often endlessly transparent about the various issues that are, at present, causing them to prefer something other than the actual policy. The chosen policy often appears to be an orphan, at best, and can become a whipping boy.

But the consensus policy is generally much simpler to understand than those 19 component views. For example, if the broad characterization of principal facts about the dual mandate evolve only slowly—as they have for the last few years—then the net effect on policy of all the grappling and speechifying is minimal.

Following FOMC communications in detail is like watching classical Greek tragedy: observing the drama unfold may be great entertainment, but this doesn’t change the fact that the outcome is inevitable.

You might think that folks on the outside would have figured this out—and this series of posts is intended to help in that regard. But there is a strong pull toward that ‘skittish, market-obsessed Fed’ narrative. And this narrative is very plausible. You can almost inevitably find some significant wiggle in financial market data to support any market obsession story. This provides a good starting point for persistent misconceptions. And with FOMC members making 19 different cases, you can also generally find support for your particular story in some FOMC communication.

Aside: this is why I asked you to read an earlier post as if you only knew of the FOMC statement and press conference: these are the principal places where the communication is unambiguously directed at explaining the consensus. As I’ll argue in greater detail for those who stick around for the more complete argument, communications other than these systematically obscure and confuse much more than they clarify.

So that’s the basic sketch. Let me summarize.

Over the last 3 years, the general picture regarding the Fed’s dual mandate has been remarkably constant. As a result, policy has evolved very predictably in line with communications on behalf of the consensus. The skittish, market-obsessed, and flip flopping Fed story fits the facts quite well also, and support for this story can often be stitched together out of structurally flawed Fed communications. In principle, outsiders could see through this. But many market participants cling tightly to the idea that the Fed is market obsessed, reflexively rejecting what is, in fact, a simpler story that fits the data at least as well.[4] As for the media, it is unfortunate, but perhaps not surprising, that the Greek drama is enthusiastically covered to the near complete exclusion of steady, predictable outcome.

I hope this barebones sketch is sufficiently intriguing that some readers will stick around for the supporting posts.


1. I won’t repeat the full argument here, but one example is Bernanke’s June 2012 statement that the taper would (if the jobs market progress continued) start later that year and end around mid-year 2013. The taper started in December and purchases were trivial by mid-year, ending in October. The slight delay relative to the baseline calendar was due to a brief tactical pause when the jobs data briefly appeared to falter. [back]

2. Most of the relevant material will become public along with the FOMC transcripts 5 years after the fact. [back]

3. This “19” should, in these posts, be read as “however many of the full complement of 19 members are in place at any given time.” Of course, for many years, at least 2 governor slots have been empty. [back]

4. As I’ll argue more fully in coming posts, a main difference in the way the high-drama and low-drama stories account for the facts we’ve observed is that in the low-drama story it is no accident that ex post the Fed has delivered a policy consistent with what was laid out in advance. In the high drama story, the fact that policy evolved pretty much as stated on behalf of the consensus, I suppose, is just how the flip flops happened to net out. [back]

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July 18, 2016

A series on ‘Understanding FOMC actions and communications’ (Hint: two separate topics) By Jon Faust

This post provides links to a series of related posts arranged earliest to most recent. The list will be updated as posts appear.

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June 26, 2016

What will the Fed do? (June 2016, update!) By Jon Faust

My previous post described the well-disguised, steady predictability of recent FOMC policy. All that’s out the window now. (No.) Brexit changes everything! (We’ll see.) Will the Fed’s intermeeting rate cut go negative? (Get ahold of yourself.)

But Brexit is putting a wrinkle in this blog: I had promised that the next post would be entitled ‘Why has transparency been so damn confusing?’ Instead I’ll interrupt that plan with a brief account of what the steady-predictability story means post-Brexit. Indeed, Brexit provides a dramatic example of why focusing on the evolution of the Fed’s consensus can be so useful. (more…)

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June 12, 2016

What will the Fed do? (June 2016 edition) By Jon Faust

Over the last several weeks, we’ve seen what Michael Mackenzie in the FT called a renewal of the market’s tortured dance with the Fed. The basic story seems to be that the Fed “moved policy to the sidelines” at its March meeting, causing market participants to discount any risk of a near-term rate increase. The Fed’s March minutes and a series of Fed speeches then returned a summer rate increase to the discussion. But just as the markets began to follow that lead, the bad jobs report led to a pirouette, dashing hopes/fears of near-term rate increases, and completing a bruising turn around the dance floor. (more…)

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May 10, 2016

Six Degrees of Separation between Jobs and Inflation By CFEGuru

By Bob Barbera and Jon Faust

Friday’s reported increase of 160,000 in nonfarm payrolls was less than the recent average. This doesn’t mean much for the macroeconomic outlook and, therefore, shouldn’t and probably won’t mean much for the path of monetary policy.

Monthly nonfarm payroll gains bounce around a good deal and are substantially revised. Moreover, weather-especially winter weather–can dramatically affect the numbers. Remember that seasonal adjustment accounts for the typical effect of winter, not for the particular winter we experience. The CFE’s Jonathan Wright, one of the leading experts on this topic, regularly publishes a weather adjusted payrolls series. By his reckoning (reported here), this winter’s weather, including that nasty April in much of the country, may fully explain the weakness in today’s report. (more…)

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March 26, 2016

Beyond the dots By Jon Faust

Since the last FOMC meeting, we have again heard cries of lost Fed credibility and of general confusion. In contrast, my colleagues and I at the CFE have been arguing for many months now that we would likely see what has in fact transpired. In our view, the Fed’s actions, including those at the March meeting, are consistent with a credible and consistent commitment to begin interest rate normalization while continuing to support continued improvement in the labor market with inflation moving back toward two percent. We suspect this may sound, well, nuts to some readers, but the case is fairly brief, so we invite you to take a look. (more…)

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March 14, 2016

U.S. Monetary Policy: Three Hard Questions By Jon Faust

Since the market turmoil began early this year, Fed officials across the spectrum have been emphasizing that incoming U.S. macroeconomic data have remained broadly consistent with the baseline outlook that prevailed at year end. The economy is on track to create between 160,000 and 260,000 jobs a month and, once those nagging transitory disturbances abate, inflation will head slowly back to 2 percent. Given the excessive focus market volatility sometimes commands, Fed officials are right to emphasize this point about the baseline.

But the baseline outlook is the easy part of policy at present. The hard part is assessing upside and downside risks and how they should affect the near-term path of policy. (more…)

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