Wednesday, July 14, 2010

Quandary about the Fed outlook

Paul Krugman beat me to this...but here's my take:

The FOMC members are asked to give their assessment of “the rate to which each variable would be expected to converge over time under appropriate monetary policy and in the absence of further shocks”. The 2012 forecast – the time frame that would provide enough of a buffer for the 1 year to 1.5 years lag in policy – includes persistently high unemployment and anemic headline and core inflation.

My quandary: all merits of monetary policy aside, doesn’t their forecast by definition imply inappropriate monetary policy? At the very minimum, it implies inappropriate fiscal policy.

Rebecca Wilder

10 comments:

  1. Nice picture, Rebecca!

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  2. so what did you and Ian Masters talk about?  aj

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  3. <span>Those tables make me puke. I already know.<span>  </span>All the high priests, by their own admission, testify that all forecasts are "shaky".  Maybe it's theoretically algebraic, but in principle it is just elementary math.  It's just an historical fact.  Economic forecasts are infallible. Now you have to ask yourself, why is that?  Well, I won't guess & I don't care.  </span>
    <span> </span>
    <span>What I would rather do is find a couple of tall oak trees.  </span>
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    <span>My only metric should be just an approximation.  The truistic measure is bank debits.  The G.6 was discontinued due to cost cutting.  That's a telling sign.  No one was there to defend it.  </span>
    <span> </span>
    <span>You could never have had a "housing bubble" using bank debits.  As was explained in the FED's propaganda, bank debits included property transactions, new & existing.  Therefore the series was distorted.  Who decided that?</span>
    <span> </span>
    <span>One plug:<span>  </span></span><span><span>My prediction for AAA corporate bond yields in 1981 was 15.48%. AAA corporate yields hit 15.49%. I was off by only .01% (not luck, logic).  I only used bank debits to nail that.</span></span>
    <span> </span>
    <span>Well I'm guessing the big dogs are having a pow wow in DC next week.   Nothing really to wonder about.  </span>
    <span> </span>
    <span>Tomorrow is yesterday.  Yesterday is history.   History is tomorrow. <span> </span>You can rewrite history if you’re in the ball park.<span>  </span>So you have a pitcher who throws 96 mph fastballs.<span>  </span>Now you have to look for a batter that can hit it.<span>  </span>I don’t think it’s going to be a shutout.<span>  </span>This time it’s the luck of the draw.<span>  </span>Both the FEDs concerns converge.<span>  </span>That’s the only way they can hit a target.<span>  </span>Otherwise they will always strike out.</span>

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  4. Just checked what stocks did.  It just makes me sick.  They did what I told people they would do on the exact day I said they would.  I'm not that smart.  I think the problem is with the FED's technical staff.  They are some backstabbers.  The bankers run their lives.  It's all politics. 

    If you want a session with Bernanke just find a CEO in charge of a company with a lot of employees.  Go thru the senate.  They will buckle and accommodate. 

    There are some whoppers when it comes to the FED.  Take the ICON Paul Volcker. 

    Wikipedia: 

    "Volcker's Fed is widely credited with ending the United States' <span>stagflation</span> crisis of the 1970s. <span>Inflation</span>, which peaked at 13.5% in 1981, was successfully lowered to 3.2% by 1983.<sup></sup><span><span>[</span>7<span>]</span></span>"
    <sup></sup>
    <sup>There you have it.  Paul Vocker won acclaim by taming the inflation that he created.  Bravo!</sup>

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  5. One more faux pas:  BERNANKE STARTED "CREDIT EASING" WHEN BEAR STERNS 2 HEDGE FUNDS COLLAPSED.  BUT AT THE SAME TIME HE CONTINUED TO "TIGHTEN" MONETARY POLICY.  BERNANKE DIDN'T START "QUANTITATIVE EASING" UNTIL LEHMAN BROTHERS FAILED.  BERNANKE IS RESPONSIBLE FOR DRIVING THE ECONOMY INTO A DEEP DEPRESSION.  believe it or not!

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  6. You're implicitly defining appropriate policy in terms of the first moment (of the distribution of possible outcomes), since the forecast is presumably a first moment forecast.  But "appropriate policy" also depends on higher moments.  In other words, if the Fed aimed for the unconditionally optimal path for its target variables, it would risk severely overshooting that path.  (Think about it:  for all we know, the Fed might have to buy up the entire national debt to achieve the optimal path, and even that might not be enough.  But it might also be way more than enough and produce hyperinflation.)  IIRC there is a literature that argues that policy actions should be conservative (in the sense of involving relatively small changes in the instruments) when uncertainty is high.  The implication is that, when uncertainty is high, appropriate policy will undershoot its mark.  (That is, the results of an appropriate actual policy under high uncertainty will be somewhere between the unconditionally optimal results and the results that a static policy would produce.)

    Another issue here is that policy could have lingering effects on the Fed's balance sheet that will place constraints on the Fed well beyond the usual lag period for monetary policy (particularly if fiscal policy fails to tighten appropriately after the economy recovers).

    Not that I personally believe the Fed is following an appropriate policy, but I can understand how an appropriate policy might not be expected to lead to optimal results.  But then, I think the Fed's forecasts are too optimistic, so even if my objective function and beliefs about higher moments were the same as theirs, I would still think policy was inappropriate.

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  7. Major revision.  Economy & Markets to crash.  Sell everything.  Armageddon is upon us.

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  8. Bernanke's monetary policy is the most restrictive since the Federal Reserve Act of 1913.

    The fall in the proxy for inflation from Sept 2010 to Jan 2011 is (-44).

    The fall in the proxy for real-output from May 2010 to Feb 2011 is (-17).

    Obama should fire Bernanke immediately. The banks should be nationalized NOW. The remuneration rate should be eliminated NOW. The trading desk should buy state, local, and private debt NOW. Do not close your eyes.  The bottom is falling out.  We have entered a DEPRESSION. An economic disaster of immense proportions is DIRECTLY ahead

    No one understands money & central banking.  Listen up:

    (1) Paul Volcker won acclaim for taming the inflation that he alone created.

    (2) Bernanke didn't "ease" monetary policy when Bear Sterns 2 hedge funds collapsed.  He initiated "credit easing" while continuing with his 29 consecutive months of policy "tightening" that began in Feb 2006.  Instead Bernanke waited until Lehman Brothers failed.  Bernanke drove this country into a depression by himself.

    (3) Greenspan never ever "tightened" monetary policy towards the end of his term.  Despite raising the FFR 17 times, Greenspan maintained his "loose" money policy, i.e., for the last 41 consecutive months of his term.

    This is a CRISIS.  We need to act NOW. ACT NOW.

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  9. What’s the point in a country borrowing something (money) which it can produce itself in limitless quantities anytime? I’m offering a $100 prize for an intelligent answer.

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  10. We are having a jobless recovery and I think this will affect the stock markets soon.

    Why the rally is fake.

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