Economics focus: Level Worship

Price-level targeting could make monetary policy more potent—or just more confusing

Oct 28th 2010

[Greg Ip] EVER since Ben Bernanke, the chairman of the Federal Reserve, signalled in the summer that he stood ready to keep using unconventional monetary policy to shore up America’s fragile economic recovery, expectations have been building that the Fed will launch a second programme of quantitative easing (QE)—the purchase of bonds with newly printed money. That moment is likely to come at the Fed’s meeting on November 2nd-3rd. Whether QE2 can live up to the hype is another matter. QE aims to stimulate demand by lowering nominal long-term interest rates, much as conventional monetary easing works by lowering short-term nominal rates. But with short-term rates already close to zero and long-term rates also very low, the room for further reductions in nominal rates is tight.

There may in any case be another way to achieve the same stimulus. What matters for boosting demand is the real interest rate—the nominal rate minus expected inflation—since inflation reduces the burden of repaying debt. If nominal rates cannot fall any further, why not raise expected inflation? Central bankers have roundly rejected the most obvious way to do that. Raising official inflation-rate targets, they say, would destroy years of hard-won credibility. But they are more receptive to another idea: targeting the level of prices rather than the inflation rate.

The entire article is linked here.

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Government bonds: A bull market in pessimism

[Greg Ip] WHEN Japan slid into deflation in the mid-1990s bond investors were caught unawares. As late as 1995 yields on government bonds, a haven in times of deflation, were still approaching 5%. Investors today are not about to repeat that mistake. Inflation may be positive in America, Britain and Germany, but in all three countries government-bond yields have plunged to lows exceeded in recent times only by levels during the 2008 panic.

Global monetary policy: The central bankers’ burden

 Deflation is not imminent but the rich world’s central banks must be ready to do what they can to fend it off

Jul 15th 2010

[Greg Ip] FOR people who pride themselves on being boring and cautious, the rich world’s central bankers have in the past few years proved to be a flamboyant bunch. Responding aggressively to financial panic, recession and the threat of deflation, they lowered short-term interest rates close to zero and many then plunged into the realm of the unconventional, buying government debt and extending vast new loans to banks. For the most part, they have avoided the rancorous disagreement that now consumes the debate over fiscal policy.

That consensus is fraying.

The inflation rate: Price puzzle

 

Inflation figures fuel a debate over when the Fed should tighten

Mar 18th 2010 | WASHINGTON, DC | From The Economist print edition

[Greg Ip] TRACKING American interest rates is like watching paint dry. At its meeting on March 16th the Federal Reserve left its short-term rate target between zero and 0.25% for the tenth consecutive time, and, given “subdued inflation trends”, said it would probably leave it there for an “extended period”.

But just how subdued is inflation really? Frustratingly, the latest data provide ammunition for both the hawks, who question the need for extended low rates, and the doves, who don’t.

Dialing back the deflation watch

In the tussle over whether deflation or inflation is the bigger threat I’ve been firmly in the deflation camp. In the last few weeks, though, I’ve tiptoed closer to neutral. Core inflation hasn’t dropped as much as I’d expected to date, and the drop that has occurred seems entirely due to owners’ equivalent rent. Goods prices inflation has been surprisingly sturdy.

Yesterday’s report by the Congressional Budget Office also prompted me to reexamine my assumptions.

Central banks under fire: Policy punchbags

Jan 14th 2010 | WASHINGTON, DC 
From The Economist print edition

From Argentina to America, politicians are taking aim

Illustration by S. Kambayashi

 

[Greg Ip] RICHARD FISHER, president of the Federal Reserve’s Dallas regional bank, did not hold back. Invoking the hyperinflation of Weimar Germany and Zimbabwe, he warned on January 12th that for Congress to tamper with the Fed’s independence would lead “directly to economic ruin.”

This is hyperbole, to be sure, but the threat of political meddling with independent central banks is genuine, and not just in America.

A roadmap for more Fed easing

 Dec 4th 2009, 0:35 by The Economist | WASHINGTON

[Greg Ip] THE Federal Reserve by law is supposed to strive for stable prices and full employment. It has had great success on the first part, but with unemployment around 10%, it’s been an abysmal failure on the second. My colleague across the hall has noted the oddity of Ben Bernanke being grilled at today’s confirmation hearing on how to regulate banks but not on how he plans to get unemployment down.

Mr Bernanke might answer that with the federal funds rate around zero he is already doing all he can. He’d be wrong. Joseph Gagnon at the Peterson Institute (and a former senior staffer for Mr Bernanke at the Fed) has a new paper (PDF) that offers very specific advice on what more the Fed can do.

Economics focus: Put out

The original article is linked here.

Economics focus

Put out

Jul 2nd 2009
From The Economist print edition

Uncertainty over the size of the output gap complicates the task of central banks

HAVING raised the alarm on deflation, the Federal Reserve has now begun to sound the all clear. The statement it released after its policy meeting on June 24th notably omitted the warning from its three prior meetings that “inflation could persist for a time below rates that best foster economic growth and price stability”. To be sure, with the economy gradually finding a bottom and the rate of decline in home prices slowing, the chances of a downward spiral of deflation and economic activity have diminished. Yet it seems premature to write off the threat as long as a large output gap persists.

The recession and pay: The quiet Americans

The original article is available here.

Jun 25th 2009 | WASHINGTON, DC
From The Economist print edition

Employees are proving stoical in the face of pay cuts and compulsory unpaid leave

Illustration by David Simonds

 

BACK when times were better and the newspaper industry wasn’t fighting for dear life, reporters at the Cleveland Plain Dealer would regularly grumble at the measly pay increases their union negotiated. Last month, when the union announced it had negotiated a 12% pay cut in exchange for a promise of no lay-offs, there was applause. “It took me aback,” says Harlan Spector, a medical reporter and one of the negotiators.

Like many long-standing economic relationships, “wage stickiness” is being tested by the savagery of the recession.

Deflation in America: The greater of two evils

The original story is linked here.

May 7th 2009
From The Economist print edition

Inflation is bad, but deflation is worse

MERLE HAZARD, an unusually satirical country and western crooner, has captured monetary confusion better than anyone else. “Inflation or deflation,” he warbles, “tell me if you can: will we become Zimbabwe or will we be Japan?”

How do you guard against both the deflationary forces of America’s worst recession since the 1930s and the vigorous response of the Federal Reserve, which has in effect cut interest rates to zero and rapidly expanded its balance-sheet?