Bill Dudley — Budget Deficits Still Matter

Amazing. A major player at the Fed and key voice in setting monetary policy didn't know how the monetary system works based on correct operational understanding — which MMT provides and which he also proves ignorant about. And this when he was also serving on the FOMC and deeply involved in setting monetary policy for the US, which also affects the entire world, during the crisis and aftermath.

Bloomberg Opinion
Budget Deficits Still Matter

Bill Dudley

William C. Dudley is an American economist who served as the president of Federal Reserve Bank of New York from 2009-2018 and as vice-chairman of the Federal Open Market Committee. —Wikipedia

Related

Jeff Spross explains why monetary policy set by the Fed is less effective than fiscal policy owing to the Fed's shotgun approach versus the tight targeting of spending that MMT and other fiscalists recommend.

But he assumes for the argument that the Fed knows what it it doing. Bill Dudley's op-ed above shows that is not the case.

This undercuts the argument for preferring monetary policy to fiscal policy since fiscal policy is in the hands of politicians with interests, whereas the Fed is politically independent and operated by knowledgable people. Turns out they are not all that knowledgable after all.

Bill McBride on the FOMC meeting

No big surprises.

Calculated Risk

FOMC Projections and Press Conference Link

FOMC Statement: "In October, the Committee will initiate the balance sheet normalization program"

Bill McBride

Bill Mitchell — US central bank decision to raise interest rates doesn’t make much sense

On December 14, 2016, the US Federal Reserve Bank pushed up its policy target interest rate from 0.5 per cent to 0.75 per cent. In its – Press Release – it said that the “labor market has continued to strengthen and that economic activity has been expanding at a moderate pace since mid-year”. It acknowledged that “business investment has remained soft”. But it believes that even though it has increased the rate by 25 basis points, there is still room for “some further strengthening in labor market conditions and a return to 2 percent inflation”. The logic is very confused in my view. First, the US labour market is weak (in inflation pressure terms) notwithstanding the reduced official unemployment rate. 

Real wages growth has been effectively zero and the broad measure of labour underutilisation (U6) remains at 9.3 per cent (as at November). Second, the emphasis on central bank policy shifts is based on a view that elements of total spending are sensitive to interest rate changes and by increasing rates, price pressures will attenuated. The only problem with that logic is that all the elements of spending in the US (private investment, household durable goods) are hardly setting the world on fire. Private investment, in particular, is in poor shape. So by the US Federal Reserve bank’s own logic (which I do not share) it should be expecting on-going further poor investment growth, which will further undermine potential productive capacity. Not a sound strategy at all....

Bill Mitchell – billy blog
US central bank decision to raise interest rates doesn’t make much sense
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Bill McBride — Quick FOMC Analysis

Wide difference of opinion in the committee going forward. What happens will depend on fiscal policy decisions and economic conditions. But all are agreed that rates are headed up. The disagreement is over how fast and far.

Calculated Risk
Quick FOMC Analysis
Bill McBride

Bill McBride — Goldman's Hatzius: "The Employment Gap Is Much Bigger than the FOMC's Current Estimate"

Some excerpts from a research piece by Goldman Sachs chief economist Jan Hatzius: The Employment Gap Is Much Bigger than the FOMC's Current Estimate of the Unemployment Gap

Calculated Risk
Goldman's Hatzius: "The Employment Gap Is Much Bigger than the FOMC's Current Estimate"
Bill McBride

Bernanke rips the Wall Street Journal a new a**hole

The Wall Street Journal is a Rupert Murdoch, News Corp, rag sheet. You  might as well read the NY Post; it's more entertaining at least.

To be fair, the WSJ was garbage even years before Murdoch, when you had people like John Fund and Stephen Moore on its editorial board. These guys are all gold bug, hard-money, Laffer-supply side morons who got everything wrong for years. (And all friends with doofus, Steve Forbes,  silver spoon in the mouth Clown Boy.)

So it's fun to watch Ben Bernanke rip those editorial idiots over there at WSJ a new asshole (in Bernanke fashion).

Some comments from Bernanke's blog today:

"It's generous of the WSJ writers to note, as they do, that "economic forecasting isn't easy." They should know, since the Journal has been forecasting a breakout in inflation and a collapse in the dollar at least since 2006, when the FOMC decided not to raise the federal funds rate above 5-1/4 percent."

"I am waiting for the WSJ to argue for a well-structured program of public infrastructure development, which would support growth in the near term by creating jobs and in the longer term by making our economy more productive. We shouldn't be giving up on monetary policy, which for the past few years has been pretty much the only game in town as far as economic policy goes. Instead, we should be looking for a better balance between monetary and other growth-promoting policies, including fiscal policy."

Way to go, Ben.

The WSJ should change its slogan from The Diary of the American Dream to, The Diary of the American Delusion.

The Fed's independence from the public process *updated

As someone who works in financial regulatory compliance, I regularly hear about various types of risk- credit risk, reputation risk, liquidity risk, etc. Recently however, one type of risk has been consuming a lot of time and energy in the banking world- that of interest rate risk. Interest rate risk is simply what might happen to the balance sheet of a depository institution should its cost of short term funding rise as a result of deliberate policy decisions from the FOMC.  Policy and compliance staff at DIs have been spending time developing strategies to mitigate interest rate risk, which usually involves some combination of limiting fixed rate lending, and hedging with plain-vanilla derivative investments. 

Most of the MMT community seems to agree that there is nothing wrong with our current zero interest  rate environment, and that it should be made permanent--so from our point of view all this IR risk mitigation is a waste of time, since the Fed should just leave rates at zero forever and control credit growth by regulating underwriting and capital standards. 

I would argue that changes in monetary policy are just as, if not more, intrusive and burdensome to financial institutions as other types of central bank action. During the traditional rulemaking process, there is (quite appropriately) long periods of agency research, thought, and regulatory development, with opportunities for public comment along the way.

However when it comes to monetary policy, these ideas don't seem to apply. Instead, it is taken as a given that the FOMC-

1) Has all the information in needs

2) Knows what it is doing

3) Can just do whatever it wants

4) Can ignore public input

5) Can safely ignore the “full-employment” part of its dual mandate

All of the financial and economic media/punditry takes all these factors as a given and never challenges them. The FOMC is given an astounding amount of deference and goodwill, despite the increasing evidence (from  minutes and transcripts) that it cant come to a consensus on what is going on in the economy or what its decisions actually do. 

As a political matter, legislators and pundits frequently make comments about “oppressive regulations”, “red tape” and “out of touch bureaucrats” when discussing regulatory agencies. However when it comes to the FOMC, which is one of the least accountable organizations of the federal government, and whose decisions have broad consequences for the banking system and labor market, none of these terms are ever used (BTW, courts have also ruled that the FOMC can't be FOIA'd). People just seem to let the FOMC do whatever it wants, as if it were a mystical tribe of holy oracles, whose intelligence is just to stunning for us lowly commoners to comprehend. 

So even more scandalous, in my view, is that the standard rulemaking procedures established under the Administrative Procedures Act do not seem to apply to FOMC decisions to change interest rates. The primary mode of changing interest rates is the federal funds target rate, which is voted on by the FOMC and carried out by the Federal Reserve Bank of New York. This particular action does not involve amending existing regulations, so I can see how at least this part could escape public input. 

However, open market operations are no longer the Fed's main tool. With the banking system now holding trillions in excess reserves as the result of 3 rounds of QE, the Fed cannot easily change interest rates through open market operations as in the past. It has also indicated that it does not want to rapidly shrink its portfolio. So instead, the Fed can change the rate it pays on required and excess reserve balances, which serves as a floor to interest rates. Thankfully, the rates paid on required and excess reserves are set by regulation and codified in the Code of Federal Regulations.  CFR section §204.10, "Payment of interest on balances" is where the Fed established the rates it pays on reserves. It has been changed only once since the interest on reserves program was established in late 2008. 

The Fed also loans out reserves directly through its discount windows, the rates of which are also set in regulation (smaller amounts of intra-day liquidity are also provided through daylight overdrafts which have similar costs to DW lending, however post-QE with trillions in excess reserves, the volume of overdrafts has plummeted to near zero). 

Section §201.51 of the Federal Reserve Board’s Regulation A is “Interest rates applicable to credit extended by a Federal Reserve Bank.” This section of the US Code of Regulations (CFR) establishes the rates that Federal Reserve Banks must charge to institutions that borrow reserves through the Primary Credit Facility and others. This borrowing price is one of Fed’s tools in implementing monetary policy. As a matter of policy, the Fed usually keeps these discount window rates slightly above its targeted federal funds rate, so every time the FFR target is changed, the discount window rates  are adjusted accordingly.

Therefore, it would seem that in order to change these rates, the Fed would have to initiate the rulemaking process, since amending regulatory text always requires this process. However, as I have recently realized, the Fed does NOT have to follow APA procedures when amending the interest rates it pays on reserves or charges from the window.  Each time the Fed amends Regulations A or D to change these rates, it does use a rulemaking. However, unlike other agency rulemakings, the Fed simply releases these changes as final rules, skipping the public notice-and-comment stage altogether. This loophole completely robs the public of any chance to comment or lobby on the potential effects of such an interest rate change.  

For example, each of these rules are published as final in the Federal Register, and each states near the end-

Administrative Procedure Act

    The Board did not follow the provisions of 5 U.S.C. 553(b) relating to notice and public participation in connection with the adoption of these amendments because the Board for good cause determined that delaying implementation of the new primary and secondary credit rates in order to allow notice and public comment would be unnecessary and contrary to the public interest in fostering price stability and sustainable economic growth. For these same reasons, the Board also has not provided 30 days prior notice of the effective date of the rule under section 553(d).

(Here's an example) 

The crucial text here is “The Board for good cause determined that delaying implementation….in order to allow notice and public comment would be unnecessary and contrary to the public interest.” This is quite an astounding statement that no other regulatory agency could possibly get away with. If the EPA, for example, simply decided that allowing public comment on a Clean Air Act regulation “would be unnecessary and contrary to the public interest”, it would raise an unbelievable shitstorm from both chambers and aisles of Congress.  

As any federal regulator will tell you, public notice-and-comment consumes an large amount of agency time and resources and is a crucial step in developing policy. Some of the reasons for this are good ("the public" should have input into how its country is run), while some are bad (when it comes to influencing regulations, "the public" usually means wealthy corporate lobbyists). 

So lets get some perspective here. How is it that the Fed doing something significant-- changing one of the main "prices of money"-- constitutes “good cause” to ignore the APA, but the EPA, for example, taking actions to save our air, water, food, and climate  does not? I would argue that the EPA has just as important of a role in determining our quality of life as the Fed, and rightfully must follow the public notice-and-comment process set forth in the APA. Somehow the Fed does not. 

This loophole should be the focus of any Fed reform efforts in the 115th Congress. Like it or not, the FOMC still has significant influence over the economic affairs of our country. So instead of trying to "audit the Fed" or change its structure, large strides could be made by simply forcing the Fed to take public comments on its important monetary policy actions. This would give labor groups and progressive economic think tanks a chance to make their ideas and opinions known to the otherwise cloistered FOMC. While I hope the day never comes, if the Fed does eventually decide to raise interest rates, it should hear from We the People first. 

Joseph E. Gagnon — What Were They Thinking? The Fed on the Brink of Zero

How farsighted was the leadership at the Federal Reserve as the world economy was heading toward a steep decline more than five years ago? Outside the Fed’s marble halls, the answers to that question are only now becoming known, and the verdict is perhaps surprisingly positive.

In December 2008, a few months after the Lehman Brothers collapse threw the world economy into crisis, participants in the Fed’s steering group, the Federal Open Market Committee (FOMC), met to discuss their policy options. It was widely agreed that the conventional policy instrument, the federal funds rate target, would have to be lowered to zero. The big question was “what should we do next?” A recently released transcript of the meeting shows that the FOMC was already considering most of the monetary policy options that are still being debated by economists and pundits today. The transcript frequently mentions a package of 21 memos on monetary policy at the zero bound that were prepared by Fed staff just before the meeting. The Peterson Institute for International Economics has obtained those memos through the Freedom of Information Act and is making them available to the public on its website [pdf] as of today. In the interest of full disclosure, I was a coauthor of three of those background memos.

Together, the transcript and background memos display that FOMC participants understood the severity of the economic outlook they faced and that they and their staff had a good grasp of the pros and cons of the options available. That is not to say that Fed policy over the past few years could not have been improved upon, but simply to recognize that the Fed was not flying blind and indeed was already cognizant of many of the issues that would come to dominate the public debate about monetary policy.....

Real Time Economic Issues Watch
What Were They Thinking? The Fed on the Brink of Zero
Joseph E. Gagnon

(h/t Mark Thoma at Economist's View)

Bill McBride — What does Yellen's "around six months" mean?

Yellen reiterates prior guidance.

Calculated Risk

What does Yellen's "around six months" mean?
Bill McBride

FOMC statement out — taper is on

In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in February, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $30 billion per month rather than $35 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $35 billion per month rather than $40 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee's sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.

Board of Governors of the Federal Reserve System

Press Release: Release Date: January 29, 2014

For immediate release

FOMC announces small taper

Looks like the perpetually confused FOMC is deciding to scale back the monthly purchases a bit: $5 billion in MBS and $5 billion in Treasuries.

http://www.washingtonpost.com/business/economy/fed-to-scale-back-stimulus-by-10-billion/2013/12/18/54dc2ee4-6747-11e3-8b5b-a77187b716a3_story.html?wpisrc=al_comboNE_b

Any predictions? I doubt that such a small change in the quantity of purchases will have much of an effect anyway. What I am sure about is that this decision will spur a whole flurry of misinformed comments on QE. For starters, the above article repeatedly referred to it as "stimulus".

Bill McBride — Update: Four Charts to Track Timing for QE3 Tapering

Clearly the economy will have to pickup before the FOMC would start to taper QE3 purchases in December. (September tapering seems less likely now since the key data has been worse than forecast, but still not impossible).

Calculated Risk
Update: Four Charts to Track Timing for QE3 Tapering
Bill McBride

Bill McBride — FOMC Statement: "fiscal policy is restraining economic growth", "prepared to increase or reduce the pace of its purchases"

The key changes:
1) "fiscal policy is restraining economic growth."

2) "The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes."

The FOMC is clearly signaling that fiscal policy is hurting the economy ...
Calculated Risk
FOMC Statement: "fiscal policy is restraining economic growth", "prepared to increase or reduce the pace of its purchases"
Bill McBride

Bill McBride — Bernanke: How are long-term rates likely to evolve over coming years?

Bernanke: "...it is useful to decompose longer-term yields into three components: one reflecting expected inflation over the term of the security; another capturing the expected path of short-term real, or inflation-adjusted, interest rates; and a residual component known as the term premium. Of course, none of these three components is observed directly, but there are standard ways of estimating them....

"If, as the FOMC anticipates, the economic recovery continues at a moderate pace, with unemployment slowly declining and inflation expectations remaining near 2 percent, then long-term interest rates would be expected to rise gradually toward more normal levels over the next several years."

Calculated Risk
Bernanke: How are long-term rates likely to evolve over coming years?
Bill McBride

Fed says it will remove income for the next two years. Markets rally.

To show you how perverted and misguided things have gotten.

Suppose you told someone that the government would remove significant amounts of income from the economy over the next two years. You could even call it a tax. Do you think that person would run out and buy stocks and other risk assets?

Absolutely not. They'd probably take whatever cash they had and hang on to it, real tight, out of fear that the economic future was about to become very bleak.

But that was the opposite of how investors reacted to today in response to the Fed's statement.

Here's what the Fed said:

“low rates of resource utilization and a subdued outlook for inflation over the medium run are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”

That was the surprise in the statement today. The Fed EXTENDED the length of time that they would hold interest rates at zero for more than a year. (They originally said, mid-2013.)

But we know that this policy removes income from the economy. Case in point: over the last four years the Fed has removed $400 bln in interest income from the economy. That's HUGE. That's the equivalent of almost 3% of GDP. And we're only growing at 1.8%!!

Yet when investors hear this today they bought stocks...and gold and commodities and other risk assets. And they sold the dollar even though this is all hugely deflationary.

It's QE Redux. Haven't we been through this before? Everyone piles in on the false belief that this is inflationary. They push up stocks, gold, commodities and foreign currencies and then it all comes tumbling down when the buying stops.

Same, exact thing will happen this time.

Here we go again...Obama appoints two new "fiscal conservatives" to Fed board

Here we go again as if we haven't had our fill of this lunacy. More fiscal conservatives in the Obama Administration. And you guessed it!...they've got either Harvard or Goldman Sachs' ties. (Or both!)

Jerome Powell and Jeremy Stein. Powell is a lawyer with no economics background (bad) and Stein is a Harvard professor (worse!).

Powell quote:

“I am by any fair reckoning a fiscal conservative,” Powell, who goes by Jay, said in a May 16 interview with Bloomberg Television. At the same time, allowing a default is “just not a risk that you run.” “That doesn’t mean that you don’t negotiate very hard to get additional spending cuts and get the deficit under control,” he said. “You do. But that crosses the line into hostage taking, I’m afraid, and is just tactically unacceptable.”

Did you get that part about "getting the deficit under control?"

And here's a Stein quote:

“The Fed in the early part of this decade would have been better had they been a little bit more aggressive in dealing with the housing bubble in its early stages, both through interest-rate policy and potentially through worrying a little bit more about the buildup of all this leverage on bank balance sheets,” Stein said...
Nothing in there about rampant fraud and lax oversight. Only implies low interest rates created the "bubble" and there was too much leverage. Peter Schiff stuff.

"Operation Twist" would represent a subtle, yet important, policy shift at the Fed.

If the Fed announces Operation Twist today (selling short dated securities and buying longer dated securities) it would represent a subtle, yet important shift in Fed policy in my opinion. It would signify that the inflation hawks on the FOMC have won the debate.

Operation Twist would be policy action that doesn't entail an expansion of the Fed's balance sheet and an expansion of the Fed's balance sheet is exactly what guys like Fisher, Plosser and Kocherlakota oppose. They believe it's inflationary and that it hurts the dollar.

So Operation Twist, if it is announced, would mean that the inflation hawks on the FOMC are in control.