Yesterday was an intriguing day and no I am not referring to the record numbers watching Flight Radar to follow the flight carrying Nancy Pelosi to Taiwan. What we saw was a stepping up of open mouth operations by policymakers at the US Federal Reserve.
Aug 2 (Reuters) – The Federal Reserve’s work of bringing down inflation is “nowhere near” done, San Francisco Fed President Mary Daly said on Tuesday, adding U.S. central bank officials are “still resolute and completely united” in the task of achieving price stability.
She also denied that the Federal Reserve would switch to cutting interest-rates next year.
“That would not be my modal outlook,” she said. “My modal outlook, or the outlook I think is most likely, is really that we raise interest rates and then we hold them there for a while at whatever level we think is appropriate.”
She presented herself as a doughty inflation fighter.
“The number of people who can’t afford this week what they paid for with ease six month ago just means our work is far from done,” Daly said.
That is quite a change of view from someone who was previously an inflation fan. From February 2020
(Reuters) – A top U.S. central banker on Monday called for using new tools to push up stubbornly low inflation as an aging population slows economic growth worldwide and globalization and other trends keep a lid on prices.
“We need to embrace the mindset that inflation a bit above target is far better than inflation a bit below target in today’s economic environment,” San Francisco Federal Reserve Bank President Mary Daly said on Monday in remarks prepared for delivery in Dublin, Ireland.
So she has what she wished for. Indeed in 2021 she got the opportunity to vote for it. Apparently she is now not so keen or more realistically is afraid of what the response would be if she said that now.
This backed up the words of another Federal Reserve policymaker Neel Kashkari from last week.
“Whether we are technically in a recession or not doesn’t change my analysis,” Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, told CBS’ “Face the Nation” on Sunday. “I’m focused on the inflation data. I’m focused on the wage data. And so far, inflation continues to surprise us to the upside. Wages continue to grow.” ( CNBC)
This was rather awkward for the man most associated with the policies that helped push inflation higher in the first place. In fact markets simply ignored him as a man with zero credibility.
The barrage of open mouth operations continued though.
In a separate interview on Tuesday, Chicago Fed president Charles Evans said he thought that a 0.5 percentage point increase at the next meeting in September would be appropriate. However, he left the door open to a larger 0.75 percentage point rise, which he said “could also be OK”. ( Financial Times)
A decade or so ago Charles Evans made the case for inflation at 3% or 4% to “catch up” on inflation being below target. This was based on the now abandoned claims from central bankers that they had the “tools” to reduce above target inflation and could do so easily. That was a complete lie as the present situation is showing. Sadly they never get challenged on this.
But I have selected these 3 because they have for years sung along with Prince.
This is what it sounds like
When doves cry
What does this mean?
We got some actual numbers from the President of the St.Louis Fed in a speech from New York.
Fed‘s Bullard: Repeats Wants Policy Rate At 3.75%-4% By Year-End – Fed Needs To Get Into More Restrictive Rates Territory ( @LiveSquawk)
He is in a different category to the others mentioned so far as he has been keener on dealing with inflation, but he does seem to have a bit of a problem with these thoughts.
The Fed and the ECB have considerable credibility compared with their 1970s counterparts, suggesting that a soft landing is feasible in the U.S. and the EA if the post-pandemic regime shift is executed well.
I would ask what is he smoking? But I doubt that there is anything strong enough to make you think that. As Earth Wind & Fire put it.
Every man has a place, in his heart there’s a space
And the world can’t erase his fantasies
Take a ride in the sky, on our ship, Fantasii
All your dreams will come true, right away
We can now switch to the apparently rather similar thoughts of Charles Evans.
Evans noted that he thinks rates will have to rise to between 3.75 percent and 4 percent by the end of next year but cautioned against too quick a path to get there should the Fed have to retrench unexpectedly on the back of a changing landscape. ( thenews.com.pk)
So the same level but later. Although he is not much good at predicting the future.
April 19 (Reuters) – Chicago Federal Reserve Bank President Charles Evans on Tuesday said the Fed could raise its policy target range to 2.25%-2.5% by year end.
It is already there.
Comment
Let me start with what the Federal Reserve is trying to so here. It is not a coincidence that so many Fed speakers have appeared at the same time to sing in a chorus. The problem with attempting to set an agenda via open mouth operations comes from their most recent policy move.
“While another unusually large increase could be appropriate at our next meeting, that is a decision that will depend on the data we get between now and then,” Powell said, noting that there will be two full months of data before the Fed’s next meeting, in September. ( Reuters)
That was an abandonment of Forward Guidance which had become very strict even involving leaking interest-rate moves to Nick Timiraos of the Wall Street Journal. Now we are only one week later being guided again via all these speeches.
The reason for this is something that I have regularly pointed out which is that markets were ignoring the interest-rate rises and instead concentrating on the upcoming expected deterioration in the economy. So 1.5% increases in official interest-rates were accompanied by the benchmark ten-year yield falling by more than 0.8%. This left the Fed in quite a mess because they thought they had been clever in letting the rise in bond yields do the inflation fighting for them. The most obvious example of this is the way that the 15 and 30 year mortgage rates rose. But now they will be falling just as inflation has soared leaving the Fed with yet more egg on its face.
The response has mostly been we do not believe you.
But the comments from Daly, Evans and Mester moved futures markets, with expectations for where the Fed’s benchmark policy rate will stand in December rising from 3.27 per cent on Monday to 3.39 per cent on Tuesday.
Yes bond yields rose but by much, much less than the amounts they had fallen by.
Oh and it was the central banks that created this although the Financial Times fails to mention it.
Investors also cautioned that liquidity in the Treasury market — the ease with which traders can buy and sell — is poor, with many market participants on holiday this month. A deterioration in liquidity can lead to big swings in the price of securities.
Not the holiday season as they did not create that! The fact is that everywhere QE has gone liquidity has worsened with the extreme case being Japan where at times it has been non-existent.
So when you see more open mouth operations today you now understand why….
Notayesmanseconomics's Blog 
Hello Shaun,
Never ceases to amaze me that the CB set up goals posts and as soon as they are reached they change them again so they don’t have to do anything (!).
Oh , still trying to sell the sizzle as if it were steak, never works out in the long run.
Forbin
PS: Perhaps they can change definitions again , like recession ? ahahahah
forbin,
“Oh , still trying to sell the sizzle as if it were steak, never works out in the long run.”
No and for those interested “order and chaos” is good to watch on YouTube by Proffesor Jordan Peterson albeit you have to be interested in theology.
5+5 will never make 9 whichever way you try it will always amount to 10 and if you move the goalposts it won’t make much difference some of these things never change and if you try and change them you end up in chaos.
Pressure is on the BOE again to raise rates and expectations of 15% inflation I heard today on GB news and the Guardian saying circa 17% RPI
https://www.theguardian.com/business/2022/aug/03/inflation-will-soar-to-astronomical-levels-over-next-year-thinktank-warns
But at the same time stagnation will bring the economy to a halt and people stop spending. The article says the BOE will need to increase interest rates to 3% which seems a strange affair when in the late 70s as inflation was in the double digits so where interest rates !
Either they were wrong in the economic climate in the 70s or they are wrong now which is it ?
Or the other theory is they really haven’t a clue either way and that goes for most of the countries around the world trying to tackle inflation, productivity and unemployment.
However I forgot about Japan:
“Not the holiday season as they did not create that! The fact is that everywhere QE has gone liquidity has worsened with the extreme case being Japan where at times it has been non-existent.”
Japan did well post war but the last decade has been poor growth but at the same time they have maintained negative or zero interest rates but avoided sky high inflation !
So which is the worst evil sky high inflation, stagnation and riots or slow growth and low to negative interest rates but a reasonable stable population like Japan?
Just reading this brought flashbacks to your coverage of Mark Carney’s tenure at the BoE,during which ‘open mouth operations’ were used and very little was done…..At all………Whilst the biggest asset bubble in the history of the UK brewed up.
I say that but obviously the BoE penion Trustees took the opportunity to stuff the pot with RPI inflation linked bonds(pretty much 85% last time I checked.
Watch what they do etc!!!
This still leaves me puzzled why in the late 70s and early 80s which I cannot be precise about however interest rates seemed to follow inflation. All I can remember is years of discontent, strikes and asset collapses and building companies going bust. Those were the years when the manufacturers offshored, then what followed was the GOV policy to go down the financial services route, then the financial crisi in 2008.. As for Mark Carney were the other bankers any better at dealing with the after shocks of all that financial mess?
Hello Peter. For me, one of the people who appears to make the most economic sense is Prof. Richard Werner, who specialises in money creation and banking activities. He is the person who coined the term ‘quantitative easing’ back in the mid 90’s, and his central analysis is called ‘Quantity theory of credit’. Reason he pops into mind when thinking about you is that he’s not impressed with the playing around with interest rates; indeed, he has an interesting contrarian view on their effect (based on signidficant historical research he undertook on their correlation to GDP performance), whereby he states that higher interest rates tend to increase GDP, whilst lower ones reduce it. He’s also a strong Christian, which I know is meaningful to you. There are excellent Youtube videos where he explains the optimum creation and flow of money in the economy. He has also created a community bank in Cambridge (England) as he is a strong advocate of the German Mittelstand relationship between businesses and local banks being a key determinant of sustained economic success; definitely not an advocate of a handful of major banks loaning to SME’s (as per UK), as the ‘big boy’ banks will seek to fund ‘big boy’ business, noting and many of the best performing businesses in the world come from Germany’s SME sector…….we’ll maybe gloss over how German energy planning is as duff as our own, but happily that’s a different matter I guess.
I have a real dislike/hate relationship with economic teachings as I find the various tribes (schools and gurus) unnecessarily obfuscating (especially when there’s so much retrospective analysis of cause and effect now available to us), so I tend to take a view through the likes of Prof.Werner and Prof.Steve Keen as my personal guide (along with the reasoned pieces from Shaun of course!), certainly the post-Keynesian’s seem to have a better handle on how the ‘real world’s’ economic model’s variables really hang together than the neo-classicals, who tend to stuff out the mainstream i.e. Central Banks in many countries, and a ‘select’ club of financial institutions (especially American). My own biases in fairness!
Sorry for the long-winded reply, but we absolutely cannot have good political planning unless it’s underpinned by good economic understanding (and practice), and for me the prevalence of neo-classical nonsense is so well established that even if politicians had a desire to change the economic planning of government (i.e. plan the effective transition to fossil fuels 30-40 years ahead of need would have been nice, and the maximum mechanisms of how could we ‘really’ fund it), the public are already hooked on a garbled explanation of NC garbled homespun flimflam; e.g. Mrs Thatcher old maxim of the housewife’s finances being like the Government’s budgetary prudence, ignoring the massive difference that a household doesn’t have a central bank to work with. I can find fault with Labour and SNP too, so I’m an equal opportunities dissenter : ) There is NO magic money tree, but there are better ways we could have funded our needs over the last 30-40 years (Shaun has mentioned the UK Gov borrowing over 100 years on the ultra low rates for example).
I’ll leave you in peace now.
All the best, Iain
“Now the workers have struck for fame / ‘Cause Lennon’s on sale again”
“He got an ice pick, that made his ears burn / No more heroes anymore”
I’m not my own hero Andrew, but I’m happy with my wheelbarrow and grubbing mattock in my early retirement ; )
Sorry Andrew, one more from one of Canada’s greatest gifts to the world:
Rush
There is unrest in the forest
Trouble with the trees
For the maples want more sunlight
And the oaks ignore their pleas
The trouble with the maples
(And they’re quite convinced they’re right)
They say the oaks are just too lofty
And they grab up all the light
But the oaks can’t help their feelings
If they like the way they’re made
And they wonder why the maples
Can’t be happy in their shade
There is trouble in the forest
And the creatures all have fled
As the maples scream, “Oppression”
And the oaks just shake their heads
So the maples formed a union
And demanded equal rights
They say, “The oaks are just too greedy
We will make them give us light”
Now there’s no more oak oppression
For they passed a noble law
And the trees are all kept equal
By hatchet, axe, and saw
I read a Dr Tim Morgan piece the other day and thought of your work over the years Shaun.This crisis has been a long time coming.Politicians of all parties are quick to look for short term factors they can blame but the sustained mismeasurement of price inflation/GDP over time combined with a burgeoning govt/private debt bubble growing has created a day of reckoning we can’t avoid.
Raise rates and we get a defaltionary depression.Leave rates and we get an stagflationary depression imho.
From Dr Tim-I dont know whetehr you’d agree with him that any tax cuts will likely be met by an earlier BoE rise
‘Put simply, the BoE needs to show FX markets some resolve, even if that comes at the cost of some domestic economic pain. The Bank undoubtedly knows about – as some politicians seemingly do not – the price that could become payable for fiscal and monetary recklessness, if that recklessness were to trigger a currency crisis.
It’s a point seldom mentioned that, if a future leadership were to enact irresponsible tax cuts, the Bank might, as a compensatory measure, have no choice but to raise rates more briskly than would otherwise have been the case.
Some in Britain have dreamed, unrealistically, of turning the country into ‘Singapore on Thames’. The real and present danger is of turning into ‘Sri Lanka on Thames’, where a weak currency makes vital imports prohibitively expensive.
The prevention of a currency crisis has to be the overriding priority of responsible decision-makers. The balance of risk – no less than the balance of pain – has to be tied to the demonstration of sufficient resolve to stave off any such crisis.’
You just don’t get it do you?
The BofE don’t care less about the exchange rate of sterling,all they care about are the precious,the housing bubble and the construction sector,in that order.They have a 100 year history of devaluing the pound to achieve the above to prove it .
I don’t know about ‘irresponsible tax cuts’. However, M.E.T. is ‘following’ the ‘ideas’ of Professor Patrick Minford and his ‘voodoo economics’? Supply-side reforms {tax cuts} will be enough to rejuvenate the economy {increase productivity} and will reduce national debt!
postkey,
Profesor Minford latest interviews have suggested Liza Truss tax cuts would only need an increase rates to increase to about 3% which seems to be at odds for some out there suggesting rates would have to rise above 7% or even more.
I don’t think anyone really knows at the moment it is just trial and error.
Minford is wrong; tax cuts are not enough to rejuvenate the economy because the lower income the lower the tax cut, whilst the best way to rejuvenate the economy is to put money in the pockets of the poorest, as wealthier people can already afford what they want
Whatever the central banks are doing it isn’t doing much for the global economy :
https://seekingalpha.com/article/4529009-global-manufacturing-pmi-hits-2-year-low-in-july-as-production-falls-in-developed-world
Hi Peter
The US ISM release this afternoon told a different story.
“In July, the Services PMI® registered 56.7 percent, 1.4 percentage points higher than June’s reading of 55.3 percent. The Business Activity Index registered 59.9 percent, an increase of 3.8 percentage points compared to the reading of 56.1 percent in June. The New Orders Index figure of 59.9 percent is 4.3 percentage points higher than the June reading of 55.6 percent.”
As the US TV series Soap used to say “Confused you will be,,,”
To those who don’t follow things across the pond like I do, may I just point out that his doublespeak by the Fed is absolutely every day stuff, Powell will come out in the morning stating their absolute determination to keep raising rates to kill inflation, then later in the day a regional Fed official will come out and say that rate increases will be data dependant/ we will keep an eye on unemployment at the same time or we are also watching the effect on the economy.
This talking out of both sides of their mouth at the same time is all part of the game to keep market participants guessing, of course if we had a free press these contradictions would be exposed and reported and an explanation sought as to their obvious contradictions, but of course the press are part of the game and so they keep contradicting each other and everyone keeps thinking the Fed is in complete control of the economy! How can they be if they are all saying different things to the media at the same time!
Hi Kevin
I guess in a sense they have covered pretty much all of the bases. But you are right and in the rush to get the latest bits of news the media so rarely question their past statements.
Great blog as usual, Shaun.
As I mentioned previously, the US Fed’s new average-inflation-targeting framework is essentially the same as the Bank of Canada’s new framework, inflation overshooting at the effective lower bound. I finally had time to read the paper cited by Amano et al in their working paper on inflation overshooting as an inspiration, by Eggertsson and Woodward:
Click to access 2003a_bpea_eggertsson.pdf
It dates from January 2003, exactly nine years before the US Fed formally adopted a 2% inflation target. It was also the same year but months previous to Justin Trudeau winning the leadership of the Liberal Party of Canada, and at that time he probably really didn’t think about monetary policy. Note that the Eggertsson and Woodward paper was itself inspired by a 1998 paper by Paul Krugman that recommended the Bank of Japan adopt a 4% inflation target. So whenever monetary economists fret about what to do at the effective lower bound it tends to be bad news for the defense of price stability. Amano et al summarize the earlier paper as follows: “Eggertsson and Woodford (2003) show that allowing inflation to overshoot its target when the economy is facing an ELB episode helps promote a faster recovery in real economic activity.” So they really don’t distinguish between their approach and the Americans, although Eggertsson and Woodford really recommend price level targeting, not inflation targeting, and they only seem to see targeting a higher price level target than would be compatible with price stability as a temporary thing to compensate for a previous deflationary episode. (Yes, they really do see a 0% inflation rate as the ideal.)
Benjamin Friedland’s discussion of the paper notes that: “true price-level target means that the central bank is committed not only to undo deflations with subsequent inflations, but also to undo inflations with subsequent deflations. . . Many historical episodes suggest that deflation is not a desirable outcome for an economy arranged as ours is, and much economic analysis has explained why. . . . Having the central bank deliberately create a deflation therefore usually seems like a bad idea. Eggertsson and Woodford’s model includes none of the mechanisms (debt defaults, for example) that make deflation harmful.” So the inflation overshooting framework basically just forgets about price level targeting and allows inflation to overshoot at the effective lower bound without any thought about compensatory low inflation rates in the future. So it means that the central bank, even if it performs according to plan, will have inflation running above target over five or more years, but how much more is hard to say.
Of the four Bank of Canada governors before Tiff Macklem who governed only with a 2% target rate, all but David Dodge had annualized rates of inflation on their watch under 2%, ranging from Stephen Poloz at 1.46% to Mark Carney at 1.61%. (David Dodge was probably feeling his oats as the first governor since inflation targets were established who was not supposed to look forward to a future with stable prices.) Even this range is somewhat exaggerated since the measurement bias for CPI inflation fell by 0.2 percentage points part way into Poloz’s term. I suspect the increase in the inflation rate above the 2% target would probably also be variable from governor to governor, but much more so, if the next government is foolish enough to stay with this failed policy. Right now the annualized inflation rate under Governor Macklem is 5.65%, but it would be false of course to claim that the change in inflation framework is responsible for all 3.65% of this overshoot.
Hi Andrew and thank you
Thanks for the reminder about Paul Krugman who is having a really bad run at the moment. I watched an interview of his yesterday and the elephant in the room was inflation as he had assured everyone there wasn’t going to be any. But more than the points as he was under fire on recession too was his body language which looked awful.
I think that the “inflationistas” are learning some hard lessons right now. First that inflation can ( and at the moment is) hurt people badly. Next that it damages the economy. Also that once you let the genie out of the bottle it is much harder to put it back.
But psychology is on my mind today and having noted the body language of Paul Krugman let me add in does Mary Daly sound like someone about to back up her claims about inflation and interest-rates?