Good News, Bad News

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Includes: RINF
by: Scott Sumner

The good news is that the Fed is unlikely to raise rates in the near future. The bad news is that the Fed is unlikely to raise rates in the near future. How can two mutually exclusive claims both be true? If you can't embrace contradictions, then you are not a true macroeconomist. (I'm looking at you, Bob.)

The good news is that given the condition of the economy, the Fed is unlikely to raise rates soon.

The bad news is that the Fed's unlikeliness to raise rates soon shows the poor condition of the economy, caused by the Fed itself.

The Fed is unlikely to raise rates soon because in 2015 they signaled that they were anxious to tighten monetary policy, which lowered expected NGDP growth. The market also knows that (just as in 1937) the Fed is reluctant to admit mistakes, because it makes them look bad. So they wait too long to change course (as in 1937-38.) That's already priced in, already being factored into investor's decisions. So if a negative shock comes along (say a fall in velocity) the Fed is not prepared to react.

Here's a fed funds futures bleg. Am I reading the table below correctly, that the markets expect roughly a 0.9% fed funds rate in December 2017? If so, it would be below the 1.0% figure that Fed insiders laughed at back in September, when Kocherlakota's dot was trailing far behind all the others. Now it looks like even he was too pessimistic optimistic (and I was even further off course, but at least not as far off as the Fed.) Just as Jimmy Carter "promoted" G. William Miller to the meaningless job of Treasury Secretary after just 18 months on the job, and replaced him with Volcker, Obama should promote Yellen to Treasury Secretary, and replace her with Kocherlakota.

Kocherlakota was right, the Fed should have cut rates in September. I'm embarrassed to admit that I missed that call.

The much, much, much bigger story here (which I predict readers will overlook) is that the Fed desperately needs a new policy regime. It's the lack of level targeting, stupid.