Headlines are typically not written by the same person that pens the article. Nonetheless, the headline should at least match the content of the article. Bloomberg failed with this headline:
Treasury Traders Are Doubtful Powell Can Drive Inflation Higher
I was surprised by this headline, as the Fed obviously can drive inflation higher. Perhaps they meant that Powell cannot convince the FOMC to drive inflation higher, but that would be an odd way of phrasing that claim.
The article itself is excellent:
The Treasury market has set a high bar for the Federal Reserve to jump in order to recharge inflation expectations and upend a bullish tone that has surfaced since Chair Jerome Powell laid out a new plan to allow consumer prices to run hot.
Bond-market gauges of inflation expectations have declined for the past two weeks, signaling traders are demanding that Fed policy makers deliver more information about how they will engender a rise in inflation. Benchmark 10-year yields have fallen to below 0.70%, helped also by haven demand as lofty U.S. stock prices turned lower.
Many economists predict Federal Open Market Committee members won’t take any new actions when they wrap up a two-day gathering on Wednesday, an outcome likely to embolden bond bulls and further crimp inflation expectations. . . .
“The market definitely needs more from the Fed now,” Aneta Markowska, chief U.S. financial economist at Jefferies, said by phone. “The Fed will be undershooting on inflation for the better part of four years, so why wait to do more? And inflation expectations have already been fading.”
Markowska’s absolutely right; the Fed should adopt a more expansionary monetary policy. A dramatic boost in QE would be a good start, although other tools are also available. So why don’t they?
The headline should have read:
Treasury Traders Are Doubtful Powell Will Drive Inflation Higher
If the Fed fails to adopt a more expansionary monetary policy in the near future, it will be a tacit admission that the average inflation targeting policy is not serious. The Fed is facing the possibility of a very serious policy failure—I hope they understand that fact.
PS. Of course it’s theoretically possible (albeit exceedingly unlikely) that the Fed cannot raise inflation. But that hypothesis is not even worth entertaining until they’ve done all they could and failed. In all of human history, no (fiat money) central bank has ever exhausted its ability to inflate. The Fed is not about to do so.
READER COMMENTS
Rajat
Sep 13 2020 at 7:35pm
The timidity of the Fed has been around for a while (at least since 2008) and so can’t be blamed entirely on social media and Trump, etc. Do you get the feeling the Great Stagnation has also afflicted institutions like the Fed? I certainly think in Australia the RBA under its current governor (Philip Lowe) has been extremely conservative in the way it employs the available instruments to hit its target – in keeping with Lowe’s BIS background, and his belief in bubbles and ‘leaning against the wind’. It seems like institutions accrue prestige over a period and then become led by (small-‘c’) conservatives whose temperament and focus is on doing more of the same to maintain that prestige rather than doing more of what led to the rise in prestige. Bernanke no doubt better knew what to do in 2008 than Greenspan likely did; but would Greenspan maybe have actually done more? Change still happens at central banks, it just seems to happen a lot slower – taking decades instead of years – than it used to. What do you think?
Scott Sumner
Sep 13 2020 at 8:40pm
Rajat, That sound plausible. I actually don’t think Greenspan would have done more, as he seemed to think the Fed was doing too much as it was (during 2008-09).
I suspect that most central bankers have the wrong model—i.e. a non-market monetarist model—and this is the main cause of the policy dysfunction. Other approaches work fine when interest rates are 5%, but at zero interest rates you really need a market monetarist perspective on things.
Rajat
Sep 13 2020 at 9:24pm
Isn’t the slow speed of adoption of the right model simply part of the stagnation? In the late 1970s, the Fed moved very quickly from a cost-push model for inflation to a more monetarist or at least demand-side model. But so far it has taken well over a decade – and counting – to move from the New Keynesian model to the MM model.
Scott Sumner
Sep 14 2020 at 8:25pm
It seemed a long time when I was young, say about 10 years (1969-79)
Thomas Hutcheson
Sep 14 2020 at 1:54pm
It seems like when you have a Congressional mandate to achieve maximum employment and stable prices (and have defined “stable prices” as some price index increasing at an average of y% per year), almost any model would tell you that when inflation is below that rate and employment is less than any reasonable definition of “full,” you ought to be doing more monetary stimulus than you are. Using information from the TIPS market (or an NGDP futures market) might help fine tune the response (interventions could be daily rather than monthly) but surely that is not absolutely necessary.
Shyam Vasudevan
Sep 13 2020 at 10:40pm
I think part of the problem is framing the debate in terms of raising people’s cost of living, when it should instead be around nominal cash flows.
Scott Sumner
Sep 14 2020 at 8:25pm
Yes.
bill
Sep 14 2020 at 12:23pm
Tangential question. Why does the Fed prefer to pay interest on reserves now? It was always zero before October 2008 and since they started paying IOR they can’t hit their inflation target. I figure that there must be some technical reason that they still think IOR is doing something desirable?
Scott Sumner
Sep 14 2020 at 8:26pm
They seem to believe it helps the money market mutual fund industry.
bill
Sep 15 2020 at 12:41pm
Thanks. I think you’re right. That and banks.
Garrett
Sep 14 2020 at 7:50pm
I hear about “haven demand” all the time, mostly in treasuries and yen. Is there anything to this beyond just the impact of a demand shock?
Scott Sumner
Sep 14 2020 at 8:26pm
Probably not.
Thomas Hutcheson
Sep 15 2020 at 1:01am
Total agreement on substance.
Could, could? the headline writer have in mind that the Fed is subject to some unspoken constraint on the range of policies such that hitting the average inflation target would require exceeding that constraint and hence that the “cannot” achieve the target. An analogy would be IF the Fed allowed itself only the instrument of manipulating the nominal rate of short term interest rates and it were constrained by the ZLB, then there could be a sense in which they “couldn’t” achieve their target.
Jose Pablo
Sep 15 2020 at 8:51am
The BoJ has not exhauted is ability to inflate?
Interesting times … maybe the FED should bring some experts from Argentina
marcus nunes
Sep 16 2020 at 8:34am
One problem is that even economists at the Fed don´t believe inflation is a monetary phenomenon! In “What´s up with the Phillips Curve” by New York Fed economist Marco Del Negro & co-authors that pushed for AIT, we read:
Their leading candidate for the driver of inflation stability is a reduced sensitivity of inflation to cost pressures—such as those associated with wage movements—or, in economic parlance, a decline in the slope of the Phillips curve. This could be due to many structural forces—such as the increased relevance of global supply chains, heightened international competition, and other effects of globalization.
“A flat Phillips Curve requires the monetary authority to work harder to stabilize inflation: Unemployment needs to get lower to bring inflation back to target after a recession,” the authors write. They use an econometric model to explore how monetary policy should adapt, examining, for example, a strategy known as average inflation targeting—one of several strategies the Federal Reserve has been evaluating during a public review of its monetary policy framework.
And thinking monetary policy is interest rate policy:
“The problem with too-low inflation is that it means nominal interest rates are also very low, leaving monetary policymakers with little ammunition to fight economic downturns.”
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