Read it at Tim Duy's Fed Watch
In other words, they are certainly capable of inducing higher inflation. They just don't because, in their view, 2% is a firm target, and the costs of exceeding that target, or, more importantly, changing that target, are effectively assumed to be infinite and thus by definition exceed any expected benefits.
Ultimately, It's About the Inflation Target
by Tim Duy
Here's the comment I left there.
tjfxh said...
Tim, what paths or paths (empirically measurable causal transmission mechanism) do you see available to the Fed for increasing inflation. I don't see any that are within the Fed's legal purview. How can the Fed create credible inflationary expectations without the actual ability to do so that people understand. No one i've encountered so far has had an answer to this. David Beckworth came up with some suggestions for implementing Scott Sumners suggestion of NGDP targeting, but they were shot down as beyond the Fed's legal purview.
Thanks,
Tom Hickey
Contributor
www.MikeNormanEconomics.com
18 comments:
Who did the "shooting down"?
How can the Fed create credible inflationary expectations without the actual ability to do so that people understand. No one i've encountered so far has had an answer to this...
That hurts Tom. :o)
http://mikenormaneconomics.blogspot.com/2011/12/limits-on-fed-purchases.html
...The issue isn't what the Federal Reserve Banks can purchase (Section 14 of the FRA) but what the Secretary of the Treasury can order the Fed governors to buy under the Gold Reserve Act...
31 USC 5302. Stabilizing exchange rates and arrangements
(b) Consistent with the obligations of the Government in the International Monetary Fund on orderly exchange arrangements and a stable system of exchange rates, the Secretary or an agency designated by the Secretary, with the approval of the President, may deal in gold, foreign exchange, and other instruments of credit and securities the Secretary considers necessary.
-----
I'd say "instruments of credit and securities" is pretty damn broad. The IMF language is just a prefatory clause (like "a well regulated militia" in the 2nd Amendment) that doesn't actually limit what comes after since stable exchange rates are an integral part of monetary policy. As the "designated agency", the Fed could trade its own book (in fact, it already does).
"The ESF does not provide financing to the Federal Reserve System for foreign exchange operations. Rather, the Federal Reserve participates with its own funds."
http://www.newyorkfed.org/aboutthefed/fedpoint/fed14.html
But as Winterspeak pointed out, purchasing financial instrument doesn't change non-government NFA, only the composition of financial assets. The Fed would have to purchase real assets, like houses instead of MBS, and I don't think that the language that permits this is there.
The Fed can try to engineer domestic inflation by devaluing the dollar in the fx market or by driving up the price of gold, but that has bigger drawbacks associated with it than its probably worth. No one has actually suggested this course of action as far as I know. It's called currency manipulation and other countries take a very dim view of it if it is implement as a policy, which it would have to be to cause inflationary expectations.
Tom -
What's your take on Bernanke's observations concerning the Fed's role in causing the Great Depression?
"No one has actually suggested this course of action as far as I know."
Except for Ravi Batra and his dual exchange rate plan to boost exports.
I meant the people in the discussion about Sumner's NGDP targeting, which is basically a fancy way of saying inflation targeting, and others calling for inflation targeting in this debate on the blogosphere. Here's am asking Tim what his stance is as a Fed watcher who is an expert on this area. His post takes it for granted that it's obvious the Fed has further tools to target inflation, but it is not obvious to me. I'm just asking.
My guess is that most don't know about Batra's suggestion.
Sorry, this is ot, Germany sells bonds at negative yields: how is that possible for a risky bond? When US sold theirs at neg. yields we took it as a confirmation of the sovereign status, how come Germans can do the same?
http://www.bbc.co.uk/news/business-16470494
I was so interested in the answer to this question I spent an hour of my life I can never get back listening to Sumner explain himself.
http://www.econtalk.org/archives/2012/01/sumner_on_money.html
It was a good interview, thorough, teased out a lot of the detail of Sumner's positions.
However when it go to the $64,000 question, Sumner weaseled. When the question was rephrased and asked again, Sumner continued to weasel.
The bottom line seems to be that once you get past expectations, he's got nothing.
geerusell: The bottom line seems to be that once you get past expectations, he's got nothing.
Right, it's like trying to rob a bank with a toy gun. There has to be an actual causal transmission mechanism to cause expectations in the mind. Getting from the mind (unobservable expectations) to real change (observable economic change) is just jabber otherwise. It's magical thinking.
Tom said
or by driving up the price of gold
.
.
No one has actually suggested this course of action as far as I know.
How do you know that this is not already being done? Gold price since 2001
cb's other than the Fed have been big buyers of gold as well as the Chinese and Indian publics since they have become more prosperous. Gold is a traditional store and display of wealth in Asia. Of course, the god bugs have also been piling in and probably most investors have altered their portfolio composition to include more gold due to increased systemic risk and greater uncertainty. Then there was the advent of the gold ETF's.
I doubt that the good case can be made that the rising price of gold is driven by the Fed. I don't recall that even Zero Hedge has gone there yet, and they would be the first to "know."
So Tom, your take is that right at the end of 2001, Indians and Chinese gold buyers suddenly woke up after over twenty years of being asleep and said "Hey gold is cheap - let us buy it up?"
See Gold Prices for a 100 years - log scale
See also this chart from Bob's gold price
I didn't say that Asian buying is the only reason, but it is widely recognized as one of the factors, along with cb's, especially cb's of emerging countries, and portfolio managers changing composition more heavily weighted toward precious metals. These are the major factors I've heard mentioned.
Many also posit that the emergence of ETF's, allowing small players to get involved heated up the gold market too, as did growing expectations of both systemic collapse and rapidly increasing inflation due to different interpretations of conditions.
Again, I have head no one say that the Fed has been behind this phenomenon, so if it s the case it pretty well hidden from view.
Tom,
Right after 9/11/2001? The graphs are extremely clear on this. There is a very sharp inflection point!
Clonal, I was not paying attention to the gold market at the time, and I am just going on what I've read since paying attention within the past couple of years. I haven't seen anything on possible reasons for that inflection point in what I have read.
Here's an interesting article that connects gold and RRE, and could have something to do with it.
Gold Housing Ratio Falls to Historic Low
Tom,
From 1980 when gold peaked in real dollars, real gold price declined at a rate of 5.1% It changed course and started increasing Dec 2001 at a rate of 15% till Dec 2008. It increased its climb to a rate of 24.5 % till now (this includes the recent fall)
In my books, this was, and remains an attempt by the CBs (probably co-ordinated) to prevent deflation.
What I read is that cb's were selling gold 1999-2001 and then stopped selling. The contraction of supply was a factor in the upward trend. Then the cb's of india and China started buying and now recently more cp's are buying, which is a factor in gold price acceleration.
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