This is coming a bit late to this piece, so not sure people will see this. But I’d be curious to think if you think having someone from organized labor on the FOMC would have made the rate hike mistake less likely. A number of people have pushed back at my oped (https://www.businessinsider.com/biden-appoint-federal-reserve-board-governor-labor-american-working-families-2020-12) saying that labor economists (like Janet Yellen) are their representatives. And I think that’s true to a point. But I don’t think it could replace someone that is on the ground with working people on a daily basis. Would be interested to hear what you think.
One thing I never understood about the funds rate: if you believe it can't/shouldn't go to zero, then why stop at 0.25%? Why not just keep halving it? There are infinite numbers between 0.25 and 0...
Yellen's mistake was not to lead the Fed to get the PCE price level bank on a 2% pa track and keep it there. Going forward she should mention that Powel has let inflations expectations fall and the Fed needs to get them back up to 2%
Unpopular opinion we have full employment when we have so much competition for workers you have wage inflation. When every industry has someone like the New York times throwing money at new employees, producing excellent content and making a profit. When every industry is like Vox and the New York times that is full employment. When you see Mr Pickle sandwich shop losing people to Subway and complaining they cant innovative that is full employment.
I love the articles with FRED macro statistics. It would be interesting to hear your views on macro policies in 70's and 80's like the Volcker deflations. I some times wonder if the mistakes that were made addressing the 2008 crisis were not at least partially caused by dogma build up from managing the Carter era economic problems.
People like Mickey Kaus, Ross Douthat, and others have argued that Trump's immigration policies are at least in part responsible for the fast wage growth from 2017 - 2019. I think one could easily quibble with that, BUT I do wonder if fruitful negotiations could be had trading restrictions to unskilled immigration for big fat infrastructure spends. In the end, yes the unskilled labor in other countries is hurt, but you get to argue that Dems really aren't for open borders and you get the nice fiscal shot in the arm.
If you consider, housing, medical and education costs inflation is pretty high, and it seems like a lot of these decisions are being made based on a make believe economy where wages are reasonable and costs are stable.
Excellent post. One small quibble about the suggestion that 1/4% rate hikes are not that important. That's usually the case, but not always. What matters is the gap between the policy rate and the so-called "natural interest rate". A rate hike also reduces the natural rate, by slightly slowing the economy. Normally this is not a big deal, but it can be at a turning point in the business cycle. You could argue that the initial downturn in December 2007 was caused by the Fed not cutting rates fast enough, at a time when the natural rate was falling rapidly due to the housing crisis.
One can also make the argument that the rate hike of December 2015, combined with some less than dovish forward guidance, contributed to the slowdown in GDP growth in 2016, which might have even cost Clinton the election. That's speculative, but there is no reason to assume that even a 25 basis point rise is inconsequential---it depends on the economic context in which it occurs. Interest rates do not measure the stance of monetary policy; it's the market rate minus the natural rate that matters.
As far as Kinsale's comment about ammunition, a rise in interest rates actually reduces the Fed's ammo, by reducing the natural interest rate (i.e. slowing the economy). The Fed's ability to influence the economy through conventional policy depends on the level of the natural rate of interest, not the market rate.
Love this! Give me more wonky takes of past Fed decisions, monetary vs fiscal policy, and conversations around the tools used by the Fed beyond interest rate setting. Bonus if we can compare the actions of the US to Europe over the past decade or so.
Nice writeup but I don't think "there is no actual evidence of any significant ideological disagreement between these three women about anything Treasury has authority over" is important.
Cabinet picks should include a look back as well as a look forward. Yellen caused a lot of needless suffering with her overly anti-worker interest rate policies. Biden not giving her this position and letting it leak that the reason was her Fed performance would send a clear signal that Fed chairpersons are evaluated on unemployment/wages and not just inflation.
By giving her this spot it basically sent the signal that being overly growth skeptical carries no negative consequences.
Calling a 25 basis point hike "overly anti-worker" is, I think, a little bit of an exaggeration. I think the Fed was looking at the possibility of the US ending up like Japan where you can't really ever raise rates again and you're stuck in this never ending liquidity trap. They took the first chance they could to get interest rates out of the basement. Plenty of older folks are not thrilled with CD rates at 0.5% if you're lucky and bond yields at basement levels. And lest we forget the median voter is over the age of 50...
Love this choice of article MattY. It's a good refresher for sure, very engaging. I'm honestly just glad there's a well written author out there that shares most of my political and economic priors.
It always seems like someone shares some of my political views then writes a piece praising Stephanie Kelton/MMT, or someone that shares most of my views on economic policy then gets upset at trans people. While it's good to read differing views, it's nice to have a niche too.
Certainly I hope Biden errs on the side of dovish Treasury/Fed appointments and Yellen's actions *slightly* indicate less than optimal dovishness, but I don't find her actions concerning. As Matt points out, the increases were modest and likely did no harm (e.g., 30 year mortgage rates continued to fall in 2016). I don't know. Maybe it's like tapping your brakes when you see a curve coming up. It turns out the curve was not as sharp as you imagined and had you not done so you would have gotten to your destination a bit sooner. But, again, not the biggest deal in the world.
I'm OK with any of these choices for Treasury. Unless you don't want a short Treasury secretary, of course.
My takeaway from this is Yellen's mistake was minor, she is very well qualified, and Brainard would be a good Fed chair - lets hope both women get these jobs.
Warren's opposition to Summers was not without merit, you sort of glossed over that Matt.
I agree with most of this article, but I will say that it is easy to classify something as a “mistake” which at the time seemed to be very sound economic footing. Why raise the Fed Funds rate? Our old friend the Phillips Curve, of course. This relationship between inflation and unemployment had held for the past several decades, and now looks tired and outdated only with the benefit of hindsight.
At the time there was ample evidence to support Yellen and Fischer’s position. Not only did you have lots of data to support this link between inflation and unemployment, you also did have unparalleled asset purchases from the Fed and by extension a large increase in the money supply. If you had to take an action with this as your background, I think most rational people would have a very difficult time choosing the more unsubstantiated claim. There was a lot of debate at the time about whether employment would accelerate given the large growth in the money supply, but it never came. That’s just hypothesis testing, and I’m not sure we assign blame to those who make the ultimately wrong call so long as it is well-grounded.
In fact, this article shows the diminishing value of QE1 (QE2?) and lowering the Fed Funds rate had on the unemployment rate! The Fed pulled out incredibly unconventional tools and only managed an unemployment rate slightly below 5% by Jan 2017. When I look at those chart lines, that is further affirmation of anemic fiscal policy being the culprit, rather than slightly increasing the Fed Funds rate.
this st louis fed post says that the data that should show the phillip's curve has basically just been noise since 1970. it also has this bit about Powell's confirmation testimony
> He noted that the connection between economic slack and inflation was strong 50 years ago. However, he said that it has become “weaker and weaker and weaker to the point where it’s a faint heartbeat that you can hear now.”
I'm not so sure that in 2015 the data in favor of the phillip's curve was as rock solid as you're claiming.
When I look around ... I see asset bubbles inflating everywhere. Seems to be the result of taking the risk free rate to zero. Just look at what poured into VC starting in 2012 and then the throughline to the SoftBank Vision Fund for why this is a bad idea. For those that own assets ... this is awesome but certainly also the cause of this widening wealth inequality especially post COVID.
This is coming a bit late to this piece, so not sure people will see this. But I’d be curious to think if you think having someone from organized labor on the FOMC would have made the rate hike mistake less likely. A number of people have pushed back at my oped (https://www.businessinsider.com/biden-appoint-federal-reserve-board-governor-labor-american-working-families-2020-12) saying that labor economists (like Janet Yellen) are their representatives. And I think that’s true to a point. But I don’t think it could replace someone that is on the ground with working people on a daily basis. Would be interested to hear what you think.
One thing I never understood about the funds rate: if you believe it can't/shouldn't go to zero, then why stop at 0.25%? Why not just keep halving it? There are infinite numbers between 0.25 and 0...
Yellen's mistake was not to lead the Fed to get the PCE price level bank on a 2% pa track and keep it there. Going forward she should mention that Powel has let inflations expectations fall and the Fed needs to get them back up to 2%
Unpopular opinion we have full employment when we have so much competition for workers you have wage inflation. When every industry has someone like the New York times throwing money at new employees, producing excellent content and making a profit. When every industry is like Vox and the New York times that is full employment. When you see Mr Pickle sandwich shop losing people to Subway and complaining they cant innovative that is full employment.
I love the articles with FRED macro statistics. It would be interesting to hear your views on macro policies in 70's and 80's like the Volcker deflations. I some times wonder if the mistakes that were made addressing the 2008 crisis were not at least partially caused by dogma build up from managing the Carter era economic problems.
People like Mickey Kaus, Ross Douthat, and others have argued that Trump's immigration policies are at least in part responsible for the fast wage growth from 2017 - 2019. I think one could easily quibble with that, BUT I do wonder if fruitful negotiations could be had trading restrictions to unskilled immigration for big fat infrastructure spends. In the end, yes the unskilled labor in other countries is hurt, but you get to argue that Dems really aren't for open borders and you get the nice fiscal shot in the arm.
If you consider, housing, medical and education costs inflation is pretty high, and it seems like a lot of these decisions are being made based on a make believe economy where wages are reasonable and costs are stable.
Excellent post. One small quibble about the suggestion that 1/4% rate hikes are not that important. That's usually the case, but not always. What matters is the gap between the policy rate and the so-called "natural interest rate". A rate hike also reduces the natural rate, by slightly slowing the economy. Normally this is not a big deal, but it can be at a turning point in the business cycle. You could argue that the initial downturn in December 2007 was caused by the Fed not cutting rates fast enough, at a time when the natural rate was falling rapidly due to the housing crisis.
One can also make the argument that the rate hike of December 2015, combined with some less than dovish forward guidance, contributed to the slowdown in GDP growth in 2016, which might have even cost Clinton the election. That's speculative, but there is no reason to assume that even a 25 basis point rise is inconsequential---it depends on the economic context in which it occurs. Interest rates do not measure the stance of monetary policy; it's the market rate minus the natural rate that matters.
As far as Kinsale's comment about ammunition, a rise in interest rates actually reduces the Fed's ammo, by reducing the natural interest rate (i.e. slowing the economy). The Fed's ability to influence the economy through conventional policy depends on the level of the natural rate of interest, not the market rate.
Love this! Give me more wonky takes of past Fed decisions, monetary vs fiscal policy, and conversations around the tools used by the Fed beyond interest rate setting. Bonus if we can compare the actions of the US to Europe over the past decade or so.
Matt,
Nice writeup but I don't think "there is no actual evidence of any significant ideological disagreement between these three women about anything Treasury has authority over" is important.
Cabinet picks should include a look back as well as a look forward. Yellen caused a lot of needless suffering with her overly anti-worker interest rate policies. Biden not giving her this position and letting it leak that the reason was her Fed performance would send a clear signal that Fed chairpersons are evaluated on unemployment/wages and not just inflation.
By giving her this spot it basically sent the signal that being overly growth skeptical carries no negative consequences.
Calling a 25 basis point hike "overly anti-worker" is, I think, a little bit of an exaggeration. I think the Fed was looking at the possibility of the US ending up like Japan where you can't really ever raise rates again and you're stuck in this never ending liquidity trap. They took the first chance they could to get interest rates out of the basement. Plenty of older folks are not thrilled with CD rates at 0.5% if you're lucky and bond yields at basement levels. And lest we forget the median voter is over the age of 50...
Love this choice of article MattY. It's a good refresher for sure, very engaging. I'm honestly just glad there's a well written author out there that shares most of my political and economic priors.
It always seems like someone shares some of my political views then writes a piece praising Stephanie Kelton/MMT, or someone that shares most of my views on economic policy then gets upset at trans people. While it's good to read differing views, it's nice to have a niche too.
Certainly I hope Biden errs on the side of dovish Treasury/Fed appointments and Yellen's actions *slightly* indicate less than optimal dovishness, but I don't find her actions concerning. As Matt points out, the increases were modest and likely did no harm (e.g., 30 year mortgage rates continued to fall in 2016). I don't know. Maybe it's like tapping your brakes when you see a curve coming up. It turns out the curve was not as sharp as you imagined and had you not done so you would have gotten to your destination a bit sooner. But, again, not the biggest deal in the world.
I'm OK with any of these choices for Treasury. Unless you don't want a short Treasury secretary, of course.
My takeaway from this is Yellen's mistake was minor, she is very well qualified, and Brainard would be a good Fed chair - lets hope both women get these jobs.
Warren's opposition to Summers was not without merit, you sort of glossed over that Matt.
Good article!
I agree with most of this article, but I will say that it is easy to classify something as a “mistake” which at the time seemed to be very sound economic footing. Why raise the Fed Funds rate? Our old friend the Phillips Curve, of course. This relationship between inflation and unemployment had held for the past several decades, and now looks tired and outdated only with the benefit of hindsight.
At the time there was ample evidence to support Yellen and Fischer’s position. Not only did you have lots of data to support this link between inflation and unemployment, you also did have unparalleled asset purchases from the Fed and by extension a large increase in the money supply. If you had to take an action with this as your background, I think most rational people would have a very difficult time choosing the more unsubstantiated claim. There was a lot of debate at the time about whether employment would accelerate given the large growth in the money supply, but it never came. That’s just hypothesis testing, and I’m not sure we assign blame to those who make the ultimately wrong call so long as it is well-grounded.
In fact, this article shows the diminishing value of QE1 (QE2?) and lowering the Fed Funds rate had on the unemployment rate! The Fed pulled out incredibly unconventional tools and only managed an unemployment rate slightly below 5% by Jan 2017. When I look at those chart lines, that is further affirmation of anemic fiscal policy being the culprit, rather than slightly increasing the Fed Funds rate.
this st louis fed post says that the data that should show the phillip's curve has basically just been noise since 1970. it also has this bit about Powell's confirmation testimony
> He noted that the connection between economic slack and inflation was strong 50 years ago. However, he said that it has become “weaker and weaker and weaker to the point where it’s a faint heartbeat that you can hear now.”
I'm not so sure that in 2015 the data in favor of the phillip's curve was as rock solid as you're claiming.
https://www.stlouisfed.org/open-vault/2020/january/what-is-phillips-curve-why-flattened
When I look around ... I see asset bubbles inflating everywhere. Seems to be the result of taking the risk free rate to zero. Just look at what poured into VC starting in 2012 and then the throughline to the SoftBank Vision Fund for why this is a bad idea. For those that own assets ... this is awesome but certainly also the cause of this widening wealth inequality especially post COVID.
The best thing about being an economist is that you will occasionally be right about something.