December 26, 2014

By CFEGuru

“The main lesson from international experience is that controls on capital outflows can work—but only if they are associated with a credible policy plan addressing the underlying cause of the confidence crisis.”

Olivier Jeanne, of the Center and Peterson Institute, has an interesting op-ed in the Dec. 23 Financial Times arguing that capital controls may be useful policy tool for Russia at present, so long as they are used only to provide breathing space to begin putting in place more fundamental policy changes.

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December 18, 2014

Patience and prices By Bob Barbera

Consensus expectations were off regarding the November estimate for U.S. CPI inflation released yesterday. The 0.3% fall for headline inflation was a larger drop than estimated by 82 of the 84 economists who ventured forth with an opinion in Bloomberg’s survey. No-one offered up a forecast of a greater fall than 0.3%. We suspect that consensus expectations for inflation in early 2015 are similarly off the mark. Back-of-the-envelope calculations suggest that for a relatively wide range of oil price scenarios, over the next several months, the U.S. headline inflation rate will plunge.

If we embed today’s energy futures prices into consumer product prices, the drop in first quarter 2015 CPI inflation could be breathtaking.

A plunge for headline inflation is already baked in the cake for December. The E.I.A. surveys of gasoline prices at the pump December-to-date are down around 70 cents, year-on-year. That is almost double the 32 cent year-on-year fall registered in November. Based on the energy component alone, the CPI headline looks set up to fall around 0.7% for the month, which would take year-on-year headline inflation down to 0.3%. And it appears there is more to come. If we embed today’s energy futures prices into consumer product prices, the drop in first quarter 2015 CPI inflation could be breathtaking. For example, near-contract futures prices for gasoline are trading down $1.15, year-on-year. (more…)

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December 16, 2014

Of dots and (considerable) periods By Jon Faust

In a recent post, I argued that the Bernanke and Yellen Fed’s have been striving for a ‘no tea leaves’ approach to policy communications. An astute JHU student responded, ‘How about those dots?’ Good students can be annoying that way.

There is a sound reason for publishing the dot plot, but we should not expect these ‘if you were Czar’ policy paths to be of much value in clarifying policy intentions of the FOMC.

At the outset, let me remove some suspense by sharing what Wednesday’s new dot plot will clarify about the likely path of policy: nothing.

What is the dot plot? The FOMC publishes a Survey of Economic Projections (SEP) quarterly, giving the 19 FOMC participants’ projections for real activity and inflation.[1] Along with these projections, each participant submits his/her view of where the federal funds rate will be at the end of the current year and end of the next couple years. These year-end rates for the participants are then turned into the dot plot—the October plot is below. (more…)

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December 6, 2014

What do markets expect the Fed to do? By Jon Faust

Matt Raskin, along with several co-authors (Richard Crump, Emanuel Moench, William O’Boyle, Carlo Rosa, and Lisa Stowe), has published a series on measuring policy interest rate expecations on the NY Fed’s Liberty Street Economic Blog.

These blog posts provide an excellent discussion of how to interpret market and survey-based indicators of interest rate expectations. For example, the authors note, “Market prices provide timely information on policy expectations. But as we emphasized in our previous post, they can deviate from investors’ expectations of the most likely path because they embed risk premiums…”

By the way, Matt Raskin recently returned to Hopkins to complete his PhD after leaving a few years ago to work at the New York Fed. He is now an Assistant Vice President in the Markets Group, and I can attest that Matt’s analysis played an important role in policy discussions on a number of occasions over my recent time at the Fed.

Good work by Matt and his co-authors.

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November 21, 2014

Today’s CPI release: If you just squint, you’ll see … By Jon Faust

By Bob Barbera and Jon Faust

The FOMC minutes released yesterday and today’s CPI data release underscore a remarkable shift. Over the past five years, the state of the labor market has dominated monetary policy discussions, but for the first time since the crisis inflation is now taking center stage. All through the recovery, of course, inflation hawks have warned that inflation would soon demand our attention. But probably neither hawks nor doves predicted that excessively low inflation would be our concern as unemployment moved closer to normal. And yet today’s CPI data and the FOMC commentary reported yesterday remind us that, in the short run, inflation is probably headed lower.

Today and in coming months, analysts at the Fed and elsewhere will be parsing the data and squinting extra hard to see signs that inflation will, without additional policy measures, move back up to desired levels. The difficulty, of course, is that factors such as the falling price of oil and of other commodities and the rising value of the dollar are putting downward pressure on inflation.1 A centerpiece of inflation analysis in situations like this is examining the behavior of sub-components of inflation that are less likely to be affected by transitory forces. These indices, one hopes, will give a clearer sense of where a shadowy beast known as underlying inflation may be headed. The baseline view of many analysts is that underlying inflation is headed slowly back to the Fed’s objective. This may be the right baseline, but recent data have, in our view, significantly eroded the confidence we can have in this baseline view.


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November 8, 2014

Hawks, Doves, and Tea Leaves By Jon Faust

In its most recent policy statement, the FOMC removed the phrase, “there remains significant underutilization of labor resources” and substituted that the “underutilization of labor resources is gradually diminishing.” Fed watchers have pronounced this hawkish. I have a different reading, resting on my perception of two recent changes I perceive in Fed communications.

Having been involved in the crafting of FOMC statements over the last few years, I believe that small wording changes really do mean something, but small changes tend to mean small things.

First, I believe that the Fed now strives for “no tea leaves” approach to communication. The FOMC declares in its strategy document that it “seeks to explain its monetary policy decisions to the public as clearly as possible.” This is a dramatic change from the situation not so long ago, when speaking about the future course of policy was viewed, both inside the Fed and by most central banks, as a mortal sin. The transparency revolution began tentatively decades ago, with the FOMC offering occasional terse hints about policy. Interested observers justifiably gazed at the few words offered up like so many tea leaves, seeking to divine the future course of policy. Expertise in this form of divination was much prized on Wall Street.

Expert analysts still pour over the FOMC statement, making much of every change. But I think (more…)

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November 7, 2014

Nice weather we’re having? Seasons and jobs By Jon Faust

When macroeconomic data such as today’s employment report are released, we often focus on seasonally adjusted numbers.  Seasonally adjusted employment numbers smooth through changes in employment that are judged to be part of some annual cycle such as the jump in retail employment every year as the Christmas buying season ramps up.  Of course, there is no magic wand that allows the Bureau of Labor Statistics to turn the raw numbers into numbers that leave out seasonal effects.  In recent research, Jonathan Wright has argued for a change in the way that the jobs data are adjusted.  He argues for a methods that would tend to deliver a less volatile estimate of the importance of seasons. In a blog post at the implications of this research for Friday’s jobs report are discussed. Justin Wolfers also discusses Jonathan’s work in the New York Times.  Have a look, and enjoy the nice fall weather.

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October 28, 2014

A Farewell to QE? By Jon Faust

The FOMC has long communicated that, if something like its modal outlook played out, it would likely make one final $15 billion reduction in the pace of asset purchases at its October FOMC meeting, which is now taking place.  This would put an end to the purchase program known as QE-infinity.  In essence, we may be coming to the “beyond” stage of the Fed’s bold September 2013 declaration of “To QE infinity and beyond.”

Most analysts seem to see the end of the program at this meeting as a foregone conclusion, and in this view the main discussion at the meeting will be about how to change the forward guidance for the federal funds rate—guidance that is currently intertwined with purchase program.  Given the momentous effects often attributed to QE, however, I thought it would be worth setting aside the forward guidance issue for a moment and considering a few farewell questions regarding QE.


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October 20, 2014

Is the Fed Behind the Curve or Jumping the Gun? By Jon Faust

Part of my job the last three years on leave at the Fed was following public commentary on Fed policy—both expert and lay commentary. There were at least two reasons for doing so. First, lots of good ideas come in, and given the difficult times we were facing, careful consideration of all reasonable ideas was the order of the day. Second, the Fed recognized that its use of unfamiliar tools gave rise to a special responsibility to explain policy. Keeping track of public commentary was an essential part of deciding what communication should focus on.

One steady theme in the commentary over the entire period was concern that the Fed would soon “fall behind the curve” with regard to containing a burst of high inflation. This was and is a serious concern. But the opposite risk—the risk of tightening too soon and causing disinflation–is also a concern. Today’s Wall Street Journal Realtime economics blog carries a piece I wrote on this topic: Is the Fed Behind the Curve or Jumping the Gun?

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October 18, 2014

I’m back. Faust returns from post at the Fed By Jon Faust

This fall (2014), I returned to the CFE at JHU after nearly 3 years on leave serving as Special Adviser to the Board of Governors of the Fed. It’s great to be back. I’ve returned with a wealth of knowledge and insights that probably could not have been acquired in any other way, and I’m very excited by the prospect of incorporating these insights in my research and teaching.

Bernanke and Faust

So what did I do at the Fed? Over this period the Fed’s main policy interest rate was as low as it can go and fiscal policy was a significant drag on economic activity. There is no standard central bank playbook for times like these. Thus, with Chair Bernanke and then Chair Yellen, and with the other leadership at the Fed, I spent most days thinking about, discussing, and sometimes arguing about (but no tantrums) what was most likely to be a constructive way forward. For someone who has spent a lifetime thinking about these issues, this was incredible, fascinating, and at times frightening.

Bernanke and Yellen

How did the Fed do over this period? I tend to be a tough grader. Given what we know now, I’d say that grades of A+ and D or below are probably off the table. But with the end of this chapter not yet written, an incomplete is probably the most appropriate grade for now.

I can say that in difficult times, the policy environment can become quite corrosive. The spectacle known as Congress is a daily reminder of this. Against this backdrop, the FOMC—the main policymaking body at the Fed—performed much as one might hope. Deep differences exist in society and among experts regarding the appropriate monetary policy for this period. This broad range of views was well represented on the FOMC. Firmly held differences were vigorously, but respectfully, debated. No one seemed to lose sight of the need to form a consensus policy in the face of profound unknowns. I am honored to have served these policymakers.

Back at Hopkins, I’ll be drawing on this amazing experience in my teaching and research. And over coming months I intend share some of my experiences in informal pieces on this CFE website.

It’s great to be back.

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