February 10, 2016

Are the Saudis Thinking Clearly? And Should We? By Bob Barbera

Saudi Arabia slashed oil production in the mid-1980s as prices plunged. Not so Today:

Fig. 1. Saudi Arabia Oil Production, 1,000 bbl/day. Source: EIA Monthly Energy Review via Jim Hamilton’s Econbrowser.

Given Saudi Arabia’s long-standing commitment to act as swing producer to stabilize prices, current Saudi behavior raises big questions. Why is Saudi Arabia pumping at historic rates in the face of a collapse in the oil price? And, as President Obama’s state of the union message highlights, what should be the U.S. policy response?

Let’s take it as given that the Saudis remember how to cut production by two-thirds as they did when oil prices fell by about two-thirds in the early 1980s. This time they have increased production in the face of a similar fall. Indeed, the Saudi’s are now pumping more oil than they did in 2008 when the oil price was well over $100 per barrel. What’s so different today?

Perhaps we should start with what’s been the same since the 1970s. (more…)

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February 6, 2016

Still Crazy After All These Years By Jon Faust

For the past several years, the Congressional Budget Office has been offering frightening forecasts about government debt growing out of control unless strong action is taken. While these forecasts have played a prominent role in policy debates, the CFE’s Jonathan Wright and Bob Barbera have for several years been arguing that those forecasts are, well, crazy. Or as the headline on Bob’s 2014 FT piece put it: “Forecasts of U.S. Fiscal Armageddon are Wrong.” The key to their argument—in the FT, here, and here —is that the CBOs economic growth and interest rate projections jointly make no sense. For the more complete argument see their pieces, but the gist is that under the CBO’s projected tepid growth projection, interest rates were highly unlikely to rise to the assumed levels.[1]

Jonathan discussed these issues with CBO forecasters in early 2014, arguing that it was implausible that government borrowing rates would rise to the levels CBO was projecting in the main scenario. Checking back today, same story. The CBO is projecting that the Treasury 10-year yield will rise above 3 percent in Q4 this year. Taking bets on that? The implausibly high rates continue to greatly exaggerate the debt problem.[2]

We were glad to read in Greg Ip’s recent column that Doug Elmendorf, the CBO director responsible for those forecasts until recently, now agrees. Elmendorf and Louise Scheiner of the Hutchins Institute make the argument that,[3]

…the fact that U.S. government borrowing rates are at historical lows and likely to stay low for some time, implies spending cuts and tax increases should be delayed and smaller in size than widely believed.

It was Elmendorf’s CBO that helped stoke those widely-believed views now labelled as misguided. And as noted above, the CBO is still stoking.

For the sake of coherent public policy, we hope that the CBO will listen to Elmendorf and Scheiner.


1. The interest rates were plausible, perhaps, but only if growth rebounded. In either case—low interest rates and growth or higher rates and higher growth—the budget picture looks much better. [back]

2. We are arguing, like Elmendorf and Scheiner discussed in the text, that the fiscal issues are far less severe and less pressing than they’ve been portrayed. We can still have a lively discussion regarding just how much of a problem, if any, remains once we take this fact on board. [back]

3. Hutchins Working Paper 18[back]

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January 29, 2016

Lunch and Tea with the Forecasters Club of NY By Jon Faust

If you had your TV set tuned to CNBC… August 21, 2001, two commentators were watching Alan Greenspan get out of a car and head to his office. They discussed the color of his tie (maroon) and the brand of shoes he appeared to be wearing (Rockports).’
         Danny Hakim, New York Times[1]

Yesterday, I had a great visit with the Forecasters Club of New York. Here are my slides. As we were chatting, a question came up about the Fed’s change in its strategy statement. This question has surfaced many places since the FOMC meeting, and my view about it flows directly from the no tea leaves approach to interpreting Fed communication that I’ve been pushing.

When there is a significant change in the Fed’s assessment of the outlook or in its likely reaction to the outlook, in this view, the Fed will probably attempt to tell you that directly. Because the world is complicated and communication is hard, those statements won’t be as clear as anyone would like—we’ll still need those Fed analysts. Important news will not, however, be signaled by obscure signals and signs.

Of course, the life of a tea-leaf-watcher is far more entertaining. The FOMC’s projections alone are a veritable vat of soggy tea leaves, and then there’s the Chair’s tie (or scarf). As of Wednesday, it looks like we can add the annual revision or nonrevision of the strategy statement to the list of tea leaves to be pondered.

Since 2012, the Fed has followed the tradition of reaffirming each January, possibly with revisions, its Statement of Longer-run Goals and Policy Strategy. In this year’s version, the FOMC added language clarifying that the 2 percent inflation goal was symmetric: “The Committee would be concerned if inflation were running persistently above or below this objective.[2] ” I can just imagine the dialog leading to this dramatic change:

Chair: How can we signal our dovishness?

Fresh-faced staffer: We could attempt to say something straightforward in the FOMC statement.

Chair: Who’s the new person? How about some serious ideas?

Savy staffer: I’ve got it. January is the month we revise our goals and strategy statement. We could slip something in there.

Chair: Brilliant. What scarf should I pair with that?

The symmetry now embedded in the strategy statement has always been FOMC policy. Symmetry has regularly been asserted by policymakers, and I suspect that no current or recent FOMC member has ever said anything to the contrary. This January may have been an appropriate time for the FOMC to be sure the public understood this point, but I don’t think it reflects any change in views or signal about the near-term course of policy.[3]

In the no-tea-leaf interpretation, the FOMC on Wednesday said that this year’s macro data and market moves have the FOMC’s attention, but are still too recent to warrant a definitive and pronounced shift in the U.S. outlook. As the presence or absence of a significant change in the outlook becomes clearer, the FOMC will, as always, adjust policy as appropriate.

What I’d like to hear from the FOMC is a clearer statement about their assessment of the likelihood of recession[4] and about how policy would likely respond. And by the way, the ‘balance of risks’ statement—or absence of such a statement—is a grossly inadequate vehicle for conveying that information. But that’s a subject for another day.


1. Quoted in All the People, Joy Hakim, 2003, p231. [back]

2. The use of the subjunctive tense here is entirely appropriate, but it does kind of invite a waggish lad to add, “You know, for example, if persistently low inflation were ever to happen.” [back]

3. So why was it not explicit before? Not sure, but we can speculate. Perhaps it was not included because between the original penning of the statement and the 2015 revision, questions over symmetry were not so pressing in practice, and the FOMC was not so aware of public confusion on this point. Policymakers, in this view, included the clarification so that they didn’t have to keep answering questions on the topic. [back]

4. And throw in the likelihood of a substantial overshoot of 2 percent inflation. [back]

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January 26, 2016

The Pause that Refreshes By Jon Faust

How will the Fed respond to the recent drops in the stock market? We might get a hint from the Fed’s conduct after last August’s turbulence, which now looks like a dress rehearsal for the current problems. In that event, the Fed chose to forgo the widely-signaled liftoff in September, but then implemented liftoff amid quieter markets in December. The lesson? In my view, the main lesson is that market distress may lead to a pause in policy plans, but unless macro fundamentals soon echo the market distress, the Fed will not meaningfully alter the course of policy.

I think there are two keys to understanding this lesson. First is Paul Samuelson’s quip that the market has called 9 out of the last 5 recessions.[1] Second is the fact, often repeated in the run up to liftoff, that the precise timing of any given policy action is of almost no importance.

Samuelson’s wisecrack is often taken to imply that the market gives highly unreliable signals about the state of the economy. But you don’t have to be Nate Silver to realize that calling 9 out of 5 recessions would indicate impressive predictive value. Taking Samuelson’s statement literally, more than half the time when the market signals recession, a recession ensues. In reality, the stock market probably is not as good a predictor as suggested by Samuelson, but stock market drops nonetheless reliably signal a heightened risk of recession.[2]

Given all the false signals, a market drop probably should not change ones view of the modal—that is, most likely—scenario much, but such drops can still suggest a significant rise in the probability of less likely, but far darker, scenarios.

Here is where the second point comes in: if the Fed has in place a policy trajectory that is appropriate for the modal scenario, there is essentially no cost briefly pausing the implementation of that trajectory to reassess macro fundamentals in light of a worrisome market signal. The effect of policy on the macroeconomy depends mainly on the expected course of policy over the next several quarters and years. Shifting the timing of any given policy move forward or backward a couple of FOMC meetings will have implications so small we cannot hope to measure them.

It is also important to note that no variable, not even the stock market, sends a reliable signal about recessions very far in advance—the stock market signal tends to be roughly contemporaneous. Thus, the Fed can get a reading on the validity of the stock market signal fairly quickly. If the stock market signal turns out to be a false alarm, the Fed can return to the previous course. The pause will have essentially no implications for the macroeconomy.[3]

In the world I’m discussing, the overall stance of policy is determined by macro fundamentals, with financial market signals occasionally putting wrinkles in the near-term timing. Chair Yellen’s explanation for the failure to liftoff at the September meeting squares with this view:

[I]n light of the heightened uncertainties abroad and a slightly softer expected path for inflation, the Committee judged it appropriate to wait for more evidence, including some further improvement in the labor market, to bolster its confidence that inflation will rise to 2 percent in the medium term. Now, I do not want to overplay the implications of these recent developments, which have not fundamentally altered our outlook. The economy has been performing well, and we expect it to continue to do so. [cite]

Here Yellen reiterates statements made by several policymakers before the September FOMC meeting that the U.S. outlook had not significantly changed. Some analysts take this fact as implying that policy should be unaffected, which then leads to the logic that the policy delay was a loss of nerve. Edward Luce put it this way just after Yellen’s September press conference:

So that is cleared up then. The Federal Reserve wanted to raise rates in September but then lost its nerve over China’s stock market crisis. Instead, it will probably move in December. No harm done.

The return to normal is on course barring a minor hiccup in the schedule. That, at least, was the gist of Janet Yellen’s message. Yet she also hinted she could simply repeat last week’s line in December.[cite]

Under this logic, the “gist of Janet Yellen’s message” must have amounted to Yellen making a tentative forecast of greater FOMC courage in December. My account (for better or worse) depends less on serial mood switching of the FOMC.

The modal outlook had not changed much, but the Fed was altering the near-term timing of liftoff—a move of little consequence—in order to reassess macro fundamentals in light of the market signal. If the market signal was not followed by the bottom falling out of the macro data, the previously signaled path would be resumed.

So what does this mean for policy in coming months? As in the weeks before September’s FOMC, policymakers have been out noting that near-term volatility has not greatly altered the modal outlook. It basically never does, which is Samuelson’s point. But pausing to assess whether macro fundamentals are turning seems even more clearly warranted than at the time of last September’s meeting.[4]

Let me add two forecasts. First, after the FOMC statement is released tomorrow, commentators will stumble over themselves in a race to divine whether hawks or doves have taken over the FOMC and will guide policy going forward. In our view, the FOMC statement and discussion thereafter is unlikely to imply any fundamental change, instead it may signal a pause to refresh the view on the macro fundamantals. If things quiet down and the macro economy continues to chug along, policy will also chug along, fundamentally unaltered, after a brief delay.

Second, as Bob Barbera and I have emphasized in a series of recent posts, we are not so sanguine about things chugging along. Instead, we see a darker picture for China and a weaker inflation outlook than seem consistent with the FOMC policy projections. If something like our forecast comes to pass, any pause will evolve into a much slower pace of rate increases than are implied by the FOMC’s December rate projections. Information arriving since we wrote this in December has nudged us further in the same direction.


1. “Science and Stocks,” Newsweek, September 19, 1966, p. 92 [back]

2. Much research supports the basic facts about the stock market lying behind Samuelson’s point. A nice recent piece on this is Bluedorn, et al., Do Asset Price Drops Foreshadow Recessions? IMF working paper 13/203. [back]

3. In this post, I am not arguing that the pause-tactic is optimal in any sense. I am arguing that it is a reasonable tactic and is how the FOMC seems to be behaving. For readers interested in formal optimality, I think it is clear that if properly communicated the conventional costs and or benefits of pausing would be second order. If I were attempting to build an interesting optimality argument, I’d include nonlinearities in the market signal, inherent nonlinearities in recessions which are magnified at the zero bound. Additionally, I’d take a world of imperfect information in which a pause might provide for more effective signal of conditional support for the economy in the event of recession than, say, would a simple Fed announcement conveying conditional support. [back]

4. The market signal is stronger and there are more negative hints showing in the U.S. macro data. [back]

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January 15, 2016

2016 Starts with a Bang–Or was that a Pop? By CFEGuru

By Bob Barbera and Jon Faust

When last we posted, we were making the case that a 25 basis point rise in the federal funds rate, paired with a sufficiently gradual tightening thereafter, was a reasonable hawk/dove compromise for the FOMC. Under our outlook, sufficiently gradual was likely to be a good deal more gradual than the FOMC was predicting, however. Our research suggests that conventional slack-based reasoning doesn’t provide much guidance on inflation, and that disparate confounding dynamics of other variables often dominate.[1] Chinese economic outcomes are one such factor, and we argued that China was likely in worse shape than was generally recognized. For this and other reasons we were projecting that inflation would once again come in below what the FOMC was projecting.

A couple weeks into the New Year, it’s tempting to claim that we nailed it. But that’s not right. With plunging Chinese share prices, oil in the vicinity $30 a barrel and the Renminbi in retreat, 2016 has already been a good deal more dramatic than we could, with a straight face, say we expected.

These developments will inevitably call into question the wisdom of the Fed’s December move. Is the current turmoil the Fed’s fault? Was liftoff a mistake?

We think the Fed’s actions played no central role in the recent turmoil. China’s woes are largely home grown, and the continued spectacular fall for oil prices reflects a complex interplay between new technologies, geopolitics, and a newfound Saudi Arabian willingness to pump with gusto at low prices. None of these confounding elements would look different with a fed funds rate at 12 basis points instead of 36 basis points.

Of course, nobody seriously believes that the 25 basis points alone could matter much—it is what liftoff might imply for the future course of policy that could be momentous. On this front, the FOMC spent much of 2015 trumpeting the nature of the hawk/dove compromise discussed above: liftoff was coming but the rise in rates thereafter would be more gradual than previously anticipated. The message seems to have gotten across: the expected path of rates arguably looked more accommodative at the end of 2015 than at the beginning.

For example, in December 2014, the median FOMC projection had the federal funds rate rising to 0.9%, 2.4%, and then 3.4% over the ensuing three years. At the time of liftoff in December 2015, the comparable projection for 1 year ahead is a bit higher, but rate expectations were the same as or lower thereafter (Table 1). The policy interest rate expectations reported in the survey of primary dealers show the same pattern.[2] If pushing the expected policy rate too high has been a mistake, it was a mistake committed by late 2014 and a mistake that moderated a bit in 2015.[3] There was certainly no tightening shift of a magnitude that might be expected to trigger the problems that may lie behind the recent turmoil.

Table 1. Federal Funds Rate Projections
     Years in the future
1 2 3
FOMC Survey
    Dec. 2014      0.9 2.4 3.7
Dec. 2015   1.4 2.4 3.3
Dealers Survey
Dec. 2014   0.9 2.2 3.2
Dec. 2015   1.2 2.2 2.9

Note: Projected federal funds rate (in percent) 1, 2, and 3 years from the survey date in the left column. Taken from the FOMC Survey of economic projections [2014, 2015] and from the N.Y. Fed’s Primary Dealers survey. Rates are the medians across respondants, reflect the midpoint of the target range where appropriate, and are rounded to the nearest tenth.

Regardless of the source of recent distress, liftoff could still prove to have been a major mistake. Once again, 25 basis points are hardly worth discussing. Liftoff could become a mistake, however, if the FOMC felt compelled to stay on a tightening path in the face of evidence warranting a reversal. Policymakers are probably as averse as the rest of us to backtracking from a difficult decision. If the FOMC were to show this aversion while incoming information reinforced what we have seen so far this year, that 25 basis points of reasonable hawk/dove compromise could mushroom toward the sort of big mistake that pundits have been trumpeting.[4]

This ugly outcome seems unlikely. At her December press conference, Chair Yellen was asked how the FOMC would feel about reversing course, and gave the right answer:

I’m not denying that there are situations where central banks have moved too early. We have considered the risk of that. We have weighed that risk carefully in making today’s decision. I don’t believe we’ll have to [reverse course]. But … as the Committee has said, we’re watching economic developments closely, and we will adjust policy in whatever way is necessary to support the attainment of our objectives. [source]

Fed officials across the spectrum have be emphasizing this same line.[5]

Thus the stage is set for a policy pivot if the tone of incoming news does not change. Should this scenario continue looming large, we hope that we get clear direction from the FOMC, and not the version of FOMC transparency in which 17 policymakers transparently express 17 views, leaving policy as transparent as Chinese GDP.


1. Faust and Leeper made this case in their paper, The Myth of Normal , presented at last summer’s policy symposium at the Jackson Hole. [back]

2. Yield-curve-based measures of expectations tell a similar story. For example, the Treasury 10-year yield just after the December meetings in 2014 and 2015 were essentially the same. [back]

3. To be fair, many critics do say that the Fed has been too tight all along. Without debating this view, our point is that the expected path of policy did not become appreciably tighter over 2015. [back]

4. e.g., here.  [back]

5. e.g., Presidents Rosengren and Bullard[back]

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December 24, 2015

China’s economic performance and other puzzles By Bob Barbera

Commodity price collapses tend to be a reliable signal of a broad-based global slowdown. For example, drops of 15 to 20 percent in CRB raw industrial commodities index [1] have reliably been associated with significant slowdowns in growth (Fig. 1).[2] The recent fall in commodity prices exceeds any decline since 1980 save the one registered during the depths of the global crisis of 2008-2009 suggesting a major slowdown.

Notes: Growth in red (right scale), commodity prices in green (left scale). Four-quarter change in the log of the quarterly average CRB/BLS raw industrials index; source: Bloomberg. Year on year percent change in world GDP at constant prices; 2015 data are forecast; source IMF WEO Oct. 2015 database.

So far, though, official tallies only suggest a modest global growth slowdown in 2015, and a popular story line envisions a sharp 2016 GDP growth slowdown that would validate the powerful fall for commodity prices. This may turn out to be correct, but the timing would be peculiar. Historically, commodity prices have moved largely coincident with big shifts in growth, and have not led them.

Another possibility deserves serious consideration: (more…)

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December 15, 2015

Liftoff? And then… By Jon Faust

Early December finds us asking the traditional question on the eve of the holidays: What will the Fed give us for interest rates next year? Holidays past might provide some guidance. The Fed’s policy projections going into the December FOMC last year showed a year-end 2015 median federal funds rate of about 1.5 percent, with a range from zero to three percent. And the situation is almost the same this year: the funds rate is zero entering the December meeting, and the projections for year-end 2016 have a span of approximately zero to three percent, with a median just below 1.5 percent. More Groundhog Day than Christmas.

So what rates will the Fed give us next year? (more…)

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August 19, 2015

Unconventional Lessons for Unwinding Unconventional Policy, I: The Volcker Disinflation By Jon Faust

The Fed is (data dependently) on the cusp of attempting to engineer something unprecedented—a relatively benign liftoff of short-term interest rates after an extended period with those rates near their lower bound. Many analysts have been carefully analyzing past tightening episodes hoping to understand the likely Fed behavior, and I am regularly asked what I take as the lessons from, e.g., 2003-2005 and 1994. Here is what history teaches: the FOMC will do what it usually does after 6 years near the lower bound for nominal rates and when its balance sheet is over $4 trillion.

The current situation is far from the range of historical experience, and there will be no simple lessons from history. But there may be more subtle lessons in both the successes and failures of the past. This is the first in a series—not sure how long a series—of posts about unconventional history lessons for the unwinding of unconventional policy.

The most recent example of the Fed engineering anything resembling an unprecedented transition is the Volcker disinflation.[1] After coming into office in 1979 Chair Volcker almost immediately set about a severe tightening of monetary policy that saw inflation fall from over 10 percent to about 5 percent by August of 1982. At that point, the Latin American debt crisis threatened the survival of many large U.S. banks and soon became the focus of policy.

Consider the nitty gritty of how the Fed managed policy. The Fed adopted new operating procedures for the transition, a nonborrowed reserves targeting procedure directed at hitting monetary growth goals stated each year in the form of cones for various measures of money. During the period, each Friday’s announcement of the money supply numbers took on the market-moving importance that is now reserved for nonfarm payroll announcements.

How did this new procedure work out? Inflation came down and has stayed down. Let’s call that success. Volcker is widely, and rightfully in my view, heralded as a hero for his leadership in achieving this objective.

The policy framework, however, was a mess. Because the behavior of the money supply bore no close relation to Volcker and the Fed’s goals, the money supply was redefined several times and the cones were moved mid-year. If we view the monetary cones as the goalposts of policy, the Fed both re-designed the football and moved the goal posts and still didn’t get the ball through the uprights.

The figure below from an article by noted historian Bob Hetzel[2] illustrates this point, and Hetzel’s extended note to the table makes clear several additional machinations:

Hetzel’s note to Table: In order to display the data available contemporaneously, M1 is taken from the first Board of Governors statistical release H.6 showing complete monthly figures for a given year. In 1980, M1-B is used. In 1981, shift-adjusted M1-B is used. This series adjusts other checkable deposits for shifts from nondemand deposit sources. The discontinuity after 1981 arises from the discontinuance of the shift adjustment. After October 1982, the target range for M1 was replaced by a “monitoring” range. The dual ranges for M1 in 1983 reflect the rebasing of the M1 monitoring range in July 1983.

At the time, the Fed was excoriated both by economists[3] and Congress. I was a research assistant[4] at the Kansas City Fed during this period and was tasked with reading all of Volcker’s testimony on monetary policy; being young and naive, I was shocked at the level of discourse. People complain about the tone in Congress today, but the tone of the monetary policy debate was at least as inflamed in the early 1980s.

But few today remember that the Fed’s operating procedure and communications framework were, by any reasonable assessment, a complete hash. Volcker brought down inflation, and missing the cone for M1-b adjusted is relegated to the footnotes of history.

What was the key to Volcker’s success? The key is probably that everyone inside and outside the Fed was pretty clear on the objective the Fed was pursuing: bring down inflation. Everyone could also see that the actual policies followed—regardless of the framework under which they were implemented—were broadly consistent with that prime objective. The rest was sideshow.

For liftoff, I think the lesson is clear. The prime objective will be to make short-term rates go up. Most informed economists agree that the Fed has the tools to do this. That is, some combination of the array of tools available to the Fed can get the job done. And the details? Will the federal funds rate stay near the middle of the announced target range? Will the ranges have to be widened to accomplish this goal? Will the parameters of the overnight reverse repurchase agreement facility have to be adjusted? I don’t know the answers to any of these questions, but if the Volcker case is any indicator, the operational details of implementing this unique transition may at times look quite messy. In the famous modal scenario, however, rates will go up, and the rest will largely be forgotten.

I will admit that I have floated this argument in many circles, and one common refrain is that today is different due to social media, the round-the-clock news coverage, and the hyper-critical Congress. Perhaps these are first-order considerations. Perhaps because of twitter, the Fed must not only achieve the objective, but also achieve it gracefully. If so, we may be doomed.

But I think not. To fill out the modal scenario, the FOMC will emphasize that raising the level of short-term rates is the prime objective and that it has the tools to achieve this. Various adjustments to the particular manipulation of tools will be made, presumably amid a firestorm of blog posts and nasty congressional hearings. And rates will rise, and we will all turn to the next subject.

A note of caution: there are many ways that events in the world could derail this modal scenario, just as the debt crisis replaced disinflation on center stage for Volcker. But that is another subject.


1.Disinflation obviously had many precedents, but this event is probably as close as we can come to unprecedented. In many ways, what is now called the Great Inflation was a unique worldwide phenomenon, and there were certainly unique features to ending it. [back]

2.Robert Hetzel, Monetary policy in the early 1980s. Economic Review, Federal Reserve Bank, March/April 1986. [back]

3.For example, in “A Map for the Road from Dunkirk,” [New York Times, March 21, 1982, as quoted by Hetzel] Nordhaus argued,

The first, step [of a new economic policy] would be to bring down the curtain on the disastrous monetarist experiment of the last two years. The Federal Reserve should be directed to cease and desist its mechanical monetary targeting and to set monetary policy with an eye to inflation and unemployment… At the same time, the Fed should overhaul its operating procedures. The techniques of emphasizing supply of bank reserves rather than interest rates since October 1979 has produced greater volatility of both interest rates and the money supply.

Note to the New York Times headline writers: if I have my history right, a map to the road from Dunkirk was not the issue; perhaps “A chart for sailing from Dunkirk.”[back]

4.With Bryon Higgins (a responsible adult), I threw my naive 2 cents worth in on the topic of redefining money: Bryon Higgins and Jon Faust, NOW’s and Super NOW’s: Implications For Defining and Measuring Money, Economic Review, Federal Reserve Bank of Kansas City, January 1983.[back]

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March 19, 2015

Dots … By Jon Faust

Just before the release of the FOMC’s Survey of Economic Projections (SEP) in December, I posted a piece saying that the dots would reveal nothing and arguing that, by design, the dot plot is not likely to help us understand policy. My main critique is that the dots convey the range of opinions, but shed no light on how the differences will be resolved. Shortly after 2 pm yesterday, Ross Margolies, a steadfast (and succinct) supporter of the CFE, emailed: I thought the dots meant nothing.

I suspect that reporting a 3-month policy projection each September would lead to an annual feeding frenzy of short sightedness.

Good point. My earlier comments were wrong in neglecting an important case: the dots are informative when they are tightly clustered. For example, over the 3-year history of the dots, essentially everyone on the FOMC expected rates to stay at zero at least through the first year reported in the SEP, and the SEP very effectively conveyed that unity.


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March 16, 2015

Happy Anniversary Chair Yellen! By Jon Faust

Post-FOMC Press Conference, March 2014

ANNE SAPHIR: Then once you do wind down the bond buying program, could you tell us how long of a gap we might expect before the rate hikes do begin?

CHAIR YELLEN:… [S]omething on the order of around six months or that type of thing. But, you know, it depends. What the statement is saying is, it depends what conditions are like. We need to see where the labor market is, how close are we to our full employment goal-that will be a complicated assessment not just based on a single statistic… Inflation matters here, too, and our general principle tries to capture that notion. If we have a substantial shortfall in inflation, if inflation is persistently running below our 2 percent objective, that is a very good reason to hold the funds rate at its present range for longer.

The first anniversary of Chair Yellen’s initial press conference is at hand and it’s a good time to review the past year. In doing so, I’ll mainly follow the norm in the press of focusing on developments regarding the date interest rates will lift off; but I’ll turn to more important issues toward the end.

The basic message from Chair Yellen last March was that we were steadily approaching the time when an initial increase in the federal funds rate would be appropriate, that the precise timing of lift off was likely to move forward or back in time depending on incoming information regarding employment and inflation, and that (more…)

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