The fed funds rate is roughly the sum of two components: the real, net-of-inflation, return on safe short-term investments and anticipated inflation.OK, so far, so good. This is just the definition of the real return: it’s the return that’s anticipated after accounting for inflation.
Monetary policy does affect the real return on safe investments over short periods of time. But over the long run, money is, as we economists like to say, neutral.I’ll agree to that, although I shall subsequently quibble with his definition of “neutral.”
This means that no matter what the inflation rate is and no matter what the FOMC does, the real return on safe short-term investments averages about 1-2 percent over the long run.Not necessarily true. (The long-run real return on safe short-term investments depends on a lot of things besides what the FOMC does, and we can’t say a priori that it will remain in that range.) But I’ll accept it for the sake of argument.
Long-run monetary neutrality is an uncontroversial, simple, but nonetheless profound proposition.True, as far as it goes, but in his subsequent statement he’s actually talking about superneutrality – the proposition that the growth rate of the money stock (rather than its absolute size) doesn’t affect real activity – which is not entirely uncontroversial. But let’s grant superneutrality, for the sake of argument.
In particular, it implies that if the FOMC maintains the fed funds rate at its current level of 0-25 basis points for too long, both anticipated and actual inflation have to become negative. Why? It’s simple arithmetic. Let’s say that the real rate of return on safe investments is 1 percent and we need to add an amount of anticipated inflation that will result in a fed funds rate of 0.25 percent. The only way to get that is to add a negative number—in this case, –0.75 percent.Here Kocherlakota seems either disingenuous or irrational. It’s true that, in a long run equilibrium where the funds rate remains near zero, it also must be the case that there is negative inflation (provided that money retains any value at all). But how do we get to that long run equilibrium? And would we ever get to that equilibrium?
Suppose that the Fed were to keep the funds rate near zero but people began to be dissatisfied with that rate and began anticipating the 1% to 2% long-run real rate. What would happen? People would stop lending short-term money to the government at the near zero rate and instead start lending money elsewhere – for longer terms and to riskier borrowers. The more this continued, the easier it would get to borrow money. The easier it got to borrow, the more people would buy with the borrowed money, and the higher the prices of those purchases would go. And prices would continue going higher until...when?
Prices would continue going higher until they were so high that they were expected to fall. At that point, there would be expected deflation, and we would be at the long run equilibrium. There would be deflation, but it would necessarily be preceded by rising prices – that is, inflation.
However, there is no reason to expect that we would ever get to that long run equilibrium. Instead, if the Fed kept interest rates too low, we would move toward another long-run equilibrium – which Kocherlakota ignores – where money becomes worthless. In that case, the Fed could continue targeting near zero interest rates, but the rates would be meaningless, since nobody would be willing to sell anything, so there would be no reason to borrow money. Now I doubt we would actually get anywhere near that long-run equilibrium, because I think the Fed would raise interest rates long before money became worthless. But the dynamics of market responses will tend to drive toward the worthless-money equilibrium rather than the deflation equilibrium. Why would people ever start to think prices will fall after they start rising rapidly?
To sum up, over the long run, a low fed funds rate must lead to consistent—but low—levels of deflation.OK, that is (almost) pure nonsense. It’s true that a low fed funds rate can exist, in long run equilibrium, only if people expect deflation (or if money is worthless). But the causation goes in the opposite direction. People lend at a low interest rate because they expect deflation. People carry umbrellas because they expect rain. An equilibrium with umbrellas must include a significant possibility of rain, but we don’t say that carrying umbrellas must “lead to” rain. If we take away people’s umbrellas, it will not prevent rain, and if we require people to carry umbrellas, it will not cause rain.
The good news is that it is certainly possible to eliminate this eventuality through smart policy choices. Right now, the real safe return on short-term investments is negative because of various headwinds in the real economy. Again, using our simple arithmetic, this negative real return combined with the near-zero fed funds rate means that inflation must be positive. Eventually, the real economy will improve sufficiently that the real return to safe short-term investments will normalize at its more typical positive level. The FOMC has to be ready to increase its target rate soon thereafter.That is pretty much the same nonsense as above, except for one thing: perhaps people believe that the Fed knows more about the likely inflation rate than outside forecasters do. If so, people could interpret the continued low interest rates as a signal that the Fed expects deflation, and the deflation could become a self-fulfilling prophecy. If that’s what Kocherlakota means, then he isn’t insane – but he’s still wrong.
That sounds easy—but it’s not. When real returns are normalized, inflationary expectations could well be negative, and there may still be a considerable amount of structural unemployment. If the FOMC hews too closely to conventional thinking, it might be inclined to keep its target rate low. That kind of reaction would simply re-enforce the deflationary expectations and lead to many years of deflation.
The Fed does have a little more information than the public does. For example, it has a better idea of how its own policies will react in the future. And perhaps it has slightly better forecasts than the public. And maybe it has a little bit of inside information about the economy. People may take Fed policies as a signal of its expectations for future inflation, and may react accordingly, but this effect is likely to be far outweighed by the actions of people who disagree with the Fed – or who find the Fed’s expectations irrelevant to their own projects – and want to take advantage of its low interest rate policy.
What does it mean to say that “the real economy will improve sufficiently that the real return to safe short-term investments will normalize at its more typical positive level”? It means there will be opportunities for real investment that have more attractive expected returns. Even if the Fed’s actions lead people to increase slightly their expectations of falling prices, people will also notice these real investment opportunities and will start investing in those rather than in safe short-term investments. Or they’ll take money and spend it on consumer purchases in anticipation of continued employment. Either way, there will be more purchases made, which will tend to drive up prices, and the deflation prophecy will not fulfill itself.
Ultimately, as people notice the economy improving, they will come to expect rising rather than falling prices, no matter what the Fed does. Ultimately, the effect of having the Fed keep interest rates too low for too long will be inflation, not deflation. Of course, the Fed will notice this and then raise interest rates to slow down the economy and stop the inflation rate from rising further, so it shouldn’t be a big problem.
DISCLOSURE: Through my investment and management role in a Treasury directional pooled investment vehicle and through my role as Chief Economist at Atlantic Asset Management, which generally manages fixed income portfolios for its clients, I have direct or indirect interests in various fixed income instruments, which may be impacted by the issues discussed herein. The views expressed herein are entirely my own opinions and may not represent the views of Atlantic Asset Management. This article should not be construed as investment advice, and is not an offer to participate in any investment strategy or product.
246 comments:
«Oldest ‹Older 201 – 246 of 246I am often to blogging and i really appreciate your content. The article has really peaks my interest. I am going to bookmark your site and keep checking for new information.
Click Here
Visit Web
Gust.com
There is noticeably a bundle to know about this. I assume you made certain nice points in features also.
Visit Web
Domestika.org
Information
Very nice post, i certainly love this website, keep on it
Click Here
Visit Web
Evensi.com
nice post just check out my post Attitude Status For Girls and also check out this post वजनदार स्टेटस
After study a few of the blog posts on your website now, and I truly like your way of blogging. I bookmarked it to my bookmark website list and will be checking back soon. Pls check out my web site as well and let me know what you think.
Visit Web
Photigymarket.com
Information
I love the way you create this blog, by the way i bookmark your website too
kartu66
milk ice cream icecream
https://www.youtube.com/watch?v=hZY7Z0ix-yY
https://www.youtube.com/watch?v=oYTb-MiLgQQ
https://www.youtube.com/channel/UCJU2Y9vQivJPB7c0xZXpjFA/videos
https://www.youtube.com/watch?v=yo2SWPkwk9M
Great Sir, Very Nice Article Visit Status Crush
There is noticeably a bundle to know about this. I assume you made certain nice points in features also.
My.desktopnexus.com
Information
Click Here
How To Start A Startup In India?
This Startup Guide,Investors for startup businessis written for Rightnetwork who are looking to start a company as well as those in the process of building one.
no1 Best information helpfull post thanks
No1 Best information helpfull post thanks
A discussion about
items and prices
No1 Best information helpfull post thanks
mogstation
nice post I will share this post with my friend's thanks.
construction startups in india
Wow such a nice and amazing conent. Buy Casual Kurtis
nice post is this article. Buy Formal Kurtis
Thanks for this guys, love this post guys. transportation business
Nice One I love It. Technology Write For Us
Thats really amazing. You discuss the things that are really mind blowing and impressive. Gambling Write For Us, Write For Us Gambling
This is the really very helpful content for all visitor because its your unique struggle and each every content line is very helpful for us thanks for sharing.
Write For Us Education
This post is beautiful, I really love your quotes selection. I have also write a post on similar topic, reader may like it. I'd be grateful if you could allow that.
Write For Us Automotive
This post is beautiful, I really love your quotes selection. I have also write a post on similar topic, reader may like it. I'd be grateful if you could allow that.
Write For Us Gambling
Very Cool and most healpfully information share with all thank you so much. Write For Us Technology
There are certainly a lot of details like that to take into consideration. That is a great point to bring up. I offer the thoughts above as general inspiration but clearly there are questions like the one you bring up where the most important thing will be working in honest good faith. I don?t know if best practices have emerged around things like that, but I am sure that your job is clearly identified as a fair game. Both boys and girls feel the impact of just a moment’s pleasure, for the rest of their lives.
Click Here
Visit Web
Allaboutcfd-tomersblog.com
thanks for you valuable information. i really love this types of content. great work. if you are looking for anime downlaoding website then visit. Wordpress Developer
I really like your article. It’s evident that you have a lot knowledge on this topic. Your points are well made and relatable. Thanks for writing engaging and interesting material…good work…keep it up.. Custom Wordpress Design
Hey, Its Amazing Blog Post And I Found This Very Useful. Thanks For sharing With Us. And Of course Keep Posting Bro. Hire WordPress Expert India
It is a really nice and awesome post.....by reading this i understand that you are awesome... Thanks. Wordpress Developer
Spot on with this write-up, I truly think this website needs much more consideration. I’ll probably be again to read much more, thanks for that info.
Heromachine.com
Information
Click Here
Visit Web
I was very pleased to find this web-site. I wanted to thanks for your time for this wonderful read!! I definitely enjoying every little bit of it and I have you bookmarked to check out new stuff you blog post.
Justgiving.com
Information
Click Here
Visit Web
Click Here
Visit Web
Videodataanalysis.com
I’m impressed, I must say. Really rarely do I encounter a blog that’s both educative and entertaining, and let me tell you, you have hit the nail on the head. Your idea is outstanding; the issue is something that not enough people are speaking intelligently about. I am very happy that I stumbled across this in my search for something relating to this.
Hi! I could have sworn I’ve visited this web site before but after looking at a few of the articles I realized it’s new to me. Anyhow, I’m definitely delighted I stumbled upon it and I’ll be bookmarking it and checking back frequently!
Quotes Guru
Quotes of the Day
Motivational Quotes of the Day
Youre so cool! I dont suppose Ive read anything like this before. So nice to find somebody with some original thoughts on this subject. realy thank you for starting this up. this website is something that is needed on the web, someone with a little originality. useful job for bringing something new to the internet!
Aytoloja.org
Information
Click Here
Visit Web
You are the great content provider. i found great knowledge and information.
write for us casino
write for us gambling
write for us technology
write for us education
write for us law
write for us finance
write for us automotive
write for us real estate
write for us fashion
write for us travel
movierulz
Such a amazing post very informative and I will definitely suggest other people about it for sure.
thestoriestimes
mlk quotes
will rogers
confucius quotes
maya angelou quotes
nietzsche quotes
alan watts quotes
abraham lincoln quotes
albert einstein quotes
Excellent read, Positive site, where did u come up with the information on this posting? I have read a few of the articles on your website now, and I really like your style. Thanks a million and please keep up the effective work
[pii_email_c1646d6cd617ef1be6ab]
[pii_email_d642d906a42a23a3b1e0]
[pii_email_d642d906a42a23a3b1e0]
Actually, I read it yesterday but I had some thoughts about it and today I wanted to read it again because it is very well written
nowindiatimes
movierulz
uwatchfree
jalshamoviez
Would you be interested in exchanging links?
Wpdemo.nusatekno.co.id
Information
Click Here
Visit Web
Varian Virus Corona Baru, Beberapa varian virus corona telah mengembangkan mutasi yang berarti mereka menyebar lebih mudah, membuat orang lebih sakit, lolos dari respons imun, menghindari tes, atau membuat perawatan tidak efektif.
Ini disebut “varian yang menjadi Perhatian” oleh Organisasi Kesehatan Dunia, dan ada empat yang telah menyebar ke AS, https://hidup-sehat.net/ termasuk varian Delta yang pertama kali ditemukan di India.
Ada berbagai varian lain yang mungkin memiliki fitur yang mengganggu, yang sedang diteliti oleh para ahli. Ini disebut “varian yang sedang disediakan.” Mereka berbeda dari strain virus asli dalam beberapa cara utama.
It’s hard to find knowledgeable people on this topic, but you sound like you know what you’re talking about! Thanks
Dribbble.com
Information
Click Here
Visit Web
Online cricket id
cricket id
cricket id
online cricket id
Online gambling clubs, otherwise called virtual gambling clubs or Web club, are online adaptations of conventional ("blocks and cement") gambling clubs. Online club empower speculators to play and bet on club games through the Web. It is a productive type of internet betting.
A few internet based gambling clubs guarantee higher compensation rates for gaming machine games, and some distribute payout rate reviews on their sites. Expecting that the web-based club is utilizing a fittingly customized irregular number generator, table games like blackjack have a laid out house edge. The payout rate for these games are laid out by the guidelines of the game.www skyexchange
Thanks for sharing such a valuable post. Please keep us updated for future posts.
your trusted destination for mobile, laptop, electronics, and gadgets. We’re thrilled to share our passion for technology and provide valuable insights to enhance your tech experiences.
https://adineera.com
Post a Comment