Brian Romanchuk — Initial Comments On Zero Rate Policy And Inflation Stability

This article represents my initial comments on the question of the stability implications of locking interest rates at zero. Martin Watts, an Australian academic, had an interesting presentation at the first Modern Monetary Theory (MMT) conference (link to videos of presentations). Although MMT fits within a broad-tent definition of "post-Keynesian" economics, there are still sharp debates with other post-Keynesians. One topic of debate is the effect of permanently locking the policy interest rate at zero, which is a policy advocated by many MMT economists. In my view, this is a debate that is best approached by using stock-flow consistent (SFC) models.

Bond Economics
Initial Comments On Zero Rate Policy And Inflation Stability
Brian Romanchuk

Zero Hedge — Deutsche Bank's chief credit strateigst Jim Reid on the endgame

Deutsche Bank's chief credit strateigst Jim Reid.

I'd call it the second leg down.

Zero Hedge
This Is The Endgame, According To Deutsche Bank

Warren Mosler — Credit check, Fed check

What is the Fed thinking? Seems be that they've held interest rates down "too long." What's the criterion for "too long." Warren investigates some charts.

The Center of the Universe
Credit check, Fed check
Warren Mosler

Warren Mosler — There is no right time for the Fed to raise rates!

Warren Mosler explains his permanent zero policy rate position.

The Center of the Universe
There is no right time for the Fed to raise rates!
Warren Mosler

Bill Gross — Monthy Letter

Bill Gross takes an interesting position on a permanently low interest rate that is similar to Warren Mosler's "the natural rate of interest is zero," although for different reasons.

PIMCO Investment Outlook
Achoo!
William H. Gross

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)

Warren Mosler — Federal Reserve Interest Rates Should Be Near Zero Forever

Warren makes US News!

US News — Opinion
Federal Reserve Interest Rates Should Be Near Zero Forever
Warren Mosler, Co-Founder of the Center for Full Employment And Price Stability

Suzi Quatro: 'Low rates stink - I want my money to earn for me'

More ZIRP protest chatter from savers becoming manifest this time from rocker Suzi Quatro, story at the Telegraph here.

Fame and Fortune: Suzi Quatro may have sold 55 million records in a 50-year career but she feels the pain of low interest rates like any other saver.

Interesting interview with Quatro at the jump where she provides some personal views on savings and thrift which is perhaps in contrast to typical rockers who seem to be generally profligate.

Art Patten — Did Michael Woodford Endorse NGDP Targeting? Hell, No.

Not as NGDP targeting is currently articulated, anyways.

Famed economist Michael Woodford gave a speech at the Federal Reserve’s annual conference in Jackson Hole, Wyoming recently that is stirring a lot of interest as it allegedly advocates nominal GDP (NGDP) targeting.

The NGDPers should take a more careful look, however. As we read it, Woodford argued that policies relying solely on expectations—the nom-de-guerre of monetary policy and monetarists—is likely to prove as fruitless when interest rates are near zero as the types of forward guidance he critiqued in the paper. Therefore, in order to stimulate economic activity, some combination of fiscal policy, monetary policy that essentially acts like fiscal policy (such as mortgage-backed security or MBS purchases), and coordination between fiscal and monetary authorities is almost certainly required.

Symmetry Capital Management, LLC
Did Michael Woodford Endorse NGDP Targeting? Hell, No.
Art Patten

Yves Smith — The Hidden Bank Time Bomb: Interest Rate Risk

At the Atlantic Economy Summit in Washington last month, Sheila Bair fielded a question about the just-released results of the latest bankstress tests. The former FDIC chief took pains to point out that they were an improvement over earlier iterations by virtue of keying off a truly dire economic scenario, but then ticked off a number of ways in which they fell short. One was in that they focused solely on credit risk, when historically, adverse interest rate moves have proven very effective in decimating the banking sector. Witness phase one of the savings and loan crisis, in which hasty deregulation and gimmickry in the early 1980s set up the crisis later in the decade, or the derivatives wipeout of 1994, in which an unexpected 25 basis point Fed funds increase created bigger losses than the 1987 crash, or the losses on US bond portfolios in 1997 and 1998, which among other things nearly wiped out Lehman.

The perils of interest rate risk have largely receded from memory since the US has been in a long-term disinflationary trend since 1983. But with rates at zero, we have nowhere to go but up from here.

Chris Whalen, in his latest newsletter, argues that this risk is even nastier than it might appear. One way of mitigating interest rate risk is by holding shorter-dated instruments. The reason is that the more back-weighted your payments are, the more exposure you have to changes in interest rates.

Read the rest at Naked Capitalism
The Hidden Bank Time Bomb: Interest Rate Risk

by Yves Smith

Warren Mosler on Martin Wolf on McCulley-Pozsar

Martin Wolf comments on a paper by Paul McCulley and Zoltan Pozsar, and Warren intersperses comments on Wolf. Warren distinguishes between fixed rate and floating rate regimes to make his points, as well as fiscal policy and exchange rate.

Read it at The Center of the Universe
Fiscal and monetary policy in a liquidity trap
by Warren Mosler

Steve Roth follows up with Answers — Taking IOR to Zero

Read it at Angry Bear
Answers: Taking IOR to Zero
by Steve Roth

Steve thanks commenters here for their insights.