My new podcast episode is out. Janet Yellen.

Origin of the 2 Percent Inflation Target — J. Barkley Rosser

So it was 1990 that the New Zealand central bank became the first in the world to impose an inflation target of 0-0.002....

Econospeak
Origin of the 2 Percent Inflation Target
J. Barkley Rosser | Professor of Economics and Business Administration James Madison University

John Heltman — Fed interest payments to banks are here to stay, Yellen says

Federal Reserve Chair Janet Yellen said Tuesday that the central bank should continue to use interest payments on member bank reserve balances as its primary means of affecting short-term interest rates, rebuffing calls to return to more conventional monetary policy tools....

American Banker
Fed interest payments to banks are here to stay, Yellen says

John Heltman

What, if anything, does Kevin Warsh understand?

I came across this article by Kevin Warsh that appeared in the Wall Street Journal last August, 2016. The article was re-posted by GATA.ORG.

As you may know, Warsh is the currently the favorite to take over as Fed Chair when Janet Yellen's term expires next February.

If you read the article you will find that Warsh sort of understands that Fed policy is confused and focused on either the wrong things or, things which the Fed has no set of tools to accomplish. On the other hand he seems to lack any ideas of his own on how to reform the Fed or, even what policies outside of monetary policy would be useful. In addition he appears to not understand the primary function of the Fed as rate setter.

First he says,

"Can't explain current inflation readings below their targets."

He might be alluding to himself here. That's because Warsh was spectacularly wrong back in 2008 and 2009 when, as a board member of hte Bernanke Fed, he predicted soaring inflation as a result of ZIRP and Quantitative Easing. It was almost as if Warsh was reading from one of Peter Schiff's scripts at the time. He's still really confused on this.

Next

"A numeric change in the inflation target isn't real reform. It serves more as subterfuge to distract from monetary, regulatory, and fiscal errors. A robust reform agenda requires more rigorous review of recent policy choices and significant changes in the Fed's tools, strategies, communications, and governance."

Warsh gets this correct. Central banks seem to conflate inflation with growth. Inflation targets are not the same as growth targets. The Bank of Japan is a good example. It's been on a 25 year quest to bring inflation up. It's growth that they need in Japan, not inflation. Meanwhile all of the BOJ's policies are deflationary, such as negative rates and trillions upon trillions in asset purchases.

He makes this observation, which is a an obvious and good observation.

"Two major obstacles must be overcome: groupthink within the academic economics guild, and the reluctance of central bankers to cede their new power."

He its the nail on the head with the "groupthink" within the academic guild as he calls it. Unfortunately, he is a card carrying member of that guild.

"First, the economics guild pushed ill-considered new dogmas into the mainstream of monetary policy. The Fed's mantra of data-dependence causes erratic policy lurches in response to noisy data. Its medium-term policy objectives are at odds with its compulsion to keep asset prices elevated. Its inflation objectives are far more precise than the residual measurement error. Its output-gap economic models are troublingly unreliable."

He's correct here, too. The Fed looks at data, which is notoriously lagging. Furthermore, there's not much the Fed can do other than set prices via the interest rate channel and make loans. It needs to use those tools in a leading fashion to whatever extent they can help achieve its mandate. The "data" follows.

"The Fed seeks to fix interest rates and control foreign-exchange rates simultaneously -- an impossible task with the free flow of capital."

With this statement he appears completely ignorant of the Fed's rate setting role. He sounds like Jim Rogers or, Schiff, again. He thinks the market sets rates. Does he not understand that all the Fed has to do would be to set the fed funds rate at zero, permanently, and all rates along the term structure would converge there? It has nothing to do with capital flows. (Whatever that means.) Similarly, negative rates would strengthen the dollar while high interest rates would fuel inflation and erode the dollar's  exchange value.

"The Fed often treats financial markets as a beast to be tamed, a cub to be coddled, or a market to be manipulated. It appears in thrall to financial markets, and financial markets are in thrall to the Fed, but only one will get the last word."

For a Harvard trained lawyer his wording is quite colorful here. A bit flowery even. However, it's true that the Fed is a slave to the markets. Yellen won't do anything unless Fed fund futures tell her to do it. Bernanke would "poll"  market participants as to the size of QE the Fed should perform.

I come away with the sense that Warsh knows the Fed needs reform, but he doesn't know in what fashion, exactly. He also doesn't understand the Fed's power as a monopolist. He mentions "fiscal errors," but doesn't say what they are. He probably thinks too much debt and deficits.

Bottom line is, we can make a lot of money off this guy if he gets in.

Tim Duy — This Expansion Will End in a Fizzle, Not a Bang

The Fed is growing increasingly concerned that this expansion will end like the last two, with a collapse in asset prices that brings down the economy. That concern will lead the central bank down the path of excessive tightening. Worse, that logic misses a key point. In both of the last two cycles, there was a sizable imbalance in the economy that extended beyond financial assets themselves. So far, the current environment lacks such an imbalance. That suggests the expansion ends with more of a fizzle than a bang....

The central point is this: High asset prices alone do not imply that a fall in those prices will bring the economy down. Those asset prices need to be linked in a very tangible way to a fairly significant and widespread imbalance in the economy for their decline to bring about a broader economy collapse....

Bloomberg View — Opinion
This Expansion Will End in a Fizzle, Not a Bang

Tim Duy | Director of Undergraduate Studies of the Department of Economics at the University of Oregon, the Director of the Oregon Economic Forum, and blogger at Tim Duy's Fed Watch

Janet Yellen — The Goals of Monetary Policy and How We Pursue Them

Board of Governors of the Federal Reserve System

Speech

Chair Janet L. Yellen

At the Commonwealth Club, San Francisco, California

January 18, 2017

The Goals of Monetary Policy and How We Pursue Them

Edward Lambert — Yellen wants to understand effective demand

Janet Yellen is really asking for research into effective demand. She sees a weakness in aggregate demand affecting aggregate supply… or potential output. That is effective demand, but she cannot even use the term effective demand because economists do not understand it.

I have been researching effective demand for 4 years. I have seen really a complete lack of understanding of what effective demand is among economists. It surprises me that Janet Yellen would be calling for research on its dynamics....

Janet Yellen just might understand more about Keynes and Post Keynesianism that she wants to let on publicly. She was excoriated as a "Keynesian" by economists on the right at the time of her appointment to the Fed chair. Maybe she is nudging without rocking the boat too much.

Has anyone read Yellen, Janet L, 1980. "On Keynesian Economics and the Economics of the Post-Keynesians," American Economic Review, American Economic Association, vol. 70(2), pages 15-25, May. (Link is to JSTOR. Registration required.)

She may be considered a New Keynesian, but this paper shows that she is at least familiar with some Post Keynesian thinking.

Angry Bear
Yellen wants to understand effective demand
Edward Lambert

Also

So whilst Janet gets empirically what is wrong with modern macro research she misses the fundamental reasons this matters.

1. Economics must be rebuilt around balance sheets and fundamental accounting identities
2. Hence state – balance sheets- must be the basis of all models. If the model is not a state machine it cannot describe the state of anything economic.
3. Hence credit and debt, and money matters
4. As debt issues are fundamentally non linear and complex models which require linearisation, such as DGSE, must be discarded, they are too broken to be fixed.

Decisions, Decisions, Decisions
Yellen Almost, but not Quite, Gets Whats wrong with Modern MacroAndrew Lainton

Brian Romanchuk — Yellen At Jackson Hole: Übergradualism Still The Baseline

Fed Chair Janet Yellen's speech at Jackson Hole may or may not get Fed watchers excited, but it seems to me that there was not a lot of new information. She made some hawkish noises, and it seems that we are due for another rate hike this year. I think December is the most plausible time, but it could be as early as September. In any event, the exact timing of the hike does not matter; the Fed is still following an übergradual rate hike path (hiking at a pace well below 25 basis points a meeting). Her discussion of policy options was mainly useful for those of us who are entertained by the collapse into incoherence of mainstream economics.…

Bond Economics
Yellen At Jackson Hole: Übergradualism Still The Baseline
Brian Romanchuk

Bill McBride — Fed policy and NGDP

Fed caught between a rock and hard place. They want to begin tightening, but NGDP won't cooperate. The "inflation" continues to be in asset prices rather than good price level or wages.

Calculated Risk
Yellen: "Case for an increase in the federal funds rate has strengthened"

Q2 GDP Revised Down to 1.1% Annual Rat
Bill McBride

John Shaw — US Budget Week:Hill Seeks Tsy/Fed Debt Limit Contingency Plans

Get ready for another debt ceiling rematch. The GOP seems determined to kneecap Uncle Sam and send the US into Third World status with "expansionary fiscal austerity." The Chinese must be rolling on the floor laughing.

MNI
US Budget Week:Hill Seeks Tsy/Fed Debt Limit Contingency Plans

John Shaw

ht Kevin Fathi

Anatole Kaletsky — Don’t Fear a Rising Dollar

How worried should businesses, investors, and policymakers around the world be about the end of near-zero interest rates and the start of the first monetary-tightening cycle since 2004-2008?

Small and gradual increases in the US policy rate won't be earth-shaking. A lot of it has already been priced in.

Project Syndicate
Don’t Fear a Rising Dollar
Anatole Kaletsky | Chief Economist and Co-Chairman of Gavekal Dragonomics, and a former columnist at the Times of London, the International New York Times and the Financial Times.

Zachary Karabell — Janet Yellen's Quiet Revolution

Trump says she's a political stooge. Actually, she's reinventing our understanding of economics.

Good post on Janet Yellen.

She's a Keynesian that takes both uncertainty and employment seriously.

Politico
Janet Yellen's Quiet Revolution
Zachary Karabell | head of global strategy at Envestnet, author of The Leading Indicators: A Short History of the Numbers That Rule Our World, and a contributing editor at Politico Magazine

ht Barry Ritholz at Bloomberg View

Anatole Kaletsky — Why the Fed Buried Monetarism

The US Federal Reserve’s decision to delay an increase in interest rates should have come as no surprise to anyone who has been paying attention to Fed Chair Janet Yellen’s comments. The Fed’s decision merely confirmed that it is not indifferent to international financial stress, and that its risk-management approach remains strongly biased in favor of “lower for longer.” So why did the markets and media behave as if the Fed’s action (or, more precisely, inaction) was unexpected?

What really shocked the markets was not the Fed’s decision to maintain zero interest rates for a few more months, but the statement that accompanied it. The Fed revealed that it was entirely unconcerned about the risks of higher inflation and was eager to push unemployment below what most economists regard as its “natural” rate of around 5%.

It is this relationship – between inflation and unemployment – that lies at the heart of all controversies about monetary policy and central banking. And almost all modern economic models, including those used by the Fed, are based on the monetarist theory of interest rates pioneered by Milton Friedman in his 1967 presidential address to the American Economic Association.

Project Syndicate
Why the Fed Buried Monetarism
Anatole Kaletsky | Chief Economist and Co-Chairman of Gavekal Dragonomics and a former columnist at the Times of London, the International New York Times and the Financial Times

ht MoveThroughit in the comments

Still dealing with Milton' Friedman's contemporary reading of Hume. However, this paper argues that David Hume's views on this subject were more liberal on inflation then Friedman's. 

Barkley Rosser — A Hidden Reason Why The Fed May Raise Interest Rates

Pensions. 

At the same time, the world is facing global deflation.

Economonitor
A Hidden Reason Why The Fed May Raise Interest Rates
J. Barkley Rosser | Professor of Economics at James Madison University in Harrisonburg, Virginia

Brad DeLong — **Must-Read: What did Alan Greenspan do in 1987 when the stock market suddenly dropped by 25%? He reduced short-term safe nominal interest rates by 200 basis points.

The problem is that the global economy is on the cusp of the second leg down in the GFC. Central banks have already shot off their bazookas and it hasn't resulted in the expected recovery other than a very tepid one in the US, assisted by fiscal policy.

By and large neoliberal conservative forces are in power in most of the economies that count, which either means a preference for austerity or a bridle on stimulative fiscal policies. Conservatives now argue that austerity has not really been tried effectively and central banks need to tighten, fiscal policy needs to be more austere to become expansionary by forcing greater wage flexibility to get investment going — and everyone needs to export, export, export, even though that is impossible in a closed global economy. 

So we are standing on the brink of 1937, and while history doesn't repeat, we all know what happened after that. Let's hope history doesn't rhyme in this case.

Think fiscal, fiscal, fiscal. "It's the demand, stupid."

This is serious. If it is not handled correctly in a prompt way, a global debt deflationary spiral is in the cards and things begin to unravel. Which will be just fine with the liquidationists.

Grasping Reality
**Must-Read: What did Alan Greenspan do in 1987 when the stock market suddenly dropped by 25%? He reduced short-term safe nominal interest rates by 200 basis points.
Brad DeLong | Professor of Economics, UCAL Berkeley

Also

If the effects of the crash cannot be reversed with monetary policy, that leaves fiscal policy — that old, neglected, unpopular tool — to fight any breakouts of deflation or mass unemployment.

Or it leaves central banks to try really radical policies that emulate the directness of fiscal policy, like literally throwing money out of helicopters or OMFG. [Overt Money Financing]

Azizonomics
Correction or Crisis?

John Aziz

Lucinda Shen — A high school drop out who delivered donuts and sold lingerie is a major advisor to Janet Yellen

After delivering donuts, working at a deli, and selling lingerie, Daly earned her GED and continued on to the University of Missouri-Kansas City and eventually got her Ph.D in economics at Syracuse University....

Daly grew up in Missouri as the daughter as a postman and a stay-at-home mom. Her parents' divorce would prompt her to drop out of school and earn her own living. At 16, Daly was living on her own — and it would be those experiences that prompted her interest in economics. 

“People lived on such a margin that they lived or died based on whether their job fell through,” she said in an interview. “That made me really interested in the labor market, interested in how people could be on this knife’s edge, of climbing up the economic ladder or falling down into the trench.”

Business Insider
A high school drop out who delivered donuts and sold lingerie is a major advisor to Janet Yellen
Lucinda Shen

ht Stephanie Kelton

Janet Yellen gives Forex traders green light to take the dollar lower

Janet Yellen just gave Forex traders the green light to take the greenback lower. In her comments to the media yesterday she said this:

“I think we have seen that it’s had a negative effect on net exports and so served as a something of a drag on the economy, and probably that drag is going to continue for some time to come,” 

I am betting that the markets take this as a sign to push the dollar lower. We are already seeing it this morning, with dollar weakness across the board.

This is easy money for Forex traders.

Trade Forex! Get my Forex trading course on video now!

John Jansen — Fischer on the Rise

Fed Vice-Chair Stanley Fisher, that is.

Across the Curve
Fischer on the Rise
John Jansen

Janet L Yellen — Finance and society

The financial sector is vital to the economy. A well-functioning financial sector promotes job creation, innovation, and inclusive economic growth. But when the incentives facing financial firms are distorted, these firms may act in ways that can harm society. Appropriate regulation, coupled with vigilant supervision, is essential to address these issues.

Unfortunately, in the years preceding the financial crisis, all too many firms took on risks they could neither measure nor manage. Leverage, interconnectedness, and maturity and liquidity transformation escalated to dangerous levels across the financial system. The result was the most severe financial crisis and economic downturn since the Great Depression. Almost 9 million Americans lost their jobs, roughly twice as many lost their homes, and all too many households ended up underwater on their mortgages and overburdened with debt. To be sure, some individuals and families borrowed unwisely, but too often financial institutions encouraged the behavior that resulted in such excessive debt.

In my remarks today I will discuss some important reasons why the incentives facing financial institutions were distorted and the steps that regulators are taking to realign those incentives.

Janet L Yellen: Finance and society 

Speech by Ms Janet L Yellen, Chair of the Board of Governors of the Federal Reserve System, at the “Finance and Society”, a conference sponsored by the Institute for New Economic Thinking, Washington DC, 6 May 2015

Joseph Joyce — The U.S.: Inept Diplomacy, Indispensable Currency

All this demonstrates the discrepancy between the diplomatic and financial power of the U.S. On the one hand, the U.S. must deal with countries that are eager to claim their places in global governance. The dominance of the U.S. and other G7 nations in international institutions is a relic of a world that came to an end with the global financial crisis. On the other hand, the dollar is still the predominant international currency, and will hold that place for many years to come. The use of the renminbi is slowly growing but it will be a long time before it can serve as an alternative to the dollar. Consequently, the actions of the Federal Reserve may have more international repercussions than those of U.S. policymakers unable to cope with the shifting landscape of financial diplomacy.

Angry Bear
The U.S.: Inept Diplomacy, Indispensable Currency
Joseph Joyce