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
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
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
My conclusion on the US is that the bond markets have got this mostly right. They are betting that secular stagnation is going to continue in the US. And that’s because we’ve made policy choices that limit wage growth and increase inequality. And judging from the policy priorities in the Trump Administration and in Congress we will continue to do so.Credit Writedowns
This seems to suggest to me that the explanation must be related to the short term nominal rate, which is a policy decision of the central bank, rather than something that affects the levels of inflation, and according to some theories (the loanable funds) what that does to savings. If I'm right then, the cause of the low rates is the financial excess of the last three decades, that forced central banks to keep rates low to save the economy, and preclude further problems. Very unlikely that would change any time soon.Naked Keynesianism
Those who want higher interest rates need to tell me precisely what they want the Fed to do to cause rates to be higher.Money Illusion
The Federal Reserve Bank of America has been publishing a new indicator – the Labor Market Conditions Index (LMCI) – which is derived from a statistical analysis of 19 individual labour market measures since October 2014. It is now being watched by those who want to be the first to predict a rise in US official interest rates. If the latest data from the LMCI is a guide to potential interest rate movements then they won’t be rising any time soon. I updated my gross flows database today and also the job openings and quits database. The gross flows analysis suggests that while there has been improvement in the US labour market in the last year, in recent months that improvement is slowing.Bill Mitchell – billy blog
...the Central Bank ever since 2012 has made it clear that its priority is inflation reduction over growth, with a medium term inflation target of just 4%. The Central Bank has also repeatedly made it clear that it will pursue a tough interest rate policy to achieve it however hard that is and however long it takes.
Experience of other economies with chronic inflation problems (such as Britain in the 1970s to 1990s) suggests that for inflation to be squeezed out of the system economic policy must be geared to that objective. This inevitably reduces growth, at least in the short term.Russia Insider
That seems to be the situation Russia is in now. It has been clear since 2012 that the Russian authorities have prioritised inflation over growth....
One theory that I have seen floating around is that the "high" Treasury debt levels will prevent the Fed from raising interest rates. As someone who is in the "secular stagnation" camp(although I dislike the term), I can think of a lot of reasons why interest rates could stay low. But the level of debt is not one of those causes (as my earlier article noted, the high debt level is a consequence of slow growth). That said, the Fed has put itself into a position that it cannot hike rates extremely rapidly without paying a political cost.Bond Economics
Paul McCulley, a familiar face at Levy Institute events (he gave a keynote at our Rio conference and at last year’s Minsky Summer Seminar), is back at PIMCO and his first note is (predictably) worth a read.
His latest essay looks at Federal Reserve policy from the standpoint of what McCulley terms the Fed’s “secular victory in the long War Against Inflation” and discusses, among other things, how the Great Moderation fed into Minskyan financial instability, how we should think about the Fed’s “neutral” real policy rate, and what this means for the question of whether stocks and bonds are overvalued. Here he is on the Taylor Rule....Multiplier Effect
(Part 1): Does Sovereign Government Set Its Own Interest Rates?
Last week we began our series exploring where MMT parts company with “Keynesian” macroeconomics. This is a response to Ed Dolan’s useful post here: http://www.economonitor.com/dolanecon/2012/11/28/what-does-it-mean-for-fiscal-policy-to-be-sustainable-mmt-and-other-perspectives/Economonitor | Great Leap Forward
