Thursday , September 19 2019
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The Fed thinks it’s smarter than the markets

Summary:
We’ll see . . . PS. I have a post on low rates over at Econlog. The good news is that the post suggests that money’s not quite as tight as it might look based on bond yields. The bad news is that money is still too tight. PPS.  Here’s a Paul Krugman tweet, discussing the Fed rate increases of 2017-18: If you wonder what a negative fiscal multiplier caused by excessive monetary offset looks like, Krugman is describing it. I actually don’t quite agree, I believe the rate increases were appropriate, except perhaps the last one. But even in that case the main problem was bad forward guidance after the December 2018 meeting. Once that was corrected, things were OK. Until they weren’t. In other words, on this particular fiscal stimulus issue I’m slightly more “Keynesian”

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We’ll see. .

PS. I have a post on low rates over at Econlog. The good news is that the post suggests that money’s not quite as tight as it might look based on bond yields. The bad news is that money is still too tight.

PPS.  Here’s a Paul Krugman tweet, discussing the Fed rate increases of 2017-18:

The Fed thinks it’s smarter than the markets

If you wonder what a negative fiscal multiplier caused by excessive monetary offset looks like, Krugman is describing it. I actually don’t quite agree, I believe the rate increases were appropriate, except perhaps the last one. But even in that case the main problem was bad forward guidance after the December 2018 meeting. Once that was corrected, things were OK. Until they weren’t.

In other words, on this particular fiscal stimulus issue I’m slightly more “Keynesian” than Krugman.

PPPS. As far as I can tell from the tweet thread, I pretty much agree with Krugman on the recession risk. Significant, but perhaps less than it looks.

PPPPS. America’s never had a soft landing, and (at least since WWII) we’ve never had a mini-recession. Other countries experience these sorts of events. Because we are in uncharted territory, with the longest expansion ever, we need to consider the possibility that one of these unusual events might occur.


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Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment".

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