Economics: Trying Again to Understand Recent Monetary Policy in the United States: Aha! Here is a veritable pivot!:
Craig Torres: Powell Signals Rate-Cut Delay After Run of Inflation Surprises: ‘Fed chair said appropriate to give policy further time to work. Central bank can keep rates steady for ‘as long as needed’…. “The recent data have clearly not given us greater confidence and instead indicate that is likely to take longer than expected to achieve that confidence,” Powell said Tuesday in a panel discussion alongside Bank of Canada Governor Tiff Macklem at the Wilson Center in Washington. “Given the strength of the labor market and progress on inflation so far, it is appropriate to allow restrictive policy further time to work and let the data and the evolving outlook guide us,” he said… <bloomberg.com/news/arti…
Over the past fifteen years, since April 16, 2009, I see eight suberas of monetary policy in the United States:
Up until late 2013: gradual recognition that we are in an era of secular stagnation and that the monetary (and fiscal!) policy stimulative response has been insufficient and subpar.
Mid-2013: the “Taper Tantrum”—a significant monetary policy mistake that further stretched out the period of ænemic recovery.
Late-2013 through 2017: The full secular-stagnation normal.
2017 to March 2020: Failed liftoff away from the zero interest-rate lower bound.
March 2020 to February 2022: plague time.
February to July 2022: post-plague normalization.
July to September 2022: shift to restrictive monetary policy.
September 2022 to present: waiting for a shoe—any shoe—to drop.
I track these suberas by the behavior of the interest rate that ought to be key for managing the interest-sensitive segments of aggregate demand—structures and, through the exchange rate, net exports—the inflation-indexed Ten-Year Treasury TIPS, the blue line in the graph below:
(The red line is the Ten-Year Treasury nominal rate; the green line is the inflation breakeven.)
The February to July 2022 normalization brought the stance of monetary policy back to its high secular-stagnation era level. The July to September 2022 tightening brought the stance of monetary policy considered as the slope of the safe and collateralizable-asset numeraire intertemporal price system back to its pre-Great Depression level. (Do note that that level was, back then, seen as depressed: it was a time of “global savings glut”, after all.)
Iconfess that I thought that during the current subera (8)—waiting for a shoe, any shoe, to drop—the Federal Reserve would manage interest rates in an attempt to keep the long real rate—the Ten-Year Treasury TIPS—at a level of about 1.75%. Thus I was very surprised last fall when they let it march upwards to 2.5%, before using their jawbones to talk it back down to the pre-Great Recession level. But now they are allowing it to rise again. And I am not sure why. These interest rates will have effects that will inflict their full force on the economy in eighteen months. Do they really think that in the Fall of 2025 the economy will be in a state in which hitting it with demand-relevant real interest rates higher than any seen so far in this millennium will be appropriate?
I read this as the Federal Reserve hivemind having reached two conclusions:
It no longer believes that considerations as to what it thinks r* is can guide monetary policy and its adjustment.
The major risk is not a deep recession and a return to the zero interest-rate lower bound, but rather some sort of rebound in inflation and a consequent de-anchoring of inflation expectations.
We shall see:
Related: <
