1. Open-Ended Expansion.
2. Targeted at Labor Market.
3. Not Tied To New Weakness.
This is a bold new world for Fed policy.CNBC NetNet
Three Things Fed Did Today It's Never Done Before
John Carney | Senior Editor
1. Open-Ended Expansion.
2. Targeted at Labor Market.
3. Not Tied To New Weakness.
This is a bold new world for Fed policy.CNBC NetNet
52 comments:
Is targeting to the labor market that different? Employment is a part of their mandate, and it's something they've always looked at, in addition to inflation.
okay, so, they've made it explicit that it's broader than just employment. maybe that is unprecedented.
Exactly what 'transmission mechanism' are they employing to target the labor market?
artsie non-linearity
That's the same question I've been asking, JK. Can't seem to get an answer from anyone promoting this policy.
There seems to be a kind of campaign underway to hype the boldness or unconventionality or radicalism of the Fed's actions. Maybe the idea is that the more bold people believe this move is, the more optimistic will be their response. Maybe the hypesters think the confidence fairies will wake up if we clap really, really, really hard - and believe with all our might in the power of the Wizard of Fed.
It's just more QE. We have already had QE. The openendedness is new, but not radically new - just new.
And as wh10 says - it's bold because its focused on the labor market? The Fed is mandated by law to focus on the labor market. It mentions the labor market in every statement and always conveys a message that says the state of the labor market is a determinant of their policy response.
I'm thinking that the hype is just a lot of asset market salesmen trying to blow up some bubbles and move their wares in the transient excitement of the "big announcement" - as well as the usual bloggers and reporters covering "the Street" who can never get enough of this hysterical BS.
I'm thinking that the openendedness could very well backfire.
One thing that may be different is we wont hear about the nervous nellies when unemployment falls below 7.5% and we have "upward pressure on wages".
There won't be an explanation of a transmission mechanism JK - other than the misnamed one y described, which is just a piece of pseudo-scientific drivel put out by the monetarist cult to put a name on their mystifications.
The mechanism is always the same among those folks: the Fed is supposed to make X happen by announcing that it intends to make X happen and is doing something Y that is aimed at making X happen. The hope is then that enough people think there is enough of a causal connection between Y and X that they start to believe, on the basis of the announcement, that Y will in fact make X happen. They then start to behave in ways that depend on the expectation that X will happen. And it is their behaving this way that in the end actually makes X happen - if the trick works.
This is the last gasp of monetarist dead-enders who have given up almost all of the substantive doctrines they once believed and are now hanging onto this last slender thread: that the Fed can conduct monetary policy through what are essentially little more than shamanistic techniques.
The shaman wants the people to plant more and work harder to make the crops grow. So the shaman does a fertility dance to petition the fertility goddess for her favors. The people believe the fertility dance will make the crops grow. They get excited, and start planting with more alacrity. They work extra hard because they now believe the fertility goddess is on their side. The crops grow! The prayers have been answered!
It is deplorable that professional economists are willing to participate in this debasement of out democracy and the erosion of use of reason in the public sphere, and replace it with this kind of primitive and archaic form of governance. It probably won't work. But who can say for sure? Maybe the people are excited enough by Bernanke's fertility dance to start planting their economic fields again and investing in hard work.
But if it does work that is almost worse. It will add to the vanity of the elites who are drawn to this way of thinking about macroeconomic governance that they are in the possession of special magical powers. And it will increase the superstitious tendencies of ordinary people, who don't know any better, to assume that the elites are right.
You have a way with words Dan....
The Fed will show itself to be powerless, very good. Monetarists have committed themselves that this will work, but it won't. I wonder what excuses they will come up with...
when i first posted, i didn't see john's whole post because there wasn't a link. now i've read it. i think his argument is sound. he's a smart guy. one though can still believe the new policies will not be that effective, as John probably does.
Thanks Matt. I expanded that comment and just posted it at NEO.
http://neweconomicperspectives.org/2012/09/shamanistic-economics.html#more-3302
I meant NEP.
Dan K on expectations — good analysis.
Expectations as a transmission mechanism fro monetary policy boils down the placebo effect.
I welcome our central banking overlords oligarchs, as they may finally show they have no cloths and all this nonsense will hopefully end for good finally.
Or not, cause propagandist and true believers will work hard so it does not end. From all their hatred of government and fiscal policy will come truth: central banks are useless institutions created only to support the survival of rotten banks which lack adequate tools to both target inflation (as shown millions of time already) and fix unemployment, underemployment or income distribution (and adding to that, are profoundly undemocratic institutions). Their only sole purpose is a transmission of wealth and corporate/rich welfare with their buying asset programs from banks.
Monetarists you are well close to your end game and you don't even know it.
OFC there is the other true risk: deficits will increase and the economy will stabilize (maybe not improve), but it all will be attributed to CB's intervention.
This is what has well happened in the past.
"Expectations" seems to mean "Average people don't know shit".
"Rational expectations" seems to mean "people behave completely irrationally".
I think we are underestimating the power of magical thinking. So many of the decisions made by bosses today are just made on emotion. Remember the guys who said they werent going to hire anyone else as long as Obama was president? I believe there are guys who run their businesses that way (stupid guys no doubt) and if Romney were to win we'd see an early spike in hirings, giving credence to those who argue he would be better for employment.
I think for a statistically significant number of bosses this expectations stuff is true, but not in the way they believe. Many of these guys make their decisions for reasons completely unrelated to the number of people they need to meet their sales expectations.
I dont think this fairy belief is going anywhere, unfortunately, because too many behave as if they do believe in fairies.
I find the disdain for "expectations" in the comments to be a bit confusing.
Let's take a popular MMT story: demand drives business investment, employment growth, etc, etc, etc. What is "demand" here? "Demand" is just the expectation of future profits. If businesses expect demand for their output to be strong moving forward into the future, then they in turn will increase their demand for factor services like labour and capital.
This business activity based on expectation of stronger growth in profits will itself increase economic activity, income, employment and so on, creating a virtuous circle that validates the original expectational change.
I'm also confused by the idea that no Fed actions other than forward guidance have an effect on the economy.
As long as you believe that the Fed can influence interest rates, then its easy to see that what the Fed does can matter.
"Expectations as a transmission mechanism from monetary policy boils down the placebo effect."
Yes, there is no difference Tom. That's all this is about, as becomes clear when you read the various defenses of QE and related policies. They are just trying to get the guys on CNBC and Bloomberg who Mike always writes about to have an outburst of bullish excitement - even if it is grounded in misunderstanding.
How and in what sense does it boil down to a "placebo effect"?
vimothy, I don't doubt that the Fed influences interest rates. But the zero bound is a real thing.
The latest theory seems to be that even though the Fed has created very low rates, and has promised an extended period of low rates, people don't believe them, and so the Fed has to make a more super special convincing promise of low rates. Alright fine. It's hard for me to believe the absence of an extra layer of security in the expectations game is really what is holding everything back, but I guess we'll see.
And there are two different ways of harnessing expectations for positive effect: a doctor could give you an antibiotic that actually works, and the evidence you receive that it is working might then give you a burst of hope and confidence that has benefits of its own.
Or they might give you a placebo and hope expectations do all the work.
Dan,
The zero bound is for the Fed Funds rate. Just because the Fed Funds rate is at zero in nominal terms, doesn't mean that other actors don't face non-zero nominal borrowing costs. (And there are effects from monetary policy other than those on the cost of funds.)
With the term "placebo", the connotation is that the medicine is pure sugar, whereas in fact, assuming that we're not always in some market clearing rational expectations optimum, it's not hard to see why changes in expectations based on monetary or fiscal policy can shift the economy between different outcomes.
In order for the metaphor to work, their needs to be no transmission mechanism at all, in any state, other than expectations / confidence. But that's certainly not the case.
Still, it's better than describing it as "shamanism", I suppose!
Dan,
I think it boils down to some form of paganism or "anti-human" operation which your "Shaman" theme makes a good case for...
There is always seems to be some form of "intermediation" for lack of a better word at work that seeks to prevent direct human exchange perhaps.
Whether gold, silver, copper, beanie babies, now this with the Fed here with "magic", or (as you point out) what they are doing could easily be looked at as some sort of modern day ritualistic practice that will lead to better economic outcomes.... all intermediating operations that stand in the way of equitable distribution of His gifts and direct human exchange of them.
This is ALL some really dark shit...
rsp,
This will have some real effects, but it won't deliver the outcomes that they're promising.
I find the disdain for "expectations" in the comments to be a bit confusing.
Difference between "rational" and "irrational" expectations. Expectations based on a causal mechanism are "rational." Expectations" based on magical thinking are "irrational" although they sometimes work due to the "magic" of mob psychology, reinforcing belief in magic.
As long as you believe that the Fed can influence interest rates, then its easy to see that what the Fed does can matter.
Presuming that interest rates alway act the same way. They don't.
For example, raising rates at a time of high credit demand is fairly effective at reducing credit demand by inducing its price. But when credit demand is weak, lowering rates doesn't necessarily increase demand, when there are good reasons that people don't want to borrow.
If the cb keeps rates low long enough for the demand for credit to pick up, then it will have an effect, but not before — other than to raise asset prices higher than they would be otherwise by reducing the cost of leverage. Now that commodities are portfolio assets, use of cheap leverage can also drive up goods prices.
And when all you have in your tool box is a hammer, then everything looks like a nail.
How and in what sense does it boil down to a "placebo effect"?
The placebo effect is based on belief that leads to confidence and it depends on "the power of positive thinking," which so far is unexplained, but real. The problem is that magic works sometimes but not all the time, and for some people and not others. It seems to depend on a variety of factors such as suggestibility (like hypnosis) and also intensity of belief and desire for a cure. But so far, we don't know how the magic works.
Unfounded expectations are like that, where as founding expectations are like medicine developed and tested scientifically so that we know how and why they work to do what.
Dan K The latest theory seems to be that even though the Fed has created very low rates, and has promised an extended period of low rates, people don't believe them, and so the Fed has to make a more super special convincing promise of low rates. Alright fine. It's hard for me to believe the absence of an extra layer of security in the expectations game is really what is holding everything back, but I guess we'll see.
I don't think that it is the case that "people don't believe them" is the actual cause. The money is not on the counter and it won't be on the counter because people who would like to spend (notional demand) don't have it (effective demand). When there is money on the counter and the trend line of bank credit extension shows positive enough, indicating delevering is about over, then the game will change.
I don't see delevering being over any time soon. All the refinancing and low mortgage rates are not enough of a "raise" to get people over-consuming again. Stock portfolios and 401k's and retirement accounts need to significantly bump up before anyone feels "wealthy" again. And if we can't trust social security benifits and medicare to be there when we need it, saving becomes even more important. These QE bullets are rubber. A loud noise sounds when they're fired, but nothing happens when they just bounce off the target.
"I find the disdain for "expectations" in the comments to be a bit confusing.
Let's take a popular MMT story: demand drives business investment, employment growth, etc, etc, etc. What is "demand" here? "Demand" is just the expectation of future profits. If businesses expect demand for their output to be strong moving forward into the future, then they in turn will increase their demand for factor services like labour and capital."
There is a huge difference in having expectations of more business tomorrow or next week because you have had more people walking through the door this week and thinking that a third party like Bernanke can just proclaim something, keep interest rates low and that everyones change in expectations will bring more customers to your door. One belief is based on real evidence another one is based on largely false hopes.
The real problem with monetary policy is not that it never has an affect its that it affects things by stimulating lending. No matter how low you drive interest rates a not insignificant portion of the population will not borrow (and should not). Even at a zero interest rate, the most you will get is people like me refinancing my old output and not purchasing any new output. There is nothing that I want or need that I wont buy at 2% interest that I would buy at zero ...... nothing. And I have refied twice since 2007, bought two cars, spent 20,000$ on remodeling and put my son through college. I have not been holding back in this recession.
I think the picture is supposed to be something like this: Suppose there are 100 same-sized businesses in a land of 100,000 people, and there is 10% unemployment. So each business employs 900 people, and 10,000 are unemployed. Those unemployed 10,000 people do not have enough income to generate any additional demand for products at a price above cost, so the businesses are not expanding.
If the businesses all became convinced at the same time that all of the other businesses were going to expand output and hire an additional 100 people each and give the new hires a healthy income, then all of the businesses would expect a significant uptick in consumer income and demand, and would have a reason to expand their own output by about 10% and hire 100 more people. But so long as they believe other businesses are not moving on hiring, they have no reason to move either.
So suppose the Big Bank announces that it has a magic pill that it is putting in the water. The pill is reputed to makes business people confident, and cause them to hire. The magic is supposed to last for one month, and the bank promises to put another pill in the water each month.
If people believe in the magic of the pill, then they will start hiring as soon as the announcement is made, even if there is no pill, and there is no magic. Things get better.
Some of the rational expectations folks say it doesn't matter whether people believe the pill is magic. They might all believe it is a placebo, and they might all know that everyone else also believes it is a placebo. But there might be a social convention in the society to act as if the pill were magic, whenever the Big Bank says it is using it. People have basically adopted a convention of letting the Big Bank guide their actions. So you get the same results. By dropping the pill in the water, the Big Bank effectively shouts "go", and as a result of the social convention, every body springs into action.
The problem is that in the real world, no such convention exists regarding the Fed - nothing is even close to it.
@DanK
"It's just more QE."
But wait! There's more! It's new, improved & DIVERSIFIED QE. They're buying more MBS than T-Bonds this time. It's called Sleuth in Advertising.
@y
["Expectations" seems to mean "Average people don't know shit".]
But they EXPECT that their trusted leaders do!
@PeterP
"I wonder what excuses they will come up with..."
That it WOULD have worked as long as more people had expected it to.
Next time,look for the Fed to buy up expectorant firms. Then we can trust them as far as we can spit.
Good analysis, Dan K.
all of the businesses would expect a significant uptick in consumer income and demand, and would have a reason to expand their own output by about 10% and hire 100 more people. But so long as they believe other businesses are not moving on hiring, they have no reason to move either.
Yes, the supposition here is that as soon as there is a general desire to hire, then their will be competition to hire the best applicants first to get a leg up. So TPTB are doing anything they can to spark that — without increasing the deficit or giving money to moochers, that is. So they end up waving magic wands.
"Yes, the supposition here is that as soon as there is a general desire to hire, then their will be competition to hire the best applicants first to get a leg up. So TPTB are doing anything they can to spark that — without increasing the deficit or giving money to moochers, that is. So they end up waving magic wands."
Yes but arent these people all unemployed because they dont have the skills to be hired or they just prefer leisure to work? How are their expectations going to change? Its all such a confusing, self contradicting, morass of sophistry.
Greg, the QE supporters tend to believe that the main problem is aggregate demand, not structural problems and moral problems. So they agree with Keynesians on that score. But they think the central bank can regulate aggregate demand. Matt Yglesias frequently opines that it is the job of the Fed to regulate aggregate demand, and that is a a theme of the Market Monetarists as well.
I suppose you are right Dan but from what I can tell they think that workers need to be better workers AND they need to settle for less income.
They still want to concentrate on the currency rather than the users of the currency which seems quite off target.
Its where they think demand arises that is the problem as I see it.
CB's can't control real interest rates in meaningful ways and can't lending practices and standards.
Cb's can't control the growth or contraction of credit which is all that matters (apart of fiscal printing of money).
There is enough evidence of this, so monetarists propagandists can't continue to ignore it.
Perhaps talk of expectations seems a little strange at first, but it’s not really so ridiculous a notion. Man is a rational animal (in the Aristotelian sense). He acts with intention. That’s why economic policy is more complicated than simply pulling the right levers to produce a mechanical outcome. If the Fed takes some action to support the economy, and people look at this and say, “Oh my God, the economy is screwed”, then it’s going to have the opposite effect to the one intended. That’s the way economic policy is, unfortunately, because that’s the way people are. They have minds of their own—they’re not robots--so what they think matters.
All well and good vimothy but I don't see how QE leads to substantial increases in hiring. And that's what's key.
Isn't NGDP targeting basically trickle-down economics on steroids? i.e. shovel as much cash as you can into the pockets of the rich in the hope that at some point they will be so ridiculously rich that they might actually choose to hire someone. By the time this happens the unemployed will be begging and destitute so the ultra rich will be able to buy their labour for a pittance. Everybody wins, a rising tide raises all boats, etc (puke).
Perhaps talk of expectations seems a little strange at first, but it’s not really so ridiculous a notion. Man is a rational animal (in the Aristotelian sense). He acts with intention. That’s why economic policy is more complicated than simply pulling the right levers to produce a mechanical outcome. If the Fed takes some action to support the economy, and people look at this and say, “Oh my God, the economy is screwed”, then it’s going to have the opposite effect to the one intended. That’s the way economic policy is, unfortunately, because that’s the way people are. They have minds of their own—they’re not robots--so what they think matters.
Who are these "people"? Most people are unaware of the what the Fed does, and those that are aware don't care that much. Traders simply follow what they think other traders will do in reaction.
The people that the Fed's policy pronouncements are aimed at is actually a relatively small group of global elites whose acronym is TPTB. They are the only ones who actions make a difference, and everything else follows them.
Change that cones from the bottom up begins in changes in people's wallets and income statements.
Isn't NGDP targeting basically trickle-down economics on steroids? i.e. shovel as much cash as you can into the pockets of the rich in the hope that at some point they will be so ridiculously rich that they might actually choose to hire someone.
There is only one policy that is dominant historically, and that is asset inflation > goods price inflation > wage inflation > forced contraction > rising unemployment > wage suppression, stabilization of price inflation > re-inflation.
This is the business cycle in which recovery comes in a V shape. This is a financial cycle and it is L-shaped as long as deleveraging lasts, which can be a decade or more, depending on private debt-accumulation and policy decisions.
Bernanke has managed to inflate equities and commodities but hasn't been able to budge housing much, and housing is the sine qua non, since so much of the economy is related to it.
"…that’s the way people are. They have minds of their own—they’re not robots--so what they think matters"
What folks think is at best a third-order consideration wrt driving the economic machine, maybr eless under most conditions. Regardless of what one thinks he/she must have the funds to spend in order to participate.
Where does one suppose these funds would come from?
Neoclassical thinking claims that the funds come from investment but this is impossible if the investments make a profit in the aggregate.
The very thing that they claim puts money in the pockets of consumers actually removes more than it puts in.
This is waved off by some sort of perpetual-motion machine thinking that argues that credit performs the function of putting money in the pockets of consumers. This is absurd at it's root.
"this is impossible if the investments make a profit in the aggregate."
What happens to those profits? I'm not sure what you're saying makes sense.
y:
"What happens to those profits? I'm not sure what you're saying makes sense."
Unless 100% of profits are spent back into the economy on consumption, there is a net accumulation of savings, ie funds removed from the pool of spending.
If in the aggregate companies earn a profit it follows that over time saving expands ad infinitum.
I've read that normally 90% of businesses make a profit. Can't vouch for the accuracy of that number.
To be clear, saving in this context is funds removed from the pool of spending, more or less permanently.
but those saved funds are usually borrowed and spent?
"but those saved funds are usually borrowed and spent?"
y: Don't get what you mean by this. Can you be more specific? Maybe describe the squence of events?
When money becomes saving, what do you think happens with it after that?
In the practical sense funds saved are sequestered or hoarded, essentially becoming non-existent as far as the spending cycle is concerned.
what I meant is that people take out loans so spending doesn't necessarily reduce despite people saving part of their income.
"what I meant is that people take out loans so spending doesn't necessarily reduce despite people saving part of their income."
How about when people pay the loans back?
Further, financing consumer purchases on credit effectively reduces one's income.
Originally my point was that investment hoovers net funds out of the economy and this dynamic has no counter-dynamic.
Credit is merely an enabler to the dynamic I'm describing. It magnifies the effects. The net result is the consumer, instead of being left with nothing (in terms of funds) is left with less than nothing…liabilities.
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