Soul-searching at Fed is beginning
The soul-searching at the Fed is beginning.
I have written many times for over a year that the Fed will have a period when they start soul-searching. They will realize that the business cycle got away from them and they will not be able to normalize rates. They just got too far behind the curve.
Danielle DiMartino on Boom/Bust said, “I think it was probably one of the most interesting FOMC meetings… I think the fact that Esther George did not descent is telling you that there is an acknowledgement among members of the committee that the United States is probably headed toward a recession.”
DiMartino goes on to say that the Fed should never go to zero bound again and maintain a 2% floor for example, so that the banking system can function in a natural way. 0% does not allow the market to discover prices efficiently.
I do not agree with her on that by the way. The Fed rate should be able to go to 0% but then lift off according to the biz cycle of effective demand. In my view, the Fed should have started lifting rates at some point in 2012. There was still some spare capacity available for the economy to adjust to the disciplining of productivity by raising rates.
Update: A similar view is presented by Signe Krogstrup. (link)
There is hardly any spare capacity left. Profit rates and top line revenue peaked at the end of 2014. The Fed rate is too far behind the curve. The Fed will not be able to raise rates going forward without triggering a contraction.
The Fed is frustrated. They want to normalize rates, but won’t be able to.
The soul-searching has begun.
I either don’t understand the use of the word “soul” or “searching” in that last sentence. Maybe both.
Okay I probably don’t want to understand.
Soul-searching… deep and anxious consideration of one’s emotions and motives or of the correctness of a course of action.
Okay thanks for trying to be helpful. But the full definition pointed to there: ” examination of one’s conscience especially with regard to motives and values ” Still begs some questions.
Are you trying to imbue the Fed with a conscience? Or values (wtf ever that might mean)? Not trying to play the usual wise-ass here I honestly am curious. In what sense do you expect or discern that the Fed has a soul to search? How is that manifest in some historical sense regarding it’s past behavior or institutional policies?
And even the google one still pulls us down a rabbit hole doesn’t it? Consideration of one’s emotions and motives – okay what are the Fed’s emotions and motives? When have they searched this soul you cite before? What happened with that?
The Fed is emotionally frustrated. Their intellectual models did not work. The soul then moves the frustration to the emotions. Imagine the emotions at the FOMC meeting. Was anyone anxious? I think so, that is why Bullard said today that the economy is not looking good. They are concerned to the point that even they do not trust their previous forecasts and plans. Their confusion naturally leads to some soul-searching… They ask themselves, “what did we do wrong?” “Why are our plans not working?”
Henry Farrell at Crooked Timber used an expression that may be more apt than “soul searching”: “the technocratic fudge didn’t work over the longer term.”
Rather than searching their souls, the governors are more likely to be wringing their hands about what recipe for technocratic fudge will work over the longer term. But technocratic fudge can’t work over the longer term. The problems are overtly political and require explicitly political approaches. Technocratic fudge claims to be non-political, which is why it is called fudge.
The members of the Fed are sincere about their work. There is no fudge. They put their souls into their work sincerely. They are getting confused and questioning their models. They still see a big output gap, even though it was closed years ago. Popping this delusion will cause soul-searching because they are in charge and are supposed to know better. They just didn’t know what a drop in labor share would do. Nobody seems to understand effective demand… but the time will come.
Actually, it looks like the US economy is accelerating and nearing economic boom which the Fed has when the U-6 reaches 9%. The final lurch is gonna hurt Ed’s motiff imo.
Where do you see the US economy accelerating? Spending?
Without the lower bound the Fed Funds rate would have gone negative. To say that it should be leaving zero along the same trajectory it would have had if it could have gone negative seems to me to be an assumption that needs to be justified, not just asserted.
By analog, it would be valid for most typical clipping electronic circuits, but if you add a bunch of capacitance, it would become wrong.