January 04, 2004
Department of "Huh?"

The Federal Reserve's Ben Bernanke says something I really do not understand: Forbes.com: Monetary policy not impotent at zero rates-Fed Bernanke: Federal Reserve Board Governor Ben Bernanke said on Saturday the U.S. central bank had tools other than interest rates that would enable it to boost the economy, even if it had pushed rates to zero. "The Federal Reserve has other ways of expanding the economy other than lowering the federal funds rate, by expanding the money supply for example," Bernanke said in response to a question at a the annual meeting of the American Economic Association. "I remain convinced that monetary policy can still be very constructive even if interest rates are zero," he said... This I do not understand. When short-term interest rates are zero, expanding the money supply--buying back short-term government bonds for cash--means that the government is inducing the private sector to swap one short-term zero-interest asset--Treasury bills--for another short-term zero-interest asset--cash. Its as if Bernanke were claiming that mass transit ridership was going to rise because the transit authority was going to replace its red buses with blue buses. When short-term interest rates aren't zero, of course, Treasury bills and cash have very different characteristics....

Posted by DeLong at 07:59 AM

December 17, 2003
Steve Cecchetti Speaks

Interest rates are almost surely not going to go up until late in 2004, or early 2005: WSJ.com - Underlying Inflation Plunges To Lowest Level in 40 Years: Underlying inflation fell last month to its lowest level in 40 years, as ample slack in the economy continued to put downward pressure on prices. Even as industrial production and home construction surged, the overall consumer-price index dropped 0.2% in November from October, mostly because of a big drop in energy costs, the Labor Department said. That brought the 12-month increase in prices down to 1.8% from 2.1%. Excluding the volatile food and energy categories, "core" consumer prices, an indicator of underlying inflation, declined 0.1% in November, the first monthly decline since 1982. That brought the rate of change for the past 12 months down to 1.1%, the lowest core inflation rate since 1963, from 1.3% in October.... The drop in prices surprised economists and probably also surprised the Federal Reserve, which last week said the risks of an "unwelcome fall in inflation" were "almost" equal to the risk of an increase, breaking a seven-month stretch in which it firmly placed inflation risks on the downside. Underlying inflation of 1.1% is getting...

Posted by DeLong at 08:04 AM

December 12, 2003
The Federal Reserve View of the World

The Washington Post's John Berry explains why the Federal Reserve is not currently planning to raise interest rates until 2005. They expect unemployment to fall very, very slowly--if at all--over the next year or so. washingtonpost.com: Fed Rate Hike Still Far Off, Minutes Hint: Although some analysts and investors believe that the Federal Reserve could raise interest rates as soon as March, Fed officials are likely to wait until long after that, perhaps until 2005, according to minutes of an Oct. 28 policymaking meeting released yesterday. Members of the central bank's top policymaking group, the Federal Open Market Committee, think that the persistent slack in the nation's job market and the ample amount of unused production capacity, coupled with continued productivity gains, are "likely to hold inflation to very low levels over the next year or two," the minutes said. "Looking ahead, members generally anticipated that an economic performance in line with their expectations would not entirely eliminate currently large margins of unemployed labor and other resources until perhaps the latter part of 2005 or even later," the minutes explained. The stock and bond markets rallied after the minutes were released, with the Dow Jones industrial average closing above 10,000...

Posted by DeLong at 09:54 AM

December 10, 2003
The Federal Reserve View of the World

The Washington Post's John Berry quotes Federal Reserve Vice Chair Roger Ferguson: Fed Watchers Seek Signal on Interest Rates (washingtonpost.com): ...One reason Fed officials are so relaxed about inflation is that it is low, but another reason is that the largest single cost of most firms, the cost of labor embedded in each good or service produced, is falling, not rising. For example, in the year ended in September, productivity growth was so strong that unit labor costs fell 2.2 percent. Using very straightforward language in a speech two weeks ago, Fed Vice Chairman Roger W. Ferguson Jr. laid out a view shared by many of his colleagues. First, economic growth might falter again. Second, large gains in productivity -- the amount of goods and services produced for each hour worked -- mean the economy can grow faster than used to be the case without putting upward pressure on prices. Third, there is a large "output gap," with actual production running well below what could be produced without causing more inflation. And fourth, research has shown that after an extended period of low inflation, prices are less likely to rise as the unemployment rate falls than they were in the...

Posted by DeLong at 07:06 AM

December 09, 2003
Federal Reserve Policy

The Federal Reserve no longer believes that deflation is a bigger threat than inflation. But it still believes that it can maintain its current accomodative monetary policy stance for a "considerable period": FRB: Press Release--FOMC statement--December 9, 2003: The Federal Open Market Committee decided today to keep its target for the federal funds rate at 1 percent. The Committee continues to believe that an accommodative stance of monetary policy, coupled with robust underlying growth in productivity, is providing important ongoing support to economic activity. The evidence accumulated over the intermeeting period confirms that output is expanding briskly, and the labor market appears to be improving modestly. Increases in core consumer prices are muted and expected to remain low. The Committee perceives that the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal. The probability of an unwelcome fall in inflation has diminished in recent months and now appears almost equal to that of a rise in inflation. However, with inflation quite low and resource use slack, the Committee believes that policy accommodation can be maintained for a considerable period. Things would change if inflation were to start to rise, or if...

Posted by DeLong at 02:14 PM

December 08, 2003
Forecasts of Federal Reserve Policy

From the New York Times: Will the Fed Stick to Its Plan on Low Rates?: ...Fed officials have made it clear that they see no need to raise the federal funds rate... currently 1 percent.... The real question is whether the central bank will retreat from its open-ended commitment to keep rates low "for a considerable period." Retreating from that commitment would be a first step toward tightening monetary policy, putting markets on alert that rate increases are possible several months down the road. Fed officials have a number of reasons for wanting to wait before taking even that first step. Though the economy grew 8.2 percent in the third quarter and seems poised to grow at nearly 4 percent through next year, Fed officials have said they want to see significant improvement in the job market and more evidence that the specter of deflation, or declining prices, has been banished.... The Labor Department reported that the economy added 57,000 jobs in November. That is less than half the pace in August and September and well below the 250,000 jobs a month that economists say are necessary to bring a big reduction in employment... prices for a broad range of...

Posted by DeLong at 09:32 AM

November 19, 2003
Federal Reserve Expectations

The Washington Post's John Berry writes about Federal Reserve expectations: Bonds (washingtonpost.com): William Poole, president of the St. Louis Federal Reserve Bank, gave the bond market a shot in the arm last week when he said in an interview with Bloomberg News that with the "modest" economic growth forecast for next year the Fed could keep its interest rate target low "well beyond March." Poole, like many other Fed officials, believes productivity growth has risen enough that the economy will have to grow at more than about a 4 percent annual rate before unemployment begins to fall. Many private economists and those in the Bush administration are predicting growth at a 4 percent rate or less in 2004. Until joblessness begins to decline, the Fed is unlikely to start to raise its target. "The standard forecast is still for good but by no means gangbusters growth," Poole said. "We are only going to make very slow gains in reducing unemployment."......

Posted by DeLong at 04:20 PM

November 17, 2003
Reply Hazy, Ask Again

The Wall Street Journal's Steven Liesman stares into his Magic 8 Ball and tries to figure out what the Federal Reserve will do. But his conclusion seems to be "Reply Hazy: Ask Again"--and this makes him mad at the Fed: WSJ.com - The Macro Investor: ...All of that leaves us where we started: Still trying to figure out what the Fed will do and when will it do it. There are basically two schools of thought. One group believes the Fed is on hold throughout 2004. They believe the line of Governor Ben Bernanke who has argued, rather convincingly, that the inflation rate could actually fall from here even amid strong growth. That's because the economy has a lot of slack, in the form of unemployed workers and idle factories. The economy has to run red hot for several quarters -- as much as a year -- before we have any danger of inflation. Nonsense, say those who think a Fed rate increase could come as soon as this spring. They see higher commodity prices and soaring gold prices as the leading edge of a rebound in inflation. They believe job creation is and will be much stronger than expected....

Posted by DeLong at 05:02 PM

October 28, 2003
Inflation Still Falling?

It looks as though the Federal Reserve believes that there is still downward pressure on inflation: FRB: Press Release -- FOMC statement -- October 28, 2003: The Federal Open Market Committee decided today to keep its target for the federal funds rate at 1 percent. The Committee continues to believe that an accommodative stance of monetary policy, coupled with robust underlying growth in productivity, is providing important ongoing support to economic activity. The evidence accumulated over the intermeeting period confirms that spending is firming, and the labor market appears to be stabilizing. Business pricing power and increases in core consumer prices remain muted. The Committee perceives that the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal. In contrast, the probability, though minor, of an unwelcome fall in inflation exceeds that of a rise in inflation from its already low level. The Committee judges that, on balance, the risk of inflation becoming undesirably low remains the predominant concern for the foreseeable future. In these circumstances, the Committee believes that policy accommodation can be maintained for a considerable period....

Posted by DeLong at 01:41 PM

October 25, 2003
John Berry Explains Things

The Washington Post's John Berry explains why the Federal Reserve is very, very unlikely to hike interest rates for quite a while. Real GDP is growing, yes--but the economy's productive potential is growing faster. The amount of economic slack, the gap between the economy's sustainable productive potential and actual output continues to grow. And until that gap shrinks significantly (which would be signaled by a sharp reduction in the unemployment rate and a sharp rise in capacity utilization) the Federal Reserve is very unlikely to move: Despite Public Fears, Quick Fed Rate Hike Unlikely (washingtonpost.com): ...a close reading of the comments by the Fed officials indicated they were making academic points rather than sending signals. When Fed officials meet Tuesday to discuss the state of the economy and set a short-term course for interest rates, they are extremely unlikely to make any change in their 1 percent overnight rate target. Moreover, they are also likely to release a statement similar to the one they issued after their September meeting saying they are more concerned about the possibility that the already low inflation rate will fall further than that economic growth will be too strong. At this point, Fed officials are...

Posted by DeLong at 08:38 AM

October 20, 2003
Joe Stiglitz Needs an Editor

My main reaction to Joseph Stiglitz's Globalization and Its Discontents was that Stiglitz needed an editor. He needed to decide whether his critique of the IMF was (1) that it brutally and cruelly violated developing-country sovereignty by putting constraints on brave leaders like Indonesia's Suharto when it loaned him money, or (2) that it empowered evil kleptocrats like Indonesia's Suharto by loaning him money at all. To say in one breath that the IMF should have loaned Suharto lots of money without conditions and to say in the next breath that the IMF should not have loaned Suharto a cent--that leaves your readers confused, and leaves your informed readers convinced that your brain needs a rebuild--or at least that you need a more powerful and assertive editor. I'm reading the Federal Reserve chapter of Stiglitz's new book, The Roaring Nineties*, and I think he is doing it again. Back in the 1960s then-Federal Reserve Chair William McChesney Martin said that the entire purpose of the Fed is to take away the punch bowl (raise interest rates) before the party gets really going (the economy really gets booming, and inflation starts rising). On page 82 of his new book, Stiglitz criticizes...

Posted by DeLong at 09:16 PM

September 19, 2003
Fed Policy and Communications Strategy

The Federal Reserve worries about how to communicate with the outside world: Fed Leaves Communication Policy Unchanged (washingtonpost.com): Federal Reserve officials, vexed about widespread misunderstanding of their policy concerns and intentions earlier this year, met Monday to review how they communicate with the public but decided not to change their practices for now, the Fed said in a statement yesterday. The Fed has been criticized by some financial analysts and former Fed officials for the way in which the central bank has conveyed its concerns about the possible use of some unconventional policies to deal with a possible bout of deflation. Some critics have also complained that speeches and congressional testimony by a number of the officials, including Fed Chairman Alan Greenspan, suggested that the Fed's target for overnight interest rates would be cut more aggressively in June than it was.... With the recent acceleration in demand growth, it is starting to look as though Alan Greenspan may have been right (and I and others like me may have been wrong) in thinking that the Federal Reserve should have moved more aggressively in the past nine months. The likelihood of deflation over the next couple of years has clearly dropped...

Posted by DeLong at 07:14 AM

September 16, 2003
From the Federal Reserve

From the Federal Reserve this afternoon: FRB: Press Release -- FOMC statement -- September 16, 2003: The Federal Open Market Committee decided today to keep its target for the federal funds rate at 1 percent. The Committee continues to believe that an accommodative stance of monetary policy, coupled with robust underlying growth in productivity, is providing important ongoing support to economic activity. The evidence accumulated over the intermeeting period confirms that spending is firming, although the labor market has been weakening. Business pricing power and increases in core consumer prices remain muted. The Committee perceives that the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal. In contrast, the probability, though minor, of an unwelcome fall in inflation exceeds that of a rise in inflation from its already low level. The Committee judges that, on balance, the risk of inflation becoming undesirably low remains the predominant concern for the foreseeable future. In these circumstances, the Committee believes that policy accommodation can be maintained for a considerable period. Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman; Ben S. Bernanke; Susan S. Bies; J. Alfred Broaddus, Jr.; Roger W. Ferguson,...

Posted by DeLong at 02:00 PM

September 15, 2003
What Will the Fed Do Next?

Greg Ip writes: WSJ.com - Fed Is Unlikely to Change Rates, But Future Course Is Uncertain: The economy is strengthening and inflation has stopped falling, both welcome signs for the Federal Reserve, which is almost certain to leave its interest rates unchanged when it meets Tuesday. The more important question will be what, if anything, the Fed signals about the future direction of interest rates. In May, the central bank said risks to economic growth were balanced but the risk of inflation falling too low outweighed the risk of rising inflation. The Fed repeated that message in June, when it cut its short-term rate target to a 45-year low of 1% from 1.25%, and in August, when it added that rates could stay low for a "considerable period." But since then, the economy has been surprisingly strong and inflation has shown signs of edging higher... That's not quite right. Since then, the economy has been surprisingly strong and surprisingly weak: news about output growth has been surprisingly good; news about employment losses has been surprisingly bad; the wedge between them--productivity growth--appears to have grown larger. Were I sitting on the FOMC, I would be more impressed by the employment than...

Posted by DeLong at 12:57 AM

September 12, 2003
What Does Alan Greenspan Know That I Do Not?

That was a question I asked Don Kohn at Jackson Hole. I did not get an answer. Let me explain. Eight times since his appointment to his post as Chair of the Board of Governors of the Federal Reserve, I have thought that Alan Greenspan has made a significant monetary policy mistake. Eight times. And at least six of those eight times, I have been wrong. I conclude that Alan Greenspan knows things--important things--about macroeconomics, about monetary policy, and about the relationship between economic structure and macroeconomics that I do not. These eight times are: Greenspan's rapid reduction in interest rates after 1987 stock market crash. I thought it was excessive--that the links from the stock market to the investment climate were weak, and that Greenspan's policies were likely to spark a substantial runup in inflation. I was wrong about the second--it didn't--and I'm not sure I was right about the first. Greenspan's not raising interest rates faster in 1988-1989. Once again, I thought he was behind the curve in controlling inflation. Once again, I was wrong. Greenspan's steep reduction in interest rates in 1990-1991 seemed to me, once again, to run a risk of reigniting the cycle of inflationary...

Posted by DeLong at 10:36 AM

Notes: On the Advantages of Not Having a Theory

Interesting conversations at Jackson Hole with Allen Sinai and Mickey Levy on how one of Greenspan's advantages at making monetary policy has been his lack of strong attachment to any particular framework. As a result, he has been much quicker to notice whenever the world changes than academic forecasters who have built their models and are quite attached to them....

Posted by DeLong at 10:14 AM

September 04, 2003
More Thoughts on Jackson Hole

Still more disconnected thoughts from Jackson Hole... One of the interesting things that I noticed at the Jackson Hole conference was that there had been a crystallization of near-consensus opinion about why the Greenspan-era Federal Reserve has done so well. The near-consensus position was that the sources of good performance were four: Very good judgment by Chairman Greenspan--good judgment reinforced by the fact that because he is not an academic he is able to abandon theories, models, and rules of thumb when the data suggest that they are wrong, as opposed to the academic tendency to hang on to the theory long past the point of no return. Universal and solid confidence that the Federal Reserve will never compromise on its long-run goal of price stability. As a result, enormous freedom for the Federal Reserve to take aggressive action to stabilize production and employment in the short run--freedom that a central bank whose commitment to price stability was questioned would never have. Substantial confidence by private-sector agents in the Federal Reserve's commitment to price stability--hence substantial stabilizing speculation in all kinds of markets that smooths out the consequences of macroeconomic shocks. What struck me as most interesting was--as I said...

Posted by DeLong at 08:13 PM

August 14, 2003
The Federal Reserve Speaks

The Federal Reserve speaks: FRB: Press Release -- FOMC statement -- August 12, 2003: Release Date: August 12, 2003: For immediate release: The Federal Open Market Committee decided today to keep its target for the federal funds rate at 1 percent. The Committee continues to believe that an accommodative stance of monetary policy, coupled with still-robust underlying growth in productivity, is providing important ongoing support to economic activity. The evidence accumulated over the intermeeting period shows that spending is firming, although labor market indicators are mixed. Business pricing power and increases in core consumer prices remain muted. The Committee perceives that the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal. In contrast, the probability, though minor, of an unwelcome fall in inflation exceeds that of a rise in inflation from its already low level. The Committee judges that, on balance, the risk of inflation becoming undesirably low is likely to be the predominant concern for the foreseeable future. In these circumstances, the Committee believes that policy accommodation can be maintained for a considerable period. Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman; Ben S. Bernanke; Susan S....

Posted by DeLong at 07:10 AM

August 12, 2003
"Sustainable Growth"

Bonds fell after today's FOMC meeting--possibly because the Fed dropped from its statement the phrase in which it worries about the economy's ability to deliver "sustainable growth": WSJ.com - Fed's Message Boosts Stocks: Stocks jumped and bonds fell after the Federal Reserve left its interest-rate targets unchanged, as hope spread among investors that an economic recovery is under way. Despite the Fed's effort Tuesday to reassure bond investors by saying that it doesn't plan to raise interest rates "for a considerable period," investors focused mainly on the prospects for economic growth. That meant that stock investors, who seek profit growth, were more pleased than bond investors, who prefer the prospect of falling rates. The Fed's statement, issued after its policy meeting Tuesday, was strikingly similar to one provided after the previous meeting, in June. But analysts noted that the Fed tinkered in small ways that suggested an improving picture. This time, for example, Fed policy makers no longer expressed worry about the economy's inability to show "sustainable growth"... IMHO, the Fed should still be worrying about the economy's inability to show "sustainable growth". The economy's "sustainable growth rate" looks to be something north of 3.5% per year: it's not clear...

Posted by DeLong at 08:07 PM

August 11, 2003
Federal Reserve Policy

I find it extremely odd that Alan Greenspan is finding it hard to convince the bond market that he will be patient, and not raise the short-term Federal Funds interest rate for quite a while. Back in 1992-1993 Greenspan was incredibly patient. In order to avoid undermining Congress's shaky will to start reducing the deficit, he kept from raising interest rates until the spring of 1994--long past the date at which I would have started raising them, had I been in his shoes. I would have raised them the previous fall... WSJ.com - The Federal Reserve Faces A Challenge in Its Message: WASHINGTON -- The question facing Federal Reserve Board policy makers at their meeting Tuesday isn't whether to change interest rates -- they almost certainly aren't going to -- but rather how to convince markets they aren't going to raise them any time soon. Since its May 6 meeting, the Fed has amply indicated that the world has changed and, unlike in previous recoveries, it is going to be extraordinarily patient about raising rates. That is because underlying inflation, at just above 1%, is at risk of going too low, whereas for most of the prior 50 years, the...

Posted by DeLong at 07:01 PM

July 23, 2003
Looking Forward to Fast GDP Growth and a Lousy Labor Market

Bernanke, McTeer, and Greenspan worry that even the relatively strong GDP growth they hope emerge will be accompanied by a lousy labor market, and perhaps downward pressure on inflation and prices. Why? Because they (like me) think that the rapid productivity growth of the new economy is still burbling away inside the economy's foundations, and driving a big wedge between output growth and employment growth. Dark linings in the economic clouds - Jul. 23, 2003: Then Fed Governor Ben Bernanke said Wednesday that gross domestic product (GDP), the broadest measure of the nation's economy, could grow at a 3 percent rate the rest of this year and a 4 percent rate next year, but he added that the unemployment rate would still be as high as 6 percent by the end of 2004. What's more, Bernanke said stronger GDP growth would do nothing to stop a recent slide in inflation that's alarmed many economists. The worry: that the economy could get hit by deflation, an unstoppable drop in prices that has hounded Japan's economy for much of the past decade. "Even if the economy recovers smartly for the rest of this year and the next, the ongoing slack in the...

Posted by DeLong at 07:43 PM

Federal Reserve Now Thinks It Still Has Running Room

The Federal Reserve now appears to believe that it still has more room to cut short-term interest rates--that the old argument that it would be unhealthy to cut the Federal Funds rate below 1% per year does not really apply: Blog - ArgMax.com: Fed Gov. Bernanke sees rates as low as zero if need be - Jul. 23, 2003: Federal Reserve Governor Ben Bernanke said on Wednesday that the central bank would be prepared to cut interest rates all the way to zero if necessary to prevent a fall in inflation. Speaking to a university audience, Bernanke said if the Fed were to reduce overnight borrowing costs to zero, it would look at so-called nontraditional methods of trying to spur growth, such as buying long-term bonds. He expressed confidence that those methods would work if the Fed needed to turn to them. But policymakers still appear focused on using their central tool of controlling short-term interest rates for now....

Posted by DeLong at 07:26 PM

July 22, 2003
*Sigh*

For my sins, I continue to go to the National Review website once a week. This time I got to the end of Larry Kudlow's second paragraph: This past spring Maestro Alan Greenspan issued official Federal Reserve statements that deflationary declines in the prices of goods and services people buy was the nation's top economic danger. Consequently, he said his Fed might make special purchases of Treasury bonds in order to pump new money into the economy, and get bond rates lower to stimulate investment. But last week, in congressional testimony, Maestro G changed his tune. Totally. Completely. Utterly. Suddenly he said that next year's economy would be strong, and that this revival would begin in the second half of this year. Hence, his new thinking goes, deflation is apparently not a threat and there's no need to add liquidity... Is that really what Greenspan said? Let's go to the videotape: Rate Cut Looking Like a Sure Thing (washingtonpost.com): Fed Chairman Alan Greenspan, who gave the first hint that he was contemplating another rate cut in testimony before a congressional committee on May 21, referred then to such a step as "taking out insurance." "We believe that because in the...

Posted by DeLong at 08:50 AM

July 17, 2003
Is Alan Greenspan Only Allowed to Talk When He Agrees with Me?

The New Republic believes that Alan Greenspan should never opine about his belief that the proper size of government is smaller than the one we have--although he should condemn budget deficits twice a day: The New Republic Online: As the chairman of the Federal Reserve, Alan Greenspan has every right to opine about the wisdom of running deficits: Persistent deficits drive up long-term interest rates (since they lower the supply of national savings), and they can be inflationary if the government prints money to finance them. Since both of these things directly impinge on Greenspan's ability to fulfill his mandate to pursue price stability, full employment, and moderate long-term interest rates, it would be remiss on his part not to comment on deficits. But there's nothing in the Fed's mandate that requires the Fed chairman to weigh in on what are essentially political questions: namely, what is the proper size of government? To the contrary, as this question has everything to do with political ideology and little to do with economics (at least at the margins, obviously a hugely bloated public sector is a drag on growth, as is a nonexistent government sector), you would expect an ostensibly apolitical...

Posted by DeLong at 12:33 PM

July 15, 2003
Greenspan Before the House Financial Services Committee

Greenspan made two points that I did not really expect. The first is the Federal Reserve's new position that it still has "substantial" room to cut short-term interest rates, even though the target Federal Funds rate is now a low 1% per year. The second is that the Federal Reserve thinks that the accounting scandals have played a significant role in discouraging investment--in which case the failure of the Bush administration to take action and the great Harvey Pitt follies have been very expensive for the American economy. Greenspan: Further interest rate cuts possible - Jul. 15, 2003: NEW YORK (CNN/Money) - The Federal Reserve could make further substantial cuts in interest rates, Alan Greenspan told Congress Tuesday, but the central bank chairman also said the Fed was not ready to take unusual steps such as buying Treasury bonds to give a lift to the economy. "With the target funds rate at 1 percent, substantial further conventional easings could be implemented if (Fed policy makers) judged such policy actions warranted," Greenspan said in remarks to the House Financial Services Committee. Greenspan also said the Fed, the nation's central bank, was ready to keep rates low for a "considerable" period of...

Posted by DeLong at 10:08 AM

July 14, 2003
U.S. Monetary Policy

Greg Ip of the Wall Street Journal is hearing interesting things about the ideas that the Federal Reserve is thinking about these days: WSJ.com - Greenspan Has Opportunity To Clarify the Fed's Message: ...Greenspan... remains more optimistic than many of his colleagues and likely will cite scattered evidence of the postwar pickup he long has expected, while acknowledging hard evidence is scarce. He may emphasize that there is so much unemployment and unused capacity in the economy that inflation remains likely to edge lower. Markets also will look to Mr. Greenspan for hints about the Fed's views on unconventional monetary policy, given that short-term interest rates are at a 45-year low. They may not get much. While Fed policy makers discussed these options at length at their June meeting, there is no sign they have emerged with any consensus. Mr. Greenspan himself appears uneasy about the unpredictable consequences of unconventional policies, whether buying bonds or committing to hold down the funds rate for a particular period of time or until some economic target is met. Mr. Greenspan, however, could reassure the public that the Fed has plenty of room for conventional stimulus. He has noted that cutting the funds rate...

Posted by DeLong at 08:52 PM

July 10, 2003
David Wessel Wonders When the Recovery Will Begin

David Wessel wonders when the real recovery will begin--when real GDP will begin to grow at the 3.5% per year pace that we think is needed to keep the unemployment rate from rising, or the 4.0% per year pace that we think is necessary if unemployment is to start to decline (and even then only slowly: by perhaps 0.2 percentage points per year). Forecasters tell him that the real recovery should begin very soon--but they said the same thing six months ago, and six months before that as well. More disturbing is the fact that it is not at all clear where any extra boost to the economy could come, should one turn out to be needed. The Federal Reserve is out of gunpowder. More aggressive fiscal policy--bigger short-run deficits--would be possible, but neither the president nor the congressional majority has shown any inclination at all to think seriously about how to try to use spending and tax policy to boost employment and growth in the next year or so. If neither monetary nor fiscal policy can be of use, the only remaining policy lever is to try to boost exports by talking the dollar down--a very difficult, hazardous, and...

Posted by DeLong at 12:21 AM

July 08, 2003
Defending Alan Greenspan

Edward Hugh, rapier in his teeth, swings on the chandelier across the ballroom to come to the defense of Sir Alan Greenspan: BONOBO LAND: I'm a 'party liner' for no man (or woman), and certainly not for Alan Greenspan, but there are certain kinds of argument that I think are so worthless that I just can't stop myself from climbing onto the soap box. Take the article posted below for example. Now regular readers here will be aware that I am a critic of the whole monetarist approach to the deflation problem. This includes Ben Bernanke, and of course Sir Alan, but I think it's also important to have a little perspective here. The important thing to realise is that these problems we are facing are new.... What is the new problem increasingly on the agenda: deflation. And who is in the forefront of keeping the world aware of the ever-present danger. Why Alan Greenspan, of course. I repeat, I would differ with the remedy, but at least give the man credit for seeing the problem.... BTW on the substantive point of the 25bp cut. I think it was a difficult call. Maybe he did the best thing available and...

Posted by DeLong at 06:18 PM

June 27, 2003
Out of Gas

Stephen Roach meditates on the gap between what the Federal Reserve wants the American economy to do--grow at 4 percent per year for a couple of years or so--and the tools at the Federal Reserve's disposal: Morgan Stanley: ...Since the equity bubble popped in early 2000, the US economy has been on an anemic 1.7% annualized growth path. That includes a mild recession in the first three quarters of 2001 and an unusually subpar recovery in the subsequent seven quarters. Significantly, the post-bubble growth pace has been well below America?s productivity-driven potential growth rate that most put in the 3.25% to 3.75% zone. The result is the emergence of a wide margin of slack between aggregate supply and demand. For a US economy that entered this post-bubble business cycle at a 2.25% inflation rate, this slack has been sufficient to push the US dangerously close to the deflation threshold; in the first five months of 2003, annualized core CPI inflation has averaged just 1.2%. Little wonder the most common complaint heard from US businesses pertains to the lack of pricing leverage. In this context, the Fed?s goal is simple -- to get the economic growth rate back above its long...

Posted by DeLong at 06:17 AM

June 25, 2003
The Expected Interest Rate Cut Materializes

The Federal Reserve's expected interest rate cut materializes: Fed cuts rates by quarter point: The Federal Reserve cut its overnight interest rate by a quarter percentage point Wednesday.... The 25 basis-point reduction in the federal funds target rate to a 45-year low of 1 percent is the 13th rate cut by the U.S. central bank since January 2001, when the fed funds rate stood at 6.50 percent. The Fed said "a slightly more expansive monetary policy would add further support for an economy which it expects to improve over time." Financial markets were leaning toward the expectation that there would be a more aggressive half-point cut to 0.75 percent.... policymakers repeated their determination to prevent an unwelcome decline in inflation. In the foreseeable future, the FOMC said risks were tilted toward too little growth as opposed to higher inflation. The statement strongly implied that the Fed will keep its target rate very low for a long time......

Posted by DeLong at 11:27 AM

June 21, 2003
Forthcoming Federal Reserve Rate Cut

The Washington Post's John Berry puts his ear to the ground and guesses that the Federal Reserve will cut interest rates next week by 0.50 percentage points (a 60% chance) or by 0.25 percentage points (a 40% chance). That seems about right to me--but his sources are much, much better than mine. One bone to pick, however. John Berry says that economists were "surprise[d]" by the fact that "recovery has been halting and 'jobless' despite huge doses of monetary and fiscal stimulus." This economist hasn't been surprised. Simply look at the late-1990s boom and the structural sources of the acceleration in productivity growth, and a "jobless recovery" looked like a definite possibility. Rate Cut Looking Like a Sure Thing (washingtonpost.com): ...Federal Reserve officials, concerned there is still no sign of the solid pickup in U.S. economic growth needed to foreclose the possibility of deflation, appear certain to cut their target for overnight interest rates next week. There is broad agreement among investors and analysts that a rate cut is coming, but there is disagreement about whether policymakers will lower their 1.25 percent target by a quarter-percentage point or by a half-point. The latter seems to be more likely as a...

Posted by DeLong at 06:48 AM

May 27, 2003
Note: Greenspan's Views as of May 2003

Greenspan's views, May 2003... Testimony of Chairman Alan Greenspan The economic outlook Before the Joint Economic Committee, U.S. Congress May 21, 2003 Mr. Chairman, I appreciate the opportunity to testify before the Joint Economic Committee. As you will recall, when I appeared here last November, I emphasized the extraordinary resilience manifested by the United States economy in recent years--the cumulative result of increased flexibility over the past quarter century. Since the middle of 2000, our economy has withstood serious blows: a significant decline in equity prices, a substantial fall in capital spending, the terrorist attacks of September 11, confidence-debilitating revelations of corporate malfeasance, and wars in Afghanistan and Iraq. Any combination of these shocks would arguably have induced a severe economic contraction two or three decades ago. Yet remarkably, over the past three years, activity has expanded, on balance--an outcome offering clear evidence of a flexible, more resilient, economic system. Once again this year, our economy has struggled to surmount new obstacles. As the tensions with Iraq increased early in 2003, uncertainties surrounding a possible war contributed to a softening in economic activity. Oil prices moved up close to $40 a barrel in February, stock prices tested their lows of...

Posted by DeLong at 10:44 AM

May 01, 2003
Why Oh Why Can't We Have a Better Press Corps? Part CCXIV

Time to Bang My Head Against the Wall Once Again... Why, oh why, can't we get a better class of journalists? Those who write ABC's The Note claim to be unable to understand Alan Greenspan's nuanced--and consistent--position on fiscal policy issues. They write, "The Note has no idea what Alan Greenspan thinks about the prospects for growth and about the Bush economy, and that is after reading everything he said, and everything ABOUT what he said..." And those who write ABC's The Note are close to the cream of the crop. But it's really not hard to understand Greenspan if you are willing to accept that his positions are always nuanced and that he is almost always polite. In Greenspan's view, expressed yesterday and many times in the past. Greenspan believes that: In the long run the most important thing is to have a balanced federal budget. Having a budget not in deficit is especially important over the next decade because of the forthcoming retirement of the baby-boom generation. But it is always important. Having a budget that is not in deficit is job 1. Once that is taken care of, one can turn to other goals. In the long...

Posted by DeLong at 11:35 AM

March 13, 2003
The Economist Is Scared of Deflation Now

The Economist is scared of deflation now. They want the Federal Reserve to cut interest rates, the European Central Bank to do the same, and governments to run bigger budget deficits over the next couple of years: Economist.com: ...Some economists argue that, since the present weakness in American confidence and spending is largely due to uncertainty about the consequences of a war with Iraq, it might be better to hold fire for now and see what the economy looks like once the conflict is over.... This argument is wrong, for two reasons. First, at a time of heightened uncertainty, it is wiser to take out an insurance policy against a future deep downturn. If a rate cut proves unnecessary, the cost of reversing it would be small. On the other hand, if the American economy remains weak, valuable time will have been gained in giving it an extra boost. When the world economy is groaning with spare capacity, there is little risk that any excessive easing of policy might send prices soaring. A greater risk is of deflation, not inflation. The lesson of Japan's failure to arrest deflation after its bubble burst in the early 1990s is that, as interest...

Posted by DeLong at 08:30 PM

September 14, 2002
Greenspan 5, DeLong 2

"You know me," said one senior Federal Reserve policymaker of the 1990s, "and on the inflation-unemployment tradeoff I'm dovey-dovey. I'm not prone to undercount the distributional and productivity benefits from low unemployment. I'm not prone to overweight the costs of moderate inflation. Yet there I was, in the Chairman's [Greenspan's] office, beggin him to raise interest rates. The NAIRU [the unemployment rate at which inflation is steady] couldn't have fallen that far. Potential growth couldn't be that fast. But he would say, 'It doesn't feel like an economy in which inflationary pressures are building'. And he was right. Whenever we monetary economics types get together, sooner or later the topic of conversation turns to Alan Greenspan. "He's not a God," somebody will say. We will agree that he's not a God. "He has a hard time giving a coherent explanation of why he holds his views," someone else will say. We will agree. Often, after a Greenspan explanation, our only reaction will be, "Huh?" "But why is his judgment so good? Why is he so right so often?" someone else will say. And we will have no answer. He knows things about how to analyze the modern business cycle that...

Posted by DeLong at 01:45 PM

September 12, 2002
Decoherence

"Decoherence" is a word from modern physics. It refers to a situation in which a superposition quantum wave function breaks into separate and mutually exclusive components: either A or B, but not both. Alan Greenspan has been trying to maintain a superposition on fiscal policy, but today it broke down, and became decoherent. He tried to argue both that (a) the Bush tax cut was a good idea, and (b) the Congress really, really needs to strengthen its controls because the country really, really needs a substantial budget surplus. It doesn't work. The position simply doesn't cohere: Greenspan Backs Budget Control and the Tax Cuts: ...The message of the Fed chairman's prepared testimony was that a breakdown of budget discipline over both taxes and spending would lead to higher interest rates and slower economic growth in the long run. Yet in the question-and-answer session, Mr. Greenspan seemed to align himself philosophically with Republicans — and anger Democrats — over how to address the nation's fiscal troubles. In response to some questions, Mr. Greenspan said the specifics of dealing with the situation were up to Congress, and he urged the House and Senate to extend budget rules, adopted a decade ago...

Posted by DeLong at 09:21 PM

More People Worry About Deflation

The Economist steps up to the "let's worry about deflation" plate. I agree with them. The Federal Reserve, however, does not seem to: the Federal Reserve appears to believe that the NAIRU--the unemployment rate at which inflation is constant--is somewhere near 5.5 percent (rather than the 4.5 to 5.5 percent I would estimate), and that the rate of growth of potential output--which is the rate at which real GDP has to grow to keep the unemployment rate constant--is only a shade above 2 percent per year (rather than the 3.5 percent per year that I would estimate). Economist.com: ...As a result, there is a risk that, before the end of 2003, the rich world's three biggest economies—America's, Japan's and Germany's—could all have negative inflation rates. A sharp jump in oil prices as a result of America invading Iraq could, of course, push up headline inflation. But the longer-term impact of higher oil prices would be deflationary, not inflationary. Higher oil prices operate like a tax that depresses growth, so their medium-term impact would be to heighten the deflation risk. DeAnne Julius, a former member of the Bank of England's monetary policy committee, argued in a recent speech that there is...

Posted by DeLong at 04:45 PM

September 09, 2002
Stephen Roach on "The Great Failure of Central Banking"

I don't agree with Stephen Roach that the Federal Reserve should have made interest rates higher and tried to make unemployment higher in the late 1990s in order to diminish investment spending and collapse the stock market bubble. In my view, the time to deal with any problems created by the bubble's collapse is when the bubble collapses--not before. Relative to a lower-stock prices, lower-investment, one-percentage-point-of-unemployment-higher bubble-popping path for the U.S. economy in the late 1990s, the actual path that we took gave us an extra $1 trillion of real production. You can complain about how that $1 trillion was distributed. You can regret that a large chunk of it--$200 billion?--was spent on investments that have much lower social value looking forward than their social cost. You can fear the damaging consequences of banruptcy and fraud on the economy. But you have to argue that these drawbacks from the fallout are quantitatively very large for the cost-benefit analysis to go Stephen Roach's way. Nevertheless, he makes his case more strongly than anybody else does: Morgan Stanley: ... Yet out of this glorious disinflation a new inflation was borne -- asset inflation. And central bankers didn’t have a clue how to...

Posted by DeLong at 09:58 AM

September 06, 2002
The Economist Joins the Pile on Alan Greenspan

This week's "Economics Focus" in the Economist joins the pack piling on to Alan Greenspan for not deflating America's stock market bubble earlier: Economist.com: ...There may be no painless way to deflate bubbles. Yet the correct test is not whether a bubble can be deflated without some loss of output. Rather, it is whether the early pricking of a bubble causes less pain than letting it grow only to burst later. The longer a bubble is allowed to inflate, the more it encourages the build-up of other imbalances, such as too much borrowing and investment, which have the power to turn a mild downturn into something nastier. If the Fed had let some air out of the bubble earlier, America's economy might now be better placed for future growth... Admittedly, for the Fed to justify an increase in interest rates when inflation was low would have been hard—but not impossible. It could, for instance, have argued that raising rates and so containing financial imbalances would avoid future economic instability and hence a large undershoot in future inflation. Central bankers do not have a political mandate to respond to asset prices. Even so, Mr Greenspan could still have done more to...

Posted by DeLong at 03:10 PM

September 03, 2002
In the Shadow of the Grand Tetons

Richard Berner from Morgan Stanley gives his take on the conversation at last weekend's Federal Reserve Jackson Hole symposium (sponsored by the Federal Reserve Bank of Kansas City). From my perspective, the strangest and most worrisome thing about his report of the conversation is the "European" belief that interest rates have to stay high to promote the "liquidation" of potentially bankrupt enterprises. This is not a strong current of thought in America (save, perhaps, for the pages of the New Republic): ...Few U.S. monetary policymakers fret that low interest rates will forestall corporate downsizing, because they believe that U.S. financial markets are appropriately denying capital to those sectors where gluts are biggest, or giving it to new management who will clean house. On the contrary, some officials worry that Corporate America is hesitant to hire. So while they are guardedly optimistic, they seemed more open-minded about the need for additional stimulus than recent press commentary had suggested. All agreed that the U.S. economy's resilience in the face of financial shocks was comforting, but no guarantee that it would persist.... With oil prices meaningfully higher than we forecast, I share their concern that fourth-quarter growth could zigzag back toward 2%. Such...

Posted by DeLong at 12:39 PM

August 30, 2002
Greenspan Defends His Policy Toward the Late Stock Market Bubble

There is a principal about asset market bubbles: a policymaking authority like the Federal Reserve can never be sure enough that an asset market rise is a bubble in order for it to take steps to pop it. Why? Because if the Federal Reserve can be sure it is a bubble, the "smart money" in the stock market can be sure that it is a bubble too--and if the smart money is sure that it is a bubble, the smart money will already have gone short the market on a large scale, and so popped the bubble by itself. Therefore the only bubbles that can flourish and grow are those that people are not sure are asset market bubbles. Here the Associated Press reports on Alan Greenspan's defense of Federal Reserve policy in the late 1990s. The only point on which I think Greenspan is weak is his claim that he knew that raising margin requirements would do no good, hence did not raise them. It's not clear to me that they wouldn't have had a beneficial effect--although probably a very small one. Greenspan Defends Decisions of Policy Makers in Late 1990s: ...In addition to defending the Fed's decision not...

Posted by DeLong at 12:36 PM