Today was obviously not the day I have been hoping and praying for since early 2009, given the face-palming going on down in Wyoming at the Fed’s Jackson Hole shindig.
But must still be hope yet, however, considering it is said that it is always darkest before the dawn… and with Janet Yellen’s speech, things look really black, except for the moon that she appears to be throwing rocks at when she discusses past performance of Fed regarding interest rates:
Would an average federal funds rate of about 3 percent impair the Fed’s ability to fight recessions? Based on the FOMC’s behavior in past recessions, one might think that such a low interest rate could substantially impair policy effectiveness.
…The FOMC cut the federal funds rate by amounts ranging from about 3 percentage points to more than 10 percentage points. On average, the FOMC reduced rates by about 5-1/2 percentage points, which seems to suggest that the FOMC would face a shortfall of about 2-1/2 percentage points for dealing with an average-sized recession. But this simple comparison exaggerates the limitations on policy created by the zero lower bound.
…The federal funds rate at the start of the past seven recessions was appreciably above the level consistent with the economy operating at potential in the longer run. In most cases, this tighter-than-normal stance of policy before the recession appears to have reflected some combination of initially higher-than-normal labor utilization and elevated inflation pressures. As a result, a large portion of the rate cuts that subsequently occurred during these recessions represented the undoing of the earlier tight stance of monetary policy. Of course, this situation could occur again in the future. But if it did, the federal funds rate at the onset of the recession would be well above its normal level, and the FOMC would be able to cut short-term interest rates by substantially more than 3 percentage points.
This is but one snippet of Yellen’s speech that with some amount of interpretation leaves entirely the impression that she believes short nominal rates are divorced from the natural rate, and that they cause something rather than reflect something. I may be over simplifying, but if all of this is true, I am at a complete loss as to how to explain the Pollyanna Fed forecasts for inflation that have been consistently wrong and low levels of nominal interest rates as far as the eye can see. One can have low interest rates, with money being very tight. And, as Yellen implies here, the reasonable stance of monetary policy is to be located on a numerical chart of nominal rates, somewhere between three and four percent.
I can’t really tell, though, if this is what she really means because I am sure she’s aware that this sort of nonsense is the kind of economics education one can get by reading CNBC day in and day out. But this next snippet holds some clues:
Two of the Fed’s most important new tools–our authority to pay interest on excess reserves and our asset purchases–interacted importantly. Without IOER authority, the Federal Reserve would have been reluctant to buy as many assets as it did because of the longer-run implications for controlling the stance of monetary policy. While we were buying assets aggressively to help bring the U.S. economy out of a severe recession, we also had to keep in mind whether and how we would be able to remove monetary policy accommodation when appropriate. That issue was particularly relevant because we fund our asset purchases through the creation of reserves, and those additional reserves would have made it ever more difficult for the pre-crisis toolkit to raise short-term interest rates when needed.
I wonder what selling assets through OMO’s really does besides just soaking up cash.
It’s a real headscratcher how we ever got to this place of tight being easy and easy being tight with supposedly bright people like Yellen running the Fed. And I’m completely baffled about the stroke of amazing luck we’ve had that the Yellen Fed hasn’t inflicted far more damage than it has.
If this were some other day, and the good fortune that Yellen’s tenure at the Fed is soon to run its course didn’t exist, this blog post may have been much longer and rant-laced. But for now, I will look past this entire intellectual blunder for the possibility of a much brighter future with a new chairperson. Can you hear the grinding of my teeth?