The new president of the Minneapolis Fed, Neel Kashkari, has an op-ed in the Wall Street Journal arguing it would be a bad idea for the Fed to adopt a Taylor-type policy rule.
I agree with Kashkari that it would be a bad idea for the Fed to adhere to a policy rule, so I guess I am glad to see him speak out. But I would add two points.
First, what the Congress is actually considering is forcing the Fed to come up with an interest rate rule and to report any deviations of rates from that rule. Such legislation would be pretty much harmless. It would force the Fed to come up with yet more tortured English, but the Fed leadership has already shown itself quite skilled at producing that.
Second, the problem with the Taylor Rule is not so much that it ignores the complexity of the US and global economies. It does that, but not necessarily to much bad effect in most economic environments.
The problem with the Taylor Rule is that it is not well suited to an economy operating in the region of the zero bound on nominal interest rates, I think. If the US could somehow get reliably away from the zero bound, Taylor might again be almost good enough for government work.
Somewhat separately, I hope this dumbing down is not a sign of things to come from Minneapolis.
My staff at the Minneapolis Fed has estimated that if the FOMC had followed the Taylor rule over the past five years, 2.5 million more Americans would be out of work today. How many people is that? It’s enough to fill all 31 NFL stadiums at the same time, almost 6,000 more people out of work in every congressional district.
I know Trump won and that we are supposed therefore to think that homely stupidity is in. But would it be too taxing of the good ole boy brain to just say that employment would be 1 ¾% lower — or maybe almost your thumb plus your pointing finger lower in percentage terms.
Imagine there are 100 people in your yard for a cook out. Take one and throw him over the fence. Then take the other, chop off both arms and throw the remainder over the fence. What you have left is sort of like the Taylor Rule. See? Measuring employment in NFL football stadiums is not really clarifying.
What would Kashkari say about tax policy? Donald Trump wants to give 24 Olympic swimming pools of Benjies to just the equivalent of the people who could fit into 112 Chuck E Cheeses?
This reminds me of one of the Fed leadership’s favorite deflections: the pretense that the difficulty is with “communicating” policy, as opposed to — you know — figuring out what it should be. We know truth. But we are having trouble explaining it to you idiots.
Dummies for Taylor
This piece from Bloomberg is fun, especially for the holiday season when everybody is into making pretend.
Apparently, some economists are “scratching their heads” over how the Fed could have moved its economic forecasts and yet not moved its interest rate dots much. The unstated premise here is that the funds rate is set by some sort of Taylor-type rule, if not in level terms then at least in rate of change or revision terms. That premise has been misleading for a decade, but economists still scratch their heads at its failure to be reflected in the Fed’s dots this time around. It must be great to be so right about things generally, that you are down to working only on precision and consistency.
My guess is Bloomberg found a select group of “economists” who were happy to be quoted whining about this non-issue. How can it be that the Fed is not applying a Taylor Rule?!
Not to be dovish here, but just hopefully undumb.
Can’t hedge out your Melancholia
Krugman’s tweets are pretty downbeat about the Trump victory in the electoral college. I admire him for telling it like it is and not offering the weak/lame advice to “move on.”
But I can just imagine the fake centrist responding, well then how come the stock market isn’t down? Yeah (said in the voice of a woman imitating her husband while irritated with him).
My answer, offered partly seriously, to that involves the movie Melancholia, which I will spoil if you keep reading this. For me the most striking scene in that movie is Kirsten Dunst trying to night-tan her breasts under the light reflected by the newly-discovered planet, Melancholia, which has drawn dangerously close and reflects a lot.
More to the point, at the end of that movie, Melancholia seems to be on an inexorable path to crash into the earth and to eliminate all life here — and also on Melancholia if there is any there. It is a maximum bad thing.
But as the planet approaches and the situation seems hopeless, do we assume anybody is selling equities? Even in that scenario the strategy is to buy the dip, which stochastically dominates. Who knows? God himself might intervene. If he doesn’t, you, literally you, are stopped out. So who cares? Not every bad thing can be hedged.
No point buying duration if you personally have none