
New Economic Challenges and the Fed's Monetary Policy Review - tigerlily
https://www.federalreserve.gov/newsevents/speech/powell20200827a.htm
======
CameronNemo
>Our new statement explicitly acknowledges the challenges posed by the
proximity of interest rates to the effective lower bound. By reducing our
scope to support the economy by cutting interest rates, the lower bound
increases downward risks to employment and inflation. To counter these risks,
we are prepared to use our full range of tools to support the economy.

What other tools do they have besides setting interest rates? They keep
alluding to these tools but do not explicitly say what they are. Should we
expect another round of quantitative easing?

~~~
gottareply2020
Normally the US Fed has the following four tools at their disposal: the
discount rate, reserve requirements, open market operations, and interest on
reserves.

But now due to a very florid interpretation of the CARES Act [0], the US Fed
has decided it is legal to buy both corporate debt and stocks[1].

This helps explain why the market is on such a bull run. The Fed has said they
will be bailing out 401ks. The republicans (who would normally abhor this type
of fiscal overreach) are delighted and the democrats don't know enough to read
the writing on the wall.

[0] [https://www.bloomberg.com/opinion/articles/2020-06-18/fed-
se...](https://www.bloomberg.com/opinion/articles/2020-06-18/fed-seems-to-
skirt-the-law-to-buy-corporate-bonds) [1]
[https://www.forbes.com/sites/kevincoldiron/2020/07/18/the-
fe...](https://www.forbes.com/sites/kevincoldiron/2020/07/18/the-fed-is-going-
to-buy-stocks/#5491fcb6eb49)

~~~
bertjk
>> the democrats don't know enough to read the writing on the wall.

What are you suggesting exactly here? That the Fed is hell-bent on inducing
general inflation, even at the cost of skyrocketing asset values?

~~~
metrix
My understanding is that the inflation is causing skyrocketing asset values,
it just hasn't trickled down into the economy.

~~~
rjknight
We are all commenting on an internet forum run by a company whose entire
purpose is to funnel money captured from the (predicted and actual) sale of
valuable assets into the economy in the form of more new companies.

~~~
esarbe
This. So much.

------
skybrian
That's a lot of words to say that they're going to allow inflation to go above
2%.

I guess the rest boils down to "don't panic, we're not getting crazy here."

~~~
jonnycomputer
well, treating 2% like a ceiling led them to consistently underperform 2%. It
wasn't 2% on average, it was below that.

~~~
wahern
Maybe they should go back to prior practice where the Fed never set a formal
target. From 2012:

> The Federal Reserve took the historic step on Wednesday of setting an
> inflation target, a victory for Chairman Ben Bernanke that brings the Fed in
> line with many of the world’s other major central banks.

Source: [https://www.reuters.com/article/us-usa-fed-inflation-
target-...](https://www.reuters.com/article/us-usa-fed-inflation-target-
idUSTRE80O25C20120125)

Has Bernanke issued a mea culpa, yet?

~~~
scoopertrooper
For what though?

~~~
wahern
I can't find any good references to the debate concerning explicit vs implicit
inflation targeting, as opposed to inflation targeting more generally. But
here's what Greenspan had to say 2005:

> To date, we have chosen not to formulate explicit inflation targets, in
> part, out of concern that they could inhibit the effective pursuit of our
> goal.

[https://www.federalreserve.gov/boarddocs/speeches/2005/20050...](https://www.federalreserve.gov/boarddocs/speeches/2005/200508272/default.htm)

And in 2001:

> A specific numerical inflation target would represent an unhelpful and false
> precision

[https://www.nytimes.com/2001/10/12/business/greenspan-
reject...](https://www.nytimes.com/2001/10/12/business/greenspan-rejects-idea-
of-inflation-targets.html)

One of the arguments against inflation targeting, whether implicit or
explicit, is that it invites asset bubbles--financial markets know that so
long as the CPI[1] doesn't budge, they can go wild. But that's a somewhat
different debate.

I think the basic argument against _explicit_ targeting is that it hinders the
Feds flexibility. With implicit targeting there's a degree of uncertainty and
so markets arguably respond better to abrupt or unexpected changes; whereas
with explicit targeting the Fed has to be more careful and gentle because
markets will more heavily leverage against that fixed number.

[1] Or whatever measure they use; I don't know if it's CPI specifically.

~~~
scoopertrooper
As a general point I wouldn't quote Greenspan on just about anything after the
GFC

> One of the arguments against inflation targeting, whether implicit or
> explicit, is that it invites asset bubbles--financial markets know that so
> long as the CPI[1] doesn't budge, they can go wild. But that's a somewhat
> different debate.

Basel III introduced a 'discretionary counter-cyclical buffer' on capital
requirements to enable central banks to better manage asset bubbles, while
still focusing on price stability with the cash rate.

> I think the basic argument against explicit targeting is that it hinders the
> Feds flexibility. With implicit targeting there's a degree of uncertainty
> and so markets arguably respond better to abrupt or unexpected changes;
> whereas with explicit targeting the Fed has to be more careful and gentle
> because markets will more heavily leverage against that fixed number.

Central banks strive to keep inflation at the target band on average, over the
long term. It doesn't stop them from taking quick and decisive action in a
crisis. A cursory study of the bank's actions (under Bernanke) at the outset
of the GFC will affirm this.

[https://en.wikipedia.org/wiki/Basel_III#Capital_requirements](https://en.wikipedia.org/wiki/Basel_III#Capital_requirements)

------
joshuanapoli
> the gains began to be shared more widely across society. The Black and
> Hispanic unemployment rates reached record lows, and the differentials
> between these rates and the white unemployment rate narrowed to their lowest
> levels on record.

I didn't know this, and it runs against the "growing wealth inequality"
narrative. Or maybe it's possible that wealth inequality is increasingly
driven by factors other than race.

~~~
WillPostForFood
>it runs against the "growing wealth inequality" narrative

There are two things happening at the same time. The bottom is doing a little
better than they were (lower poverty rate, lower unemployment, education
gains, and even income improvement). At the same time, the top is doing
amazing. So you get two different narratives that are both true.

There is growing inequality.

The bottom is doing better.

You shouldn't ignore either one. If you fixate too much on inequality, you can
push the bottom back down (everyone has nothing is very equal). If you ignore
the inequality, society starts to crack.

~~~
BurningFrog
Shorter:

The rich are getting richer and the poor are getting richer.

~~~
beisner
Er, maybe "the rich are getting richer and the poor are getting slightly less
poor" is more accurate.

~~~
BurningFrog
[https://tomdehnel.com/what-is-russell-
conjugation/](https://tomdehnel.com/what-is-russell-conjugation/)

~~~
TT3351
Do you think that communicating the significant, material difference between
the relative increases among the two groups is not important?

~~~
BurningFrog
It's perfectly good topic to talk about!

Arguing about what emotionally charged wording to use to describe it is not a
discussion about facts though.

------
OnACoffeeBreak
> We began this public review in early 2019 to assess the monetary policy
> strategy, tools, and communications that would best foster achievement of
> our congressionally assigned goals of maximum employment and price stability
> over the years ahead in service to the American people.

As an American who knows nothing about monitor policy or the process by which
it is developed, just how much public comment from an average American was
considered or even put forward? Could someone comment on that aspect?

~~~
shdc
That sentence scored 27 on the 'Gunning Fog Scale Level'. Anything above 20 is
considered "very difficult" to understand.

Based on this, i think one of the main issues is the 'average american'
wouldn't be able to successfully interact with a body that expresses itself in
such an obfuscated manner.

I'll go as far as saying the obfuscation is utterly deliberate.

~~~
TheAdamAndChe
We're talking about the Federal Reserve, not McDonald's. Given the far-
reaching repercussions of their policies, it makes absolute sense that they
would be extremely explicit in their grammar. While they use big words and
it's a long sentence, nothing there is obfuscated.

~~~
shdc
The premise of your argument is that explicitness comes at the expense of
additional complexity. I believe this premise may be flawed.

Let's rewrite it from:

> We began this public review in early 2019 to assess the monetary policy
> strategy, tools, and communications that would best foster achievement of
> our congressionally assigned goals of maximum employment and price stability
> over the years ahead in service to the American people.

To:

"""

We began this public review in early 2019. The goal was to assess items
relating to monetary policy ("Monetary Policy" has to do with the creation and
management of money at a national level).

Those monetary policy items under review were the:

\- strategy.

\- tools.

\- communications.

The goals of the policy review, which were assigned by congress, were:

\- maximum employment.

\- price stability going forward, for years to come, in service to the
American people.

"""

I believe nothing has been lost from the original text, and that this is far
easier to read and understand.

~~~
AnimalMuppet
Who do you think the target audience is? You seem to think that the target
audience should be people on HN, or people who read less well even than us.
That's not the actual audience. It's bankers.

------
WalterBright
The recent huge rise in the stock market suggests it is a sign of inflation to
come. I've been noticing a lot of big price increases at the supermarket.

All those trillions of dollars are going to show up somewhere.

~~~
skybrian
Through July, food prices are up a bit, but energy is way down, over the last
12 months:

[https://www.bls.gov/news.release/cpi.nr0.htm](https://www.bls.gov/news.release/cpi.nr0.htm)

Inflation happens when people decide to spend and the supply isn't there to
support it, but there's nothing inevitable about discretionary spending. In
some countries in some crises, people react by spending more (panic buying)
but in the US, typical behavior in uncertain times seems to be to spend less.
(After stocking up on groceries and toilet paper.)

Although, I have read articles that certain real estate markets seem to be
hot?

~~~
littlestymaar
> Inflation happens when people decide to spend and the supply isn't there to
> support it

This is what happens in case of “market equilibrium in perfect competiton”,
not IRL because supply is almost unlimited in practice for the US for
manufactured goods (because most things are imported, and paid in USD).

In practice, inflation happens when _retailers decide to raise their prices_!
It can either be because they must do it (because international currency price
variation for instance, or oil market price) or because they see an
opportunity to make profits by doing so.

~~~
skybrian
It should be obvious to anyone paying attention during the early days of the
pandemic that supply is not unlimited in the short run. Many supply chains are
optimized for efficiency assuming that demand will follow projections. If
consumers change behavior all at once, it causes immediate shortages.

Imports aren't magic. You will at least have to wait for cargo ships to cross
the ocean (unless air freight makes sense). For mask manufacturing there were
lots of other bottlenecks.

Of course in the longer run (months or years), things are different, but it
still takes time to ramp up, and how long it will take isn't something you can
answer in the abstract, using armchair reasoning.

~~~
littlestymaar
All you say is true, but you are talking about an extreme event in the order
of magnitude of a war. But inflation has happened all the time in history and
isn't caused by such events.

If you look at two hundred years of US history, you won't explain inflation
back shortage of supply.

~~~
skybrian
Inflation is an average across many prices. Individual prices do often go up
and down all the time due to changes in supply, in lots of different markets.
An everyday example is that fruit is cheaper in season. Also, oil prices are
certainly affected by changes in the supply of oil, for example when OPEC gets
it together to agree to cut supply, or when the cartel fails and they start
selling more oil again.

History is complicated with lots of different effects, but saying that supply
has nothing to do with price changes means you aren't paying attention.

~~~
littlestymaar
> in everyday example is that fruit is cheaper in season

You know that inflation is seasonally adjusted right?

> Also, oil prices are certainly affected by changes in the supply of oil […]
> but saying that supply has nothing to do with price changes

Ok fair, my sentence was a bit unclear, but I was reacting to this:

> Inflation happens when people decide to spend and the supply isn't there to
> support it

So what I meant when I said ”you won't explain inflation with [there was a
typo here btw] shortage of supply” was more precisely: “inflation is almost
never caused by fixed supply + increasing demand” (which was the initial point
I was responding to)

~~~
skybrian
Okay. When I said that inflation happens when people want to spend and supply
isn't there to support it, that could also be due to a collapse in supply, and
high inflation does seem to be associated with that, for example in Venezuela
and in countries suffering under trade sanctions.

But I'm not sure I want to defend any particular theory of what usually causes
inflation. My main point was that inflation (rising average prices) doesn't
seem to be inevitable with increased money supply, as simple theories will
have it.

I don't know if you want to continue talking, but I'm curious about something:
you seem to be pretty certain you know what has usually caused inflation in US
history, but you haven't said what what you think about that?

------
eyeball
[https://m.youtube.com/watch?v=WEMCYBPUR00](https://m.youtube.com/watch?v=WEMCYBPUR00)

------
drcode
It used to be that the Fed's message was "Keeping low interest rates and doing
QE is okay because prices are stable."

Now their message is "Keeping low interest rates and doing QE is okay because
prices are only a little unstable."

------
shdc
The root problem with conventional currency is all the trust that's required
to make it work. The central bank must be trusted not to debase the currency,
but the history of fiat currencies is full of breaches of that trust.

~~~
trisiak
Is there an unconventional currency (to contrast your statement) that comes
with either inherent value or trustless system? I'm genuinely curious what you
meant.

~~~
chrischattin
If you consider Bitcoin unconventional (I would), it qualifies as a trustless
currency.

~~~
cle
What is meant by "trustless" here?

~~~
solotronics
You don't have to trust any counterparty, everything is able to verified
checking a hash output or key pair.

------
CyberDildonics
I think the fed's own graph is the picture worth a thousand words. Don't
forget that this is the M1 money supply, which will be expanded by about 8.5x
by fractional reserve banking.

[https://fred.stlouisfed.org/series/M1REAL](https://fred.stlouisfed.org/series/M1REAL)

~~~
Brett_S
I understand M1 includes the most liquid portions of the money supply in
circulation. When the Fed "prints" money I don't think they are talking about
physical money.

Can someone explain what this graph tells us?

~~~
aniro
"The money supply measures reflect the different degrees of liquidity—or
spendability—that different types of money have. The narrowest measure, M1, is
restricted to the most liquid forms of money; it consists of currency in the
hands of the public; travelers checks; demand deposits, and other deposits
against which checks can be written. M2 includes M1, plus savings accounts,
time deposits of under $100,000, and balances in retail money market mutual
funds."

From the Fed itself:

[https://www.newyorkfed.org/aboutthefed/fedpoint/fed49.html](https://www.newyorkfed.org/aboutthefed/fedpoint/fed49.html)

------
bitxbit
I know this is counterintuitive but in order to spur growth, and encourage the
right type of risk taking which is how you end up with innovations, I believe
you need to have interest rates above a certain threshold. Indefinite ZIRP
discourages risk taking and encourages financial growth arrangements.

~~~
ivalm
Can you elaborate on this? ZIRP encourages people to seek riskier investments,
which presumably means to spur growth. Low risk financial arrangements are
exactly what suffers.

~~~
nicbou
Based on my limited observation as a layman, it seems to encourage reckless
investments in ideas that seemingly don't work. How many more 100 million quid
bike rental schemes does the world need?

~~~
ivalm
But that’s not people going to “financial arrangements.” ZIRP does encourage
over reckless investment in ventures with low chance of working out, I am just
saying it’s different.

------
alextheparrot
> The unemployment rate hovered near 50-year lows for roughly 2 years, well
> below most estimates of its sustainable level. And the unemployment rate
> captures only part of the story. Having declined significantly in the five
> years following the crisis, the labor force participation rate flattened out
> and began rising even though the aging of the population suggested that it
> should keep falling.

The entire press release is worth a read, but I want to specifically call out
the above quote. I think looking into these two statistics can form the basis
for useful discussion.

Unemployment rate being "below estimated sustainable levels" has multiple
interpretations, some charitable, some less so. One is that the current
economy is better at allocating people to their jobs. This isn't a theory,
just a hypothesis. Gig economy work, increases in highly skilled workers (Who
traditionally have had lower unemployment than less-educated cohorts [0])
might be drivers that could reduce the friction of getting a job for
contemporary workers.

To add another possible hypothesis, it could be that people are just hedging.
If a large enough cohort of people feel unsafe or want to adjust their job
risk profile, they might choose to commit to employment prior to a downturn.
If people are hedging, we might even see a decrease in real wage as people
value the (weak, but albeit better than nothing) insurance they get instead of
being valued entirely by their market rate wage.

The labor force participation component, frankly, I'm confused on. The Bureau
of Labor statics release clearly shows labor participation has been and is
still falling (Covid blip aside, 5 year time window irrespective) [1]. Their
footnote calls out the 25-54 year old bracket, which is apparently
participating more. I can see why they say that the labor force participation
rising is unexpected, I certainly don't see it.

To advance a different thesis, it is entirely possible that as people retire,
a less than whole percent of their roles are being filled by people in this
younger cohort, who can now more easily participate due to less labor being
available for existing companies. This would align more with the BLS and
Federal Reserve numbers, as we have, by percentage, more aged individuals (Who
are the primary non-participants) in addition to growth in a cohort who we
would expect to fill those rolls moving forward.

[0] [https://www.bls.gov/charts/employment-
situation/unemployment...](https://www.bls.gov/charts/employment-
situation/unemployment-rates-for-persons-25-years-and-older-by-educational-
attainment.htm)

[1] [https://www.bls.gov/charts/employment-situation/civilian-
lab...](https://www.bls.gov/charts/employment-situation/civilian-labor-force-
participation-rate.htm)

------
viburnum
This article explains the Volcker era and subsequent events in plain language

[https://nplusonemag.com/issue-34/reviews/other-peoples-
blood...](https://nplusonemag.com/issue-34/reviews/other-peoples-blood-2/)

------
viig99
Winter is here, ah damn.

------
justanotheranon
after hyperinflation finally hits, as the Ron Paulite fringe has been
predicting for over 20 years, i hope they put Trump's big beautiful tremendous
mug on the $1 trillion dollar bill.

i look forward to 2035 and warming myself up by burning trash bags full of
trumpbux in an oil drum underneath an empty freeway overpass.

------
codecamper
free money for the billionaires and inflation for the rest. lovely.

