Posted: 17 Sep 2015 12:15 AM PDT
Final Thoughts On September, by Tim Duy: Everyone's bets are placed for the outcome of tomorrow's FOMC statement and subsequent press conference. Final thoughts heading into the meeting:
I expect the Fed will pass on raising rates this meeting. This is a highly contentious issue, and reasonable arguments can be made for either case. Economists appear to be roughly split, while financial market participants taking the under with a roughly 25% probability of a rate hike. Whatever the outcome, roughly half of the economists on Wall Street will be wrong. Good thing, as misery loves company.
I believe FOMC participants will arrive at a consensus for the timing and direction of policy for subsequent meetings. The FOMC has had something of a luxury in that economic conditions have not forced them to choose a defined policy path. I believe they no longer have that luxury. They will need to commit policy to one side of the mandate or the other. At this meeting they will decide if their Phillips curve view of the world in concert with their estimate of the natural rate of unemployment dominates the fact that inflation continues to drift away from their target.
I expect the Fed will ultimately pledge allegiance to the Phillips curve. I think they believe that stable inflation is incompatible with sub-5% unemployment if short term interest rates remain at zero. Hence, they will signal that the first rate hike is imminent.
Fed Chair Janet Yellen has the opportunity to prove her mettle. Assuming that I am correct that the Fed needs to forge a consensus, Yellen will be the guiding influence on that consensus. The best outcome for her is a consensus with no dissenting votes. That said, it may be that only an immediate rate hike would be acceptable to Richmond Federal Reserve President Jeffrey Lacker.
I expect Yellen will make a strong attempt to open the door for October. The Fed has established expectations that, outside of obvious exigent circumstances, they can only make major decisions when there is a scheduled press conference. Yellen will push back hard. Indeed, I think there is a possibility that this becomes the "rate hike" press conference in spirit, with the actual hike in October. Something to think about.
The Fed will try to take the sting out of any hawkish signals with a dovish message. I expect the terminal rate forecasts in the dot plot to drift lower. In addition, I expect Yellen will emphasize that low inflation provides room for a slow and halting pace of rate increases. (My expectation, however, is that assuming the first hike goes smoothly, subsequent hikes will come at regular intervals.) Finally, the estimate of the natural rate of unemployment may drift down further.
If I am wrong...two potential alternatives. First is that everything above remains the same, but they pull the trigger today. They tend not to surprise, but maybe this time is different. Maybe they don't need to built a consensus, although I think that unlikely. Second is that Yellen pushes the FOMC into a dramatically more dovish direction that re-emphasizes the issue of underemployment and shifts expectations to 2016. I don't think that is likely as I think she is fairly entrenched in the 5% NAIRU camp, but we will see tomorrow.
Enjoy the day's excitement!
Posted: 17 Sep 2015 12:06 AM PDT
Posted: 16 Sep 2015 10:40 AM PDT
James Kwak (Dean Baker makes the same point):
Bernie Sanders Wants to Spend $18 Trillion: So What?: The front page of yesterday's Wall Street Journal featured an article claiming that Bernie Sanders wants to increase federal government spending by $18 trillion over the next ten years—an increase of about one-third over that time period. This was apparently supposed to raise some kind of alarm—what kind of maniac is this?—and I'm sure both Republicans and Hillary Clinton are happy the Journal is doing their work for them.
The problem is that a spending figure, even one as big as $18 trillion, is meaningless on its own.
Most of that money—$15 trillion—is the expansion of Medicare to cover all Americans. Yes, that's a lot of money. But we are already spending a ton of money on health care—with embarrassingly poor results. In 2013,... Americans ... paid ... $1.4 trillion... Project that out for ten years, add health care inflation, and you're talking about a lot more than $15 trillion.
At the end of the day, what matters isn't the amount of money that the federal government spends for health care. What matters is the amount of money that the American people spend for health care. The government is just a device that we use to provide certain services that are better handled collectively than individually. If the government can provide equivalent service at lower prices, then the gross dollar amount involved doesn't matter. ...
Now the big issue, I admit, is whether the government can provide equivalent service at lower prices. For the vast majority of consumer goods and services, it can't. ... But real economists have known for more than half a century that health care doesn't behave like ordinary consumer goods. ...
If you don't want to read economics papers, the best evidence that health care is different comes from comparing the United States to other rich countries, which all have something closer to a single payer model for health insurance. As is well known, we spend a lot more money and have comparable or worse aggregate health outcomes. There is a huge ongoing adebate about why this is, which I'm not going to try to settle here.
The main point, however, is that if you want to argue against the Bernie Sanders health care plan, you have to make the case that Medicare for all will actually produce worse outcomes or higher costs than our current system. The fact that it costs a lot of money is beside the point.
Posted: 16 Sep 2015 10:17 AM PDT
Posted: 16 Sep 2015 10:04 AM PDT
The Gloomy European Economist, Francesco Sarsceno, says before complaining about US policy, take a look at Europe:
Lessons from Lehman: Jared Bernstein has a very interesting piece on the lessons we
First, the attitude towards lenders, while somewhat schizophrenic (Bear Sterns, up; Lehman, down. Why? We still don't know), was forgiving to say the least. in his words, " Borrowers get austerity, joblessness, and poverty. Lenders get bailouts when credit is scarce and bribes not to lend when it's too plentiful". He then argues that both letting lenders fail and bailing them out has large costs, that should be avoided ex ante through better regulation (and we are not there, yet).
Bernstein is perfectly right, but he neglects mentioning a third option, that was advocated at the time, for example by Joe Stiglitz: temporary bank nationalization. ... Temporary nationalization ... would have avoided the "Heads I win Tail you lose" feature of financial sector bailouts.
The second point Bernstein makes is that regardless of the strategy chosen to save the financial sector, fiscal policy should have been much more aggressive in fighting the downturn. ...
Well, he says it all. What drives me nuts, is that the he complains about the US, THE US, where the Fed showed incredible activism, where the Obama administration voted and implemented a huge stimulus package (the American Recovery and Reinvestment Act) just weeks after been sworn in office, while it took us 7 years, to decide to adopt a cumbersome investment plan that will make little or no difference.
Without even mentioning the fact that the whole Greek crisis, since 2010, has been managed with an eye to (mostly German and French) lenders' needs, rather than to the well-being of European (and in particular Greek) taxpayers.
I really would like to know what would Bernstein say, were he to comment the EMU lessons from the crisis…