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Bloomberg Radio appearance
A quick note here to let you know I am supposed to be on Bloomberg Radio today at 2:00-2:30ET, on “The Hays Advantage” with Kathleen Hays. You can listen live on-line, I think, if you care to!
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Congrats! Any chance of a recording for later perusal?
I missed it mike, can you post it?
The producer at The Hays Advantage has said he will give me a link tomorrow so that I can post it in some way. I’ll post it when I get it! Probably tomorrow night. Thanks for your interest!
Ah, here’s the link:
http://media.bloomberg.com/bb/avfile/Economics/On_Economy/vUwhkI.Ln82E.mp3
Send any feedback my way!
Nice interview. Now we know why you’re obsessed with inflation š
I’d just like to comment on core inflation. Sure, it has better short-term explanatory power than broader measures, due to the volatility of the non-core prices. But non-core prices need to be taken in context. Taking the core/non-core distinction literally can encourage policy makers to pay too little attention to non-core prices.
I think some of the UK’s disastrously overloose policy in the early 2000’s stemmed from exactly this error. A growing import share from China (at lower price levels) was making a huge negative contribution to UK import prices. Together with the strength of sterling this moderated inflation. At the same time, Chinese growth was feeding into higher commodity prices, but much of this was hitting non-core CPI &/ treated as ‘temporary shocks’ that should be allowed to pass through into CPI levels (a separate error related to the volatility of oil prices).
Of course there were other significant errors (eg ignoring asset price inflation and the expansion of EU membership’s effects on immigration, dampening wage inflation in a very tight labour market and further feeding into housing prices). But this over-reliance on the core/ non-core distinction didn’t help…
One thing that puzzles me: if the point of QE is avoiding inflation, why pay such high interest on excess reserves? (I think I read somewhere it’s 1%) Wouldn’t less QE with banks more likely to lend out the proceeds be better, with more impact on the money supply and real economy, and less uncertainty about how it would play out?
I think you meant the point of QE being avoiding DEflation, right? Yes, I’ve been saying this for quite a while – the multiplier is ‘broken,’ but we know who broke it and how to fix it! Having IOER and QE both is nonsensical. Perhaps it made sense the first time because we didn’t know how big of an impact IOER might have, but it make zero sense now that we know that IOER pretty much keeps everything in reserves as long as competing interest rates are low.
One risk is that if corporate growth expectations recover, and so lending rates rise while credit improves, the same level of IOER may not have much restraining power at all. It might be linear or nonlinear. We really have no idea. But when your options are to earn 0.25% with no risk, or 4% for 10 years with corporate risk (and much more capital being consumed), banks have made the obvious decision. Money stays in the bank vaults.
What would make vastly more sense than QE3 is eliminating IOER first. Or, try and push long rates HIGHER so that the money currently in reserves might be tempted out into loans at attractive yields. That would be weird, but makes more sense than the current policy IF the purpose of the policy is in fact what the STATED purpose of the policy is (not a sure thing).
Yes – I meant deflation. Oops.
I guess they’re planning to tweak IOER when the reserves start finding their way into the money supply? Maybe they think the changes in reserves & money supply will let them figure out an appropriate rate without blowing things up…
(& given the size of the amounts involved, non-zero IOER is a politically convenient way to recap the banking system.)
If long rates go higher, won’t it hit the housing market? (Hence operation twist & recent trailing of MBS purchases?)
I think they think they can raise IOER and pull back money into reserves when needed. I think they have great confidence in that, considering that they’ve never tried it before. We really don’t know how the money supply responds in those circumstances. To say nothing of the fact that whatever they do today will have an effect a year from now!
Long rates going higher might hit the housing market, but considering the low level of activity and the fact that no one can actually get a loan at these low rates (because banks won’t lend except with 20% down, sterling credit, and a loan amount that is a very small proportion of your after-tax income, loan volumes are very small right now) I doubt it would have a big impact. Remember, if you fix the price of something you will likely either have a surplus or shortage if that price is different from the market clearing price. Right now there appears to be a shortage of credit available to borrowers at the price the Fed has manipulated. Letting rates go higher might allow the market to clear at larger credit volumes. And I think you just gave me a great idea for my next commentary. Thanks!
“To say nothing of the fact that whatever they do today will have an effect a year from now!”
Or whether a year is how long it’ll take to feed through. The ‘monetary transmission channel’ is one thing central bankers will admit to not understanding ‘very well’. (Central banker speak for ‘we have no idea about it’.)
Also they seem to be concentrating on output gaps bringing current ‘moderately elevated’ inflation levels down. They don’t seem to have registered that recent strong Chinese CPI inflation will feed into developed world prices in a year or so. That could give inflation time to bed in, raising inflationary expectations at about the same time the QE is feeding through.
“Letting rates go higher might allow the market to clear at larger credit volumes.”
Good point – so you think it’s supply constrained? But how important is the rate to this constraint? (ie maybe the supply curve is pretty inelastic due to eg lack of capital?)
I got the impression that Twist was mostly an attempt to encourage refis & free up some disposable income? Are the constraints on lending that strong for borrowers who are current with existing mortgages?
absolutely. The 20% down requirement is really almost a true requirement now. So if you had 50% equity in your house, you might still be able to refi after home prices have fallen 30%, but it will be close. And that means very few borrowers are actually able to refi.
To say nothing of the fact that the bigger motivation to refi over the last few years has been to take cash out rather than to lower interest. Even when rates were rising during the housing boom, you saw refis of people going to HIGHER rates because that way they could cash out by borrowing a larger amount.
I have no idea what Operation Twist 2 was supposed to do. Operation Twist 1 didn’t do much of anything, and we’re not talking about any net money into the system, so mostly it seems to be extending the duration of the Fed’s balance sheet for the purpose of…looking like they’re doing something? No idea. They have claimed it would help encourage refis, but I don’t know they really believe that.
Ah, ok – thanks! So the people who could likely most benefit from refis (most underwater due to having bought near the peak) are the very ones who can’t get them… :s