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Joseph E. Gagnon

International macroeconomist at the Peterson Institute for International Economics. Formerly worked at the Federal Reserve Board and US Treasury.

Articles by Joseph E. Gagnon

Yellen Treasury looks the other way on currency manipulation

April 23, 2021

Despite Secretary Janet Yellen’s promise to take a hard line against currency manipulation, the US Treasury Department declined to name any country a currency manipulator in its latest report on April 16. As noted in a previous post, currency manipulation jumped dramatically to nearly $450 billion in 2020, and Treasury’s own criteria point to at least three manipulators last year: Switzerland, Taiwan, and Vietnam. Nevertheless, Treasury declared that it had "insufficient evidence" to judge whether large-scale currency purchases by these countries were intended to support their excessive trade surpluses. What other purpose could there be?
When countries have more than adequate levels of foreign exchange reserves, the only purpose of acquiring further reserves is to hold down the exchange

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How foreign exchange intervention works through saving and investment to move the trade balance

March 22, 2021

Donald Trump’s failed tariff war is likely to become Exhibit A in future textbooks asserting the traditional economic view that tariffs and other trade barriers have little or no effect on the trade balance. But that does not mean that other policies, such as foreign exchange intervention, cannot move trade balances. As economists point out, the key insight is that a country’s trade balance reflects the balance between saving and investment inside that country. To a good approximation, tariffs have no effect on saving and investment and thus no effect on the balance between exports and imports. Foreign exchange intervention, on the other hand, works directly through saving and investment to change a country’s trade balance.
Textbook economics states that imposing a tariff on imports will

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The Fed is reluctant to project good times

March 17, 2021

In its meeting on March 17, the Federal Open Market Committee (FOMC or Fed) made no change to its policy stance, but it did release the first revision to its economic projections since the passage of two major fiscal stimulus packages in December and March. The Fed raised its outlook for growth and inflation this year and next, as have most private forecasters. But the Fed’s upward revision is notably muted in relation to the massive fiscal packages, and it made no change to the projection of its future policy stance. The Fed is determined to keep monetary policy, and projections of monetary policy, very supportive of growth until it judges that maximum employment and price stability have been achieved.
The median forecast by FOMC participants of GDP growth in 2021 (Q4/Q4) jumped to 6.5

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Inflation fears and the Biden stimulus: Look to the Korean War, not Vietnam

February 25, 2021

The debate among economists over the size of President Joseph R. Biden Jr.’s proposed $1.9 trillion stimulus package has drawn attention to past cases of inflation spurred by big government spending. Both sides have cited the Vietnam War of the 1960s as a precedent of an outbreak of inflation that would be difficult to reverse. Looking to the past can be misleading, however. The spending boom of the late 1960s—fueled not only by the war but by the Great Society programs—was long-lasting, whereas the Biden plan is a temporary response to a crisis. Moreover, the Federal Reserve’s passivity in the face of rising inflation in the 1960s is not likely to be repeated. A better historical analogy may be the large but temporary surge in inflation in 1951, related to the Korean War, which did not

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Treasury gets one right and two wrong in latest currency manipulation charges

December 16, 2020

Today the US Treasury Department released its semiannual Report on Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States, also known as the Foreign Exchange Report. Treasury named Switzerland and Vietnam as currency manipulators. China and nine other economies were put on a monitoring list for enhanced surveillance.[1] Treasury plans to consult with the newly named manipulators on ways they can grow without large trade surpluses, but Treasury’s leverage to change their policies is meager.
As I have written elsewhere, there are serious economic flaws in the criteria that the Treasury currently uses for identifying manipulators. A more defensible set of criteria, which I proposed with Fred Bergsten in 2017, would identify Singapore and Switzerland as

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Memo to the Biden administration on the US trade deficit and international financial policy

November 4, 2020

Background: A prerequisite for success in your domain is to strengthen relationships with your colleagues in the Group of 7 (G7[1]) advanced industrial democracies, the G20[2] leading economies, the International Monetary Fund (IMF), the 37-member Organization for Economic Cooperation and Development (OECD), the World Bank, and the regional development banks. The US refusal at times over the past four years to sign G7 and G20 statements is a sign of American isolation and ineffectiveness, which weakens the ability of the United States to deal with common challenges and to coordinate better economic outcomes for Americans.
Priority 1: Avert currency manipulation
The most urgent task for dollar policy is to head off worrisome signs of a resurgence of currency manipulation, the practice

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Who’s afraid of zombie firms?

October 22, 2020

The COVID-19 pandemic has turned many profitable US businesses into money-losers that can stay afloat only because of abundant credit, in part reflecting emergency lending programs of the Federal Reserve and Treasury. Some economists are concerned that these “zombie” firms will drain resources from the healthy parts of the US economy, slow the recovery, and inhibit productivity growth. These fears are fundamentally misguided. Zombies are a consequence of a weak economy, not a cause. Policy actions to kill zombies, by forcing them to shut down permanently, dismiss employees and pay off creditors, risk deepening the current recession, turning it into a depression.
According to the Washington Post, quoting Deutsche Bank Securities, nearly one in every five publicly traded US companies is a

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The Fed’s monetary stance is too tight given its economic forecast

June 11, 2020

The Federal Open Market Committee (FOMC or Fed) made no changes to its monetary policy stance at its June 2020 meeting. But the first update to its forecast since December showed inflation and employment below their goals for at least 2 1/2 years. An outlook that bad for that long is a clear sign that policy is too tight.
The Fed announced that the federal funds rate would remain near 0 this year and most likely through the end of 2022. It also said that the pace of purchases of long-term assets (quantitative easing or QE) would continue “at least at the current pace” for now.
The Fed’s Summary of Economic Projections showed that unemployment is expected to remain at least 2 percentage points higher than the February 2020 level, and inflation would remain below its 2 percent target,

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The 2020 US private saving boom: An unexpected result of COVID-19

May 18, 2020

Federal cash transfers in the COVID-19 pandemic are going to millions of American families who cannot or will not spend all of that money in the current fraught environment. As a result, the US net private saving rate in 2020 will be the highest since World War II. The economic significance of this large amount of savings is unclear. But it could mean that, as restrictions on business and personal activities are relaxed in coming months, aggregate demand will rise, accelerating economic recovery but causing a temporary uptick in inflation to the extent that demand exceeds aggregate supply.
Any rise in inflation likely would be mild and would be welcome in light of persistent shortfalls of inflation below target in recent years. It might even provide a good opportunity for the Federal

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The Fed Expands Emergency Lending by $2 Trillion

April 10, 2020

The unprecedented nature of the coronavirus-induced shutdown of the economy calls for unprecedented steps to keep firms and state and local governments alive and ready to resume normal operations as soon as it is safe to do so. The latest action to that end came on April 9 when the Federal Reserve, in partnership with the Treasury Department, set up new emergency facilities and expanded existing ones with a combined lending capacity of $2.3 trillion, more than 10 percent of US GDP. The facilities can extend credit to businesses of all sizes plus hard-pressed states and localities, leveraging funds appropriated by the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
The April 9 action was the latest and largest of several Fed actions since March 2020 to reduce interest rates at

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New US fiscal action should avert closures but not a recession

March 27, 2020

The sweeping $2 trillion package of COVID-19 rescue measures nearing Congressional approval will not prevent a sharp recession in the next few months. But  it will replace a large share of income lost by laid off workers and should enable many businesses to avoid permanent closures. Avoiding bankruptcy and liquidation is critical to enabling a rapid economic recovery as soon as health officials deem it safe to return to work.
The package’s grants, loans, and other features represent roughly 10 percent of US GDP in 2019, and this measure comes on top of two earlier bills with a combined value of less than $100 billion. Given the haste with which the bill was written, further steps may need to be taken, especially if the COVID-related business closures last more than about three months.

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The Fed expands its emergency lending facilities again

March 23, 2020

Faced with mounting dangers to the US economy, the Federal Reserve announced several new steps on March 23, 2020, to ensure adequate flows of credit through the financial system. These steps add to measures announced a week earlier by expanding the sectors of the economy to which the Fed is providing credit, going even further than the measures taken in the Great Recession of 2008–09. The initial size of the new facilities is only $300 billion, an amount too small given the magnitude of the problem. But the Fed rescue will most likely be expanded as Congress authorizes more funds for the Treasury Department to backstop the Fed. For now, it’s important to get these facilities up and running.
First, the Fed removed limits on its purchases of longer-term Treasury securities and agency

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The Fed’s big guns are welcome, but the United States needs more fiscal action

March 16, 2020

The Federal Reserve’s move on March 15 to drop the federal funds rate another percentage point to essentially zero, along with other steps to support credit markets and the economy, represents a substantial and appropriate easing of monetary policy at a time of health crisis. The announcement at an unusual weekend conference call underscored the urgency of the situation. But no amount of monetary easing can prevent a sharp decline in economic activity in the near term owing to measures taken to slow the spread of the novel coronavirus.
As Fed Chair Jerome Powell mentioned several times during the press conference after the March 15 meeting, fiscal policy is needed to help those most affected by the ongoing slowdown. As welcome as the latest Fed actions are, they will not by themselves undo

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The Fed Is on Hold for a While

December 12, 2019

The Federal Open Market Committee (FOMC or Fed) left the target range for the federal funds rate unchanged at 1.50 to 1.75 percent at its December 2019 meeting, as nearly all analysts anticipated. Fed Chair Jerome Powell made clear in the subsequent press conference that it will take a significant surprise in the economy for the Fed to either cut or raise rates over the next year. Stock prices were little changed, and bond yields fell slightly after the Fed’s announcement.
In light of the strong labor market report for November, Chair Powell’s enthusiasm for the benefits of a tight labor market sounded rather dovish, which probably explains the bond market reaction. However, the dovishness clearly had limits. When asked why the Fed has ruled out raising the inflation target to 4 percent

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The Fed Cuts and Pauses

October 30, 2019

The Federal Open Market Committee (FOMC or Fed) cut the target range for the federal funds rate 0.25 percentage point to 1.50 to 1.75 percent at its October 2019 meeting, as many analysts anticipated. Fed Chair Jerome Powell made clear in the subsequent press conference that future rate cuts are not likely unless the economy performs worse than the Fed expects. President Donald Trump has been pressing the Fed to cut rates dramatically and may be unhappy with the Fed’s reluctance to do more. But in light of continuing solid economic data, it is reasonable for the Fed to pause for now. Stock prices and bond yields did not move much after the Fed’s announcement.
GDP growth slowed a bit to 1.9 percent in the third quarter of 2019, but Chair Powell indicated that this rate is close to what was

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A Hawkish Rate Cut? No.

September 18, 2019

The Federal Open Market Committee (FOMC or Fed) cut the target for the federal funds rate 0.25 percent at its September 18 meeting to a range of 1.75 to 2 percent, as widely expected. However, the newly released median projection of FOMC participants has no further cuts in place this year or next. Financial markets had been hoping for at least one more cut this year and interpreted the median projection as a hawkish sign. The markets have it wrong, however. A correct interpretation of the projection materials shows that at least one more cut this year is likely.
The key point to remember is that not all participants can vote. There are 17 participants but only 10 voters. (Votes rotate each year among the Reserve Bank presidents.)
Of the 17 participants, five said they wanted to keep the

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The Fed Is Looking for an Excuse to Cut Rates

June 20, 2019

Faced with growing risks to the economy, the Federal Open Market Committee (FOMC) of the Federal Reserve System opted on June 19 not to change the target range for the federal funds rate. But a large majority of participants lowered their projections for the funds rate in late 2019 and late 2020 by around half a percentage point. The median projection of the longer-run, or neutral, federal funds rate fell from 2.75 to 2.5 percent.
It now appears that the Fed regrets the last two rate hikes in 2018 and is looking for any signs of economic weakness to provide cover for rate cuts. The Fed does not want to acknowledge this change of heart, especially in light of President Donald Trump’s public criticism of its policy stance. But it probably would be making the same decision even without

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The Fed Is Looking for an Excuse to Cut Rates

June 20, 2019

Faced with growing risks to the economy, the Federal Open Market Committee (FOMC) of the Federal Reserve System opted on June 19 not to change the target range for the federal funds rate. But a large majority of participants lowered their projections for the funds rate in late 2019 and late 2020 by around half a percentage point. The median projection of the longer-run, or neutral, federal funds rate fell from 2.75 to 2.5 percent.
It now appears that the Fed regrets the last two rate hikes in 2018 and is looking for any signs of economic weakness to provide cover for rate cuts. The Fed does not want to acknowledge this change of heart, especially in light of President Donald Trump’s public criticism of its policy stance. But it probably would be making the same decision even without

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The Fed Is on Hold

March 21, 2019

The Federal Open Market Committee (FOMC or Fed) left the target for the federal funds rate unchanged at a range of 2.25 to 2.50 percent, as was widely expected. The news in the March 2019 meeting came on two other fronts.
First, the projection for economic growth was marked down slightly, suggesting that the Fed has less reason to tighten further. Indeed, the median projection for the federal funds rate shows no rate increase this year and an increase of only 0.25 percent next year. Second, the FOMC announced that it will begin to slow the pace of running down its balance sheet in May, and it will stabilize the balance sheet by September, a bit earlier than expected. Both of these announcements imply a slightly easier stance of monetary policy over the next two years than markets had

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The Fed Continues Its Tightening Campaign

December 20, 2018

The Federal Open Market Committee (FOMC, or Fed) raised the target for the federal funds rate by 0.25 percentage point to a range of 2.25 to 2.50 percent at its December 2018 meeting, in line with market expectations. The Fed also indicated that it is likely to raise interest rates another 0.50 percentage point in 2019, down 0.25 percentage point from the median of its previous projections in September. Overall, the decision was a finely balanced one, with good arguments for and against raising rates at this meeting. It seems likely that decisions on future rate hikes will remain close calls well into next year.
Market participants overwhelmingly expected the Fed to mark down its projection of future interest rate hikes, but the markdown was on the small side of expectations.  Prior to the

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The Fed’s Policy Implementation Framework

December 3, 2018

The minutes of the November 2018 meeting of the Federal Open Market Committee (FOMC or Fed) cover a lengthy discussion on possible changes to the policy tools and procedures the Fed uses to control money-market interest rates. The Fed appears to be moving toward the proposal that I made with Brian Sack in a 2014 PIIE Policy Brief. Our proposal would give the Fed firmer control of the most important short-term interest rates in the economy while saving taxpayers money and keeping the payments system safe and liquid.
Our 2014 proposal had four main components:
1. The Fed should operate in a “floor” system in which it provides abundant liquidity by maintaining a large balance sheet and controls market interest rates through the influence of administered interest rates on the liquidity that it

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When the Next Recession Hits: A User’s Guide for Future QE

November 14, 2018

The global financial crisis of a decade ago pushed economies into deep recessions. To prevent these recessions from becoming depressions, several major central banks made large-scale purchases of long-term bonds and other financial assets to ease financial conditions and support spending.[1] These actions, known as quantitative easing (QE), were hardly without controversy. Critics warned that QE would fuel inflation, undercut creditors, and damage the credibility of central banks themselves. But as I have argued since the crisis, including in my recent Policy Brief with Brian Sack, QE was a success and if anything should have been undertaken more aggressively. The important thing now is to draw on lessons learned to fashion an approach for QE that smoothly and effectively transitions from

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Has Norway Been Saving Too Much or Too Little? What Intertemporal Accounting Can Tell Us

November 5, 2018

Despite amassing the world’s largest sovereign wealth fund, Norway has still not been saving enough to meet future budget demands from an aging population, according to a recent paper from economists at the International Monetary Fund (IMF). The paper assumes that adhering as closely as possible to the projected future paths of spending and revenues is a desirable goal. Social welfare considerations, however, suggest that reducing future spending relative to revenues is a better objective—and that Norway has, if anything, saved too much.
The Debate
Earlier this year, in a Policy Brief I argued that Norway has saved too much of its oil revenues relative to a benchmark in which the benefits of oil production are shared equally across generations. In response to my study, Ezequiel Cabezon and

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Treasury Correctly Declines to Label China a Currency Manipulator, For Now

October 24, 2018

The Trump administration is clearly irked by the fact that the recent depreciation in China’s currency partly offsets the tariffs the administration has imposed on US imports from China. “I think China is manipulating their currency, absolutely,” Trump said back in August. His comments and warnings by others had led to considerable speculation in the financial press about whether the US Treasury would name China a currency manipulator for allowing its currency to fall against the dollar.
On October 18, however, the US Treasury released its Foreign Exchange Report, without labeling China or any other country a currency manipulator. But Treasury Secretary Steven Mnuchin was reported to have said afterwards that he was open to changing the criteria Treasury uses to identify currency

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Tension Remains at the Heart of the Fed’s Forecast

September 27, 2018

The Federal Open Market Committee (FOMC, or Fed) surprised no one at its September meeting by raising the target for the federal funds rate a quarter of a percentage point to a range of 2.00 to 2.25 percent. The FOMC has been tightening monetary conditions very slowly since late 2015. Its dilemma is a classic one for central banks—seeking to keep inflation at its target of 2 percent without causing an abrupt slowdown in growth. The FOMC also released new projections for key economic variables. The tension in the projections between a strong economy, with unemployment below its long-run level, and inflation stable at target remains as great as it was in June. In coming months, it is likely that inflation and inflation projections will rise or else the projection of the long-run rate of

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QE Skeptics Overstate Their Case

July 5, 2018

Four prominent economists (David Greenlaw, James Hamilton, Ethan Harris, and Kenneth West, or GHHW) attracted much attention earlier this year when they argued that the consensus of previous studies overstates the effects of quantitative easing (QE) on long-term interest rates. However, a careful reading of their paper and the associated data suggests that their conclusion is also overstated. It is true that some studies of the initial round of QE, or QE1, may have found effects on bond yields that were larger than would be expected in noncrisis circumstances. But the evidence suggests that moderately lower estimates, such as those employed by staff at the Federal Reserve in recent years, are reliable measures of the effect of QE in normal times.
GHHW conclude that (1) the lasting effect

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The Fed Signals a Tiny Tightening

June 14, 2018

As was widely expected, the Federal Open Market Committee (FOMC) raised the target for the federal funds rate by 0.25 percentage point to a range of 1¾ to 2 percent at its June meeting. This was the second hike in 2018. The FOMC remains closely divided on whether it is likely to raise rates a total of three or four times this year, and only one participant’s changed projection was enough to push the median from three to four hikes. The committee slightly decreased projected rates of unemployment through 2020, increasing the internal inconsistency of its projections already apparent in a forecast that shows an extended period of unemployment below its long-run level yet no significant rise in inflation.
Chair Jerome Powell described the Fed’s policy dilemma as one of not tightening so fast

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Still No Inflation Puzzle

June 5, 2018

As the US unemployment rate continues to drift down to levels not seen in decades, many observers point to relatively low wage and price inflation as evidence that the Phillips curve is dead. Yet inflation is behaving exactly as the Phillips curve—which shows the inverse relationship between the inflation rate and the unemployment rate—would predict. The decline in the US unemployment rate is too recent and too small to have caused any significant rise in inflation to date. Inflation is likely to pick up over the course of this year and next, albeit with a considerable degree of uncertainty. This post updates and expands on my post of November 17, 2017.
The Natural Rate of Unemployment
Nowadays, economists tend to express the Phillips curve as a relationship between deviations of

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The Fed Is Satisfied for Now

May 2, 2018

The Federal Open Market Committee (FOMC) did not change the stance of US monetary policy at its meeting on May 2. Financial markets were not surprised. The minor changes in its policy statement all reflect improvements in recent economic data, notably a resumption of solid business investment and a return of core inflation close to its 2 percent target. The FOMC is widely expected to raise rates one-quarter of a percentage point at its next meeting in June.
With unemployment low and inflation at target, the United States would appear to be in monetary nirvana, as Fed watcher David Wessel tweeted in response to the FOMC statement. However, the big issue looming (aside from the unpredictable effects of a possible trade war) is the massive fiscal stimulus that is hitting the US economy this

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Janet Yellen’s Term as Fed Chair Was Uneventful—in a Good Way

February 1, 2018

The last meeting of the Federal Open Market Committee (FOMC) chaired by Janet Yellen, which took place on January 31, did not change the stance of monetary policy or make any meaningful changes from December in the policy statement. Jerome Powell, who has served on the Fed board since 2012, will take over as chair of the next meeting in March. Given that Powell has voted with Yellen at every meeting she chaired, there is little reason to expect much change in Fed policy.
The fact that Yellen’s four-year term as chair was largely uneventful should be counted as a major success. The reason is that the Fed did not screw up a smooth return of the US economy to full employment and price stability. Yellen has been a participant in the FOMC since 2004, first as president of the Federal Reserve

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