Good morning, dear readers. Here are a few stories on U.S. economic policy to tempt your palate this morning.
Some things don't need modeling
Using a macroeconomic model, two Federal Reserve bank economists found that large-scale asset purchases had at best "moderate effects on growth and inflation." Without forward guidance on the path for the fed funds rate, the effect would have been infinitesimal, they write in the San Francisco Fed's Aug. 12 Economic Letter. Oh, and communication about the beginning of rate increases will have a bigger effect than guidance on the end of asset purchases. No modeling needed; simple math will do.
Market gives tapering the all-clear signal
In a post on the FT's Alphaville blog, PIMCO's Mohamed El-Erian says the FRBSF Economic Letter (cited above) had an immediate impact on the bond market. The bearish steepening, with long rates rising more than short rates, is a sign QE's cost/benefit balance has shifted and a justification for a "pivot from QE to forward guidance." He may need to explain that to fence-sitting Fed officials. He can explain it to me while he's at it.
Tolerance for inflation is what economist Ken Rogoff wants in the next Fed chairman. Both Janet Yellen and Larry Summers fit the bill. Rogoff would like a target closer to 4 percent instead of the Fed's 2 percent. That's 4 percent -- wink, wink, nod, nod. We all know central bankers don't really want 4 percent inflation. Economists think if the Fed told us it did, we'd all change our behavior and spend more today because it will cost more tomorrow. It took decades for central banks to earn credibility. And now they want to throw it away? Why would we ever believe anything they told us in the future?
A dove in name only
When it comes to bank regulation, Janet Yellen is no dove. As president of the San Francisco Fed from 2004 to 2010, she was witness to some of the most egregious lending abuses in her district, which includes Arizona and Nevada in addition to California, Ground Zero for the housing crisis. She was an early voice for tighter bank regulation, but under Alan Greenspan, the Fed had only one voice. Given that Yellen and Summers share similar economic views, it may be their stances on regulation that separate the men from the boys -- or gals, in this case.
This time is different
At least it could be, according to Politico. Wall Street is so inured to threats of a government shutdown, investors pretty much ignore the game of chicken. Coming up in rapid succession this fall: funding government operations for the fiscal year that begins Oct. 1; raising the debt ceiling; tapering asset purchases by the Fed; and confirming a new Fed chairman, which could get "heated" if President Obama goes with Larry Summers. Threats are one thing, but I doubt the Republican Party wants to commit hara-kiri in plain sight when some red-state Senate seats are up for grabs in 2014.
Celebrities weigh in, and why not?
Everyone, it seems, has an opinion on whether Larry Summers should be the next Fed chairman. It's not a question of his training or qualifications for the job. It's his policies. He's "Mr. Deregulation" to Bette Midler, who took to Twitter with her views. She's waiting for Larry to say, oops, I goofed. The same holds for Alan Greenspan, she writes, who has yet to say, I'm sorry, for all his policy mistakes.
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