Archive for the ‘Commentary’ Category

The Fed’s Unwarranted Skittishness

Posted on December 3rd, 2015 by admin

The Federal Reserve has forecast sustained economic growth when it raises the federal-funds rate. Yet in 2013-14, even before ending asset purchases under its third round of quantitative easing, the Fed expressed concerns that a one-quarter percent rate increase could sidetrack the economy. And this year the Fed has said that a stronger dollar would harm the economy. Are its fears warranted? Recent history says no.


A Better Strategy for the Fed

Posted on March 20th, 2015 by admin

The economy is growing, labor markets have improved dramatically, and inflation is forecast to return to two percent over the intermediate term. However, the Fed still expresses extreme caution about normalizing monetary policy, citing myriad concerns, ranging from sluggish wage growth and low inflation to foreign economic and political risks, which might delay the date at which interest rates finally lift off their zero lower bound. This creates the potential for an erosion of the FOMC’s credibility and suggests the Fed lacks a clear strategy for getting monetary policy back on track.


Rules for the Fed to Live By

Posted on March 18th, 2015 by admin

Should the Federal Reserve conduct monetary policy using a monetary policy rule? This question, a classic one in economics, was raised again during Chair Janet Yellen’s recent Congressional testimony and has become the subject of intense debate since then. To some, the proposal to establish a rule is an attack on Fed independence, or a narrow-minded attempt to impose a straight jacket on monetary policy, but that is a caricature. Advocates of rules are not proposing rigid restrictions on Fed actions, but rather are insisting that the Fed spell out an empirically defensible framework that guides it, and explain deviations from that framework.


Independence, Accountability, and Transparency: Three Keywords for the Fed

Posted on March 5th, 2015 by admin

Monetary policymakers always face tradeoffs, and today provides no exception. By holding interest rates lower, for longer, Federal Reserve officials might temporarily strengthen the economy, but only at the cost of risking higher inflation down the road. To help manage these tradeoffs between short-run gains and long-run costs, the Federal Reserve, like many other central banks, has been granted considerable independence. How can an independent Federal Reserve remain accountable to the American people? To answer this question, it suffices to note that the U.S. Congress has always specified the overriding goals for monetary policy.


Don’t Audit the Fed, Restructure It

Posted on February 19th, 2015 by admin

An active–and often colorful–debate surrounds recent legislative proposals to “audit” the Federal Reserve. While participants on both sides of this debate have not always been careful to explain exactly what such an “audit” would entail, all of these proposals emphasize that the central bank requires closer monitoring. Some even hint that the Fed is engaged in nefarious activities which, if brought to light, would meet with objections from the American public. Here, we take calls for reform seriously, and propose some structural changes that would turn the Fed into a more transparent, accountable, and ultimately more effective institution.


Forward Guidance: Theory versus Reality

Posted on February 9th, 2015 by admin

Mainstream monetary economics posits that the Federal Reserve influences economic activity by shaping expectations about the future. According to theory, when the Fed provides “forward guidance” about the future course of monetary policy, consumers and producers adjust their spending, hiring, and investment decisions accordingly. Forward guidance, in turn, can be communicated to the public via statements from Fed officials or public understanding of a policy rule that leads the Federal Open Market Committee to adjust its target for the federal funds rate. This theory might, or might not, be an accurate description of how Federal Reserve actions are transmitted to aggregate spending and prices. But, for the time being, it is useful to examine the nature of forward guidance that the Fed is delivering to the public.


Why Dovish Critics of the Fed’s FOMC Statement Are Wrong

Posted on January 29th, 2015 by admin

Some observers of the Fed were complaining Wednesday that the FOMC statement should have rolled back plans for a mid-2015 rate increase. In their view, reduced rates of inflation observed currently, along with the strong dollar and weak nominal wage growth, should lead the Fed to postpone any rate increases. Such concerns are dead wrong. They reflect a deep misunderstanding of the time lags inherent in the removal of accommodative monetary policy, and confusion about the proper way to target inflation. Dovish critics are also wrong about how the Fed should respond to lower oil and gas prices, the strong dollar, and slow wage growth.


What Tsipras’s Victory Means for Greece and the EU

Posted on January 26th, 2015 by admin

It seems clear that the leftist Syriza party will be in control of Greek policy going forward. As a consequence of that, other questions now loom large for Greece. Syriza ran on a single issue: reversing Greece’s reforms, which had been the quid pro quo for the assistance Greece has received from the IMF, EC and ECB (known collectively as the “troika”) over the past several years. It is hard to see how Mr. Tsipras could change course dramatically and say that he is planning to honor Greece’s promises to the troika. Attention will now shift to the response of the troika to Syriza’s victory and its policy reversal.


How The Fed Can Bring About Higher Wages

Posted on January 14th, 2015 by admin

These most recent historical patterns should give us confidence that, as the economy continues to improve, more sizable wage gains will begin to accrue, bringing renewed prosperity to all Americans. These same patterns underscore that the best thing that the Fed can do right now is to stick to its current strategy of gradually but decisively bringing its monetary policy back to normal—a strategy that, most economists inside and outside the Fed agree, has to involve moving interest rates higher towards the middle of 2015. This will insure that inflation returns to its two percent long-run target without overshooting, maintaining the necessary backdrop of price stability that is required for a prolonged period of robust but sustainable growth. Experience shows that to bring about higher wages, monetary policymakers should focus on stabilizing inflation first.


As Economic Performance Advances, the Fed Lags Behind

Posted on January 8th, 2015 by admin

Moving into 2015, the U.S. economy is fundamentally sound. Key factors suggest that the economy is shifting gears toward sustained stronger growth, and that the supply-side nature of the lower oil prices will provide a big boost to economic performance in 2015. But the Federal Reserve’s monetary policy is wildly inconsistent with healthy economic growth. The Fed’s latest forward guidance that it can be “patient” in hiking rates—a nuanced change from its earlier “considerable time” language–misses the broader point that interest rates not only should be higher, but that economic performance will benefit and be better balanced when the Fed normalizes monetary policy. This suggests that the Fed should begin to hike rates sooner rather than later.