Monday, November 3, 2014

Scattered Thoughts on Monetary Policy

Tim Duy discusses Kocherlakota's dissent in this month's FOMC statement.  Kocherlakota would have preferred a statement "committed to keeping the target range for the federal funds rate at its current level at least until the one- to two-year-ahead inflation outlook has risen back to 2 percent, as long as risks to financial stability remain well-contained."

As Duy points out, even the dovish dissent sees 2% inflation as a ceiling.  But, more disturbing to me is this frequently cited concern about financial stability.  As I have argued in several posts, in practice this concern is kind of a price ceiling on housing, because the economy isn't likely to gain much traction until home prices reach a level that raises these misplaced concerns.  In 2007, the main risk the financial industry was caught flat-footed on was catastrophically tight monetary policy.  But since the concensus is that the main risk was in real estate, then when real estate starts tickling intrinsic values again, there will be demand to fix the imagined risks with catastrophically tight monetary policy again.  Then everyone will agree that those greedy banks pushed us off the economic cliff again because they just keep making these crazy bets on real estate that we have to rescue them from.  Being concerned about financial stability in 2014 is like being concerned about inflation in September 2008.  And this is the dissenting dove....

On that topic, here is the latest weekly update on commercial bank assets.  Commercial real estate and Industrial & Commercial Loans continue to march steadily upward.  The second graph is closed end residential real estate, which has been dead since 2007.  On the closer view, we can see how it showed signs of hope for the first half of 2014, and then died out as QE3 came to a close.  At least the monthly peak this week came in as high as last month's peak.

Another thing that gets me is how people discuss ZIRP (zero interest rate policy).  Like we're here because the Fed is pegging short term rates.  Exactly how is this their policy?  What would happen if they set the target Fed Funds Rate at 2% tomorrow?  Nobody would care.  If they announced a target rate of 2% tomorrow and then started selling bonds in OMO to try to get there, the end result would peg us even more thoroughly at the ZLB.  The only way we are getting off the ZLB in the near future is if they wait for a while and then pull some repo hocus pocus to temporarily pull reserves out of the banks.  Maybe we should have the FOMC issue a pro-gravity statement, too.  I saw some children skipping at the park today, and as each one jumped into the air, I realized what a disaster it would be if they just kept going up and didn't come back down.  Why haven't they gone on the record about this?


  1. "And this is the dissenting dove...."

    I suppose the optimistic view would be that his comment on financial stability was just lip service. Not that we have that much cause for optimism about recent monetary policy...

  2. The FOMC has a very peculiar membership. No one is from the construction industries or the real estate industries or the manufacturing industries --- but plenty are from the banking industry.

  3. Michael: It's a pretty sad optimistic view, but probably right.

    Benjamin: The crazy thing is, it's the bankers that will be hurt the worst, just like in 2008.

    1. "it's the bankers that will be hurt the worst, just like in 2008"

      I'm not sure if this is meant as a joke... is it?