Worthwhile Reads – October 24th

This week’s post will be focused on links relating to the Federal Reserve as it has a very important FOMC meeting on Tuesday and Wednesday of next week. The meeting will most likely mark the end of QE3 yet there are still questions whether the economy is stable enough to end the extraordinary measures implemented by the Fed.

Federal Reserve presidents have been making news this month as they publicly state their positions in regards to Fed policy and what should be done at the upcoming FOMC meeting. On one side there is Richard Fisher, Dallas Federal Reserve President, and Charles Plosser, Philadelphia Federal Reserve President. They have continued to beat the same drum and are in favor of ending QE while also focusing Fed policy on inflation.

On October 10th, Plosser stated in a speech to the Society of American Business Editors and Writers that Congress should remove stable employment from the Feds mandate by saying,

“I believe that assigning multiple objectives for the central bank opens the door to highly discretionary policies, which can be justified by shifting the focus or rationale for action from goal to goal. That is why I have argued that Congress ought to redefine the Fed’s monetary policy goals to focus solely, or at least primarily, on price stability.”

Following Plosser’s lead, Richard Fisher, on the same day, had a speech at the Council for Economic Education’s annual Financial Literacy and Economic Education Conference in Dallas. In his speech he indicated that he believes wages are rising and that wage inflation is, “not an issue right now for the U.S., and wages can come up, but there are concerns about getting it under control.” The statement is a red flag as wages have been stagnant for the median earner for a over decade yet he is already taking about getting wages under control. In conjunction with his view of raising wages, Fisher also stated that the Fed should change the language of its forward guidance to indicate that rates will rise sooner rather than later.

On the other side there are St. Louis Federal Reserve President James Bullard and Minneapolis Federal Reserve President Narayana Kocherlakota that believe the Fed should continue with looser monetary policy. Their positions are based on the fact that inflation expectations are still below the 2% target.

Last week Bullard went onto Bloomberg TV and stated that “Inflation expectations are declining in the U.S. That’s an important consideration for a central bank. And for that reason I think that a logical policy response at this juncture may be to delay the end of the QE.” The reason for delaying the end of QE is to keep the option of additional QE if the economy declines during the end of the year.

Earlier in the month Kocherlakota stated, “For me a necessary condition (before raising rates) is that the one-to-two year ahead outlook for inflation is back to 2 percent. The discussion about the labor market is sort of, almost irrelevant, it really is irrelevant from the point of view of monetary policy…the inflation outlook should be the dominant story right now when you think about monetary policy.” Though he is taking a less dovish stance than he has before, Kocherlakota still sees weakness in the market and any policy that aims to raise inflation will also help lower unemployment.

In the debate on whether money is too loose or too tight, Tim Duy looks at what the Fed has done and what their policies indicate. He concludes that the Fed is more hawkish than they lead people to believe. He points to the fact that the Fed does not want to raise inflation past 2% which, in all likelihood, will bring the interest rate back to zero during the next recession. He sees that the Fed must allow inflation to rise so that the interest rate can exceed 6% to prevent hitting the zero lower bound. This is important because the Fed should not make extraordinary measures taken during the Great Recession to become ordinary.

Finally Jared Bernstein writes about how the Fed can help reduce inequality through their policies. Concluding,

“Especially in the first two examples — macro-management and financial oversight — the Fed’s impact on inequality is symmetrical. The central bank can reduce it, as Greenspan did by allowing us to get to full employment, or exacerbate it (as Greenspan also did) by ignoring bubbles.

Right now, for example, there are many voices pushing Chair Yellen and Co. to tighten preemptively to stave off any future wage or price pressures. And as you can imagine, the finance sector isn’t exactly anxious to see the Fed ratchet up its oversight.

In both cases, it must resist. While lowering inequality is not directly part of the Fed’s mandate, it is in fact an outcome of its work, at least when it gets it right.”

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