The Fed raised rate last year because their Phillips curve model told them wage inflation was on the way. Alan Kreuger pointed out that notwithstanding low LFPRs, the labour market is tight and wage inflation is on the way.
The Fed rate increase and its lead up caused monetary policy conditions to tighten substantially.
Here is a post from Tim Duy
Bottom Line: The Fed has yet to fully embrace the change in financial conditionals and the implications for the path of policy. To be sure Yellen gave enough this week to take March off the table. That said, policymakers will hesitate to dramatically change their general policy outlook focused on higher rates. Consequently, I anticipate Fedspeak with seemingly unrealistic hawkish undertones. Essentially, they will leave the fear of policy error simmering on the back-burner.
and another from Sumner himself on targeting the forecast through TIPS.
My views on current business conditions are pretty similar to those of Tyler, AFAIK. I think we both see a modest risk of recession this year, but less than 50-50. So suppose there is a recession this year—can I say, “I told you so”? I certainly didn’t think the rate increase in December would lead to recession (although some other MMs were more pessimistic.) But that misses the point. Sorry to be so long winded, but wake up here, this is the key point.
The Fed needs to always keep the “shadow NGDP futures price” close to target. If at any time they let it slip, as they did in September 2008, and if MMs point out that it is slipping, and if the Fed does not take aggressive actions that it clearly could take to prevent if from slipping, then yes, it’s the Fed’s fault.
That italicized (bold) statement does not involve any Monday morning quarterbacking. I’m not going to blame them for anything that they cannot prevent in real time. But recall that currently they are not even at the zero bound. Let’s explain this with a simpler example. We do have TIPS spreads, so we don’t need shadow prices for inflation expectations. MMs claim that even with the liquidity bias in TIPS spreads, the current ultra-low 5-year spread suggests money is too tight for the Fed’s 2% inflation target. That doesn’t mean we’ll have a recession, but if the Fed wants to hit their 2% inflation target they need to ease policy. If they don’t, and if they fall short of their inflation target, then MMs will have been right.
Whatever structural problems the economy has that need to be solved through institutional/fiscal reforms I am becoming increasing convinced a nominal GDP target rule would be overall welfare enhancing.
The Fed rate increase and its lead up caused monetary policy conditions to tighten substantially.
Here is a post from Tim Duy
Bottom Line: The Fed has yet to fully embrace the change in financial conditionals and the implications for the path of policy. To be sure Yellen gave enough this week to take March off the table. That said, policymakers will hesitate to dramatically change their general policy outlook focused on higher rates. Consequently, I anticipate Fedspeak with seemingly unrealistic hawkish undertones. Essentially, they will leave the fear of policy error simmering on the back-burner.
and another from Sumner himself on targeting the forecast through TIPS.
My views on current business conditions are pretty similar to those of Tyler, AFAIK. I think we both see a modest risk of recession this year, but less than 50-50. So suppose there is a recession this year—can I say, “I told you so”? I certainly didn’t think the rate increase in December would lead to recession (although some other MMs were more pessimistic.) But that misses the point. Sorry to be so long winded, but wake up here, this is the key point.
The Fed needs to always keep the “shadow NGDP futures price” close to target. If at any time they let it slip, as they did in September 2008, and if MMs point out that it is slipping, and if the Fed does not take aggressive actions that it clearly could take to prevent if from slipping, then yes, it’s the Fed’s fault.
That italicized (bold) statement does not involve any Monday morning quarterbacking. I’m not going to blame them for anything that they cannot prevent in real time. But recall that currently they are not even at the zero bound. Let’s explain this with a simpler example. We do have TIPS spreads, so we don’t need shadow prices for inflation expectations. MMs claim that even with the liquidity bias in TIPS spreads, the current ultra-low 5-year spread suggests money is too tight for the Fed’s 2% inflation target. That doesn’t mean we’ll have a recession, but if the Fed wants to hit their 2% inflation target they need to ease policy. If they don’t, and if they fall short of their inflation target, then MMs will have been right.
Whatever structural problems the economy has that need to be solved through institutional/fiscal reforms I am becoming increasing convinced a nominal GDP target rule would be overall welfare enhancing.
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