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Articles by Stephen Williamson

Sorry You’re Let Down By the Fed’s Monetary Policy Review

August 30, 2020

On Thursday, the FOMC released a revised Statement of Longer Run Goals and Monetary Policy Strategy, and Jay Powell made a speech at the virtual Jackson Hole conference, explaining the changes in the FOMC’s approach. The new statement is rather murky, though that’s of course nothing new in the world of fedspeak. Why did the FOMC think these changes were needed, and what will they imply for monetary policy going forward?We’ll start with the statement itself. This document originated in 2012, and at the time was a venue for Ben Bernanke to set down an inflation-targeting goal consistent with the Fed’s Congressional dual mandate. Subsequently, the FOMC revisited the Statement annually (more or less), and published revised versions every January. Those previous changes were fairly minor

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The Bank of Canada Dives Into Unconventional Policy

July 27, 2020

The Bank of Canada has been doing things that, for it, are unprecedented. And, since our new Bank fo Canada Governor, Tiff Macklem, has made his first policy decision on July 15, now would be a good time to figure out what the Bank of Canada is up to. Since late March, the Bank’s target for the overnight policy rate has been at 0.25%, which Macklem referred to in his press conference last week as the "effective lower bound." That’s not an effective lower bound in the usual sense, as it’s clear that the Bank could go negative if it chose to. By saying "effective lower bound," I think the idea is to impress on you that the Bank won’t go lower. The Bank has also engaged in a large balance sheet expansion, again since late March. Recall that this is a first for the Bank of Canada, which went

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What Sort of Financial Panic Is This?

March 16, 2020

Well, as you know, things are changing by the day in financial markets, and central banks are moving quickly to keep up. Most central banks have taken aggressive action recently. After a between-meetings policy rate cut of 50 basis points on March 3, the Fed yesterday reduced its target range for the fed funds rate to 0-0.25%. More to the point, the interest rate on the Fed’s overnight reverse repo facility is set at 0%, the interest rate on reserves is 0.10%, and the interest rate on primary credit at the discount window has been reduced to 0.25%. The interest rate target moves, in timing and magnitude, are very aggressive. This was done on a Sunday, before financial markets opened on Monday, and amounted to a 100 basis-point drop in the target range. The discount window rate (the rate

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Coronavirus and Monetary Policy

March 5, 2020

On Tuesday, the FOMC voted to reduce the Fed’s range for the fed funds rate by 50 basis points, to 1.00-1.25%, and on Wednesday, the Bank of Canada followed suit with a 50 basis point cut in its overnight interest rate target, from 1.75% to 1.25%. As you know, 50 basis point cuts by central banks are aggressive, particularly in the Fed’s case where the cut occurred outside a regularly scheduled FOMC meeting. Other central banks might be doing the same – if their policy rates were not already at or close to zero, if not negative.What’s going on? Well, Jay Powell and Steve Poloz have told us why they’re doing what they’re doing. What do they have to say? First, in the FOMC statement that Powell and his colleagues issued, it says that the "fundamentals of the US economy remain strong," but

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Is Inflation Targeting the Best We Can Do?

February 18, 2020

In the U.S., the Fed is considering modifications to its longer-run goals and monetary policy strategy, and last year Fed officials went on a listening tour to hear public views on its approach to monetary policy. This is new territory for the Fed, but the Bank of Canada does this sort of public outreach on a regular basis, in between renewals of its policy agreement with the government of Canada. The Bank conducts in-house research, runs conferences, and interacts with the public in various ways, to get a fix on whether the Bank’s approach needs to be changed. Since 1991, the BoC has had a 2% inflation target, specified in its agreement with the federal government, and changes to that agreement since 1991 have been minor. In "The Role of Central Banks," I discuss the BoC’s

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The FOMC: Where It’s Come From, and Where It’s Going

January 10, 2020

After three reductions of 25 basis points each in its fed funds rate target range since the middle of last year, the Fed seems to be on pause. What is the FOMC concerned about, and why, and what’s in store for the rest of the year?What does the data look like? First, the labor market has become increasingly tight:The unemployment rate is lower than it’s been for a very long time, and the job openings rate is higher than at any time since the BLS started collecting the vacancy data. Most people, me included, have been surprised by how low the unemployment rate has fallen, but possibly that’s because our experience with expansions of this length is limited to non-existent. Real GDP growth has been consistently strong, if we adjust for the moderate average growth we have been seeing since

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An Attempt to Sort out the Fed’s Overnight Market Issues

October 28, 2019

First, we’ll get up to speed on the state of monetary policy implementation in the United States of America, in case you haven’t been paying attention. After the financial crisis, the Fed substantially increased the size of its balance sheet, primarily through the purchase of long-maturity Treasury securities and mortgage-backed securities. On the liabilities side of the balance sheet, the Fed has seen a steady increase over the last 10 years in the quantity of Federal Reserve notes (currency) outstanding, but the primary source of funding for the increase in securities-held-outright by the Fed is an increase in the reserve balances held by financial institutions. This increase in reserves outstanding necessitated a floor-system approach to targeting overnight interest rates. That is,

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The Fed’s Failed Experiment

September 26, 2019

Last week, on Tuesday September 17 in particular, overnight credit markets were misbehaving. Since then, various folks have been struggling to understand what is going on, with little assistance, apparently, from the Fed, whose job it is to prevent such misbehavior, and to tell us exactly what is going on. Here’s what happened. On Tuesday of last week, the market in overnight repos became very tight:The chart shows the repo rate (secured overnight financing rate), the effective fed funds rate, the interest rate on reserves, and the four-week T-bill rate. On September 17, these interest rates were, respectively, 5.25%, 2.30%, 2.10%, and 2.06%. It’s important to note that the repo "market" and the fed funds "market" are not markets in the Econ 101 sense. Some repo and fed funds trades are

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Is the Fed Doing Anything Right?

August 6, 2019

I’m not sure the Fed has many friends these days. Donald Trump is unhappy with it, and the financial media seems puzzled by what the Fed is doing. Can we make sense of the Fed’s behavior, particularly its change in policy last week, or is the Fed simply incoherent?It might help to start with first principles. What would good central bank policy look like, were we ever to have the good fortune to observe such a thing? A central bank should have clearly-stated goals. Those goals could be stated in the legal structure that constrains the central bank, or they could be in the central bank’s interpretation of the law. For example, in the US the Fed’s structure is defined in the Federal Reserve Act, and the Fed’s dual mandate is in the Employment Act of 1946 and the Full Employment and Balanced

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Libra: Financial Inclusion for the World’s Poor, or Scam?

June 21, 2019

In case you haven’t heard, Facebook has recently set up a financial subsidiary, Calibra, and has issued a so-called "white paper" which is a proposal to issue a cryptocurrency, Libra. As stated in the white paper, "Libra’s mission is to enable a simple global currency and financial infrastructure that empowers billions of people." Sounds rather lofty, don’t you think? Financial innovation that’s going to make a significant fraction of human beings, particularly the world’s poor, significantly better off. Makes me want to give Mark Zuckerberg a big hug.But hold on. What is Facebook actually proposing? The "white paper," which is obviously, in part, a public relations document, is long on vague descriptions of inclusion, working together, integrity, blah, blah, blah – and short on some

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Can the Fed Control Overnight Rates?

May 2, 2019

The mechanism under which central banks peg overnight nominal interest rates typically relies on having a sufficiently large buffer of some asset or liability, then supplying that asset or liability inelastically at the desired overnight rate. Financial market arbitrage then looks after the rest – the pegged nominal interest rate effectively sets all short-term interest rates. Before the financial crisis, the buffer for the Fed was a stock of overnight repos, supplied at a rate that would peg overnight repo rates. But, that was a tricky game, as the Fed’s ultimate interest rate target was the unsecured fed funds rate. The New York Fed had to make daily adjustments in its repo market trading strategy to account for the factors that might cause differences between market repo rates and the

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Balance Sheet News

February 21, 2019

The FOMC minutes for the January 29-30 meeting, released yesterday, contain some important information about the Fed’s balance sheet, and plans for the FOMC’s future operating strategy. Let’s unpack this, to try to understand what they’re up to.The key information is in the section in the minutes on "Long Run Monetary Policy Implementation Frameworks." This section deals with presentations from staff economists (in part from the previous FOMC meeting), and discussion of that material. The minutes say: The staff briefing also included a discussion of factors relevant in judging the level of reserves that would support the efficient implementation of monetary policy.The key word is "efficient." It’s not clear why we would just look at the level of an item on the liabilities side of the

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The Fed and the New Year

January 1, 2019

Much of the first two years of the Trump administration was unexpectedly good for the Fed. Appointees to the Board of Governors – Quarles, Bowman, Clarida – are actually qualified to do their jobs, in contrast to most of the folks now inhabiting the executive branch. Trump may have been willing to ditch Janet Yellen (for no obvious reason other than that she was appointed by Obama), but he replaced her with a Fed insider, Jay Powell, who has more or less maintained the status quo. On some dimensions, Powell is an improvement on Yellen, particularly in the communications department. The FOMC’s post-meeting statements are less wordy and belabored, the press conferences are more fluid, and the pressers will now take place after all 8 FOMC meetings in the coming year, which officially makes

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Fed’s Portfolio Manager Says Not to Worry

August 7, 2018

I ran across an interesting talk by Simon Potter, who is responsible for the System Open Market Account at the New York Fed. Potter is a powerful person in the Fed system, as he looks after the specifics of monetary policy implementation. His talk addresses issues that I discussed in this previous blog post.The first order of business in the talk is the phasing out of the Fed’s reinvestment policy. Recall that, after the buildup in the Fed’s balance sheet that occurred from 2009-2014, the size of the Fed’s asset portfolio, in nominal terms, was held constant by purchasing new assets as the existing assets matured. In fall 2017, the FOMC began a phaseout of the reinvestment program which will be completed this fall. After that, the size of the balance sheet will continue to fall until the

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Should You Be As Excited About GDP Growth As Donald Trump Claims to Be?

July 29, 2018

In Friday’s report on real GDP growth in the second quarter, the BEA reported a quarterly growth rate of 4.1%, which exceeds both the post-WWII US average growth rate of about 3%, and the average growth rate since the end of the last recession of about 2.2%. Trump seems to be claiming that recent GDP performance has been better than it was, and is hoping for future growth of 3% or more in real GDP. This seems more modest than his early 2017 claim that growth would proceed at 4% or more. What should we make of this?It’s always useful in these circumstances to remind yourself what is being reported. GDP is a flow – output per unit time – but the BEA reports a number which is seasonally adjusted at annual rates. That is, it’s reported as if the seasonally adjusted flow had continued for a

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Don’t Fear the Inversion – It’s the Short Rate That Kills You

July 8, 2018

Nick Tamaraos has a nice summary of issues to do with the flattening US Treasury yield curve, and the implications for monetary policy. Some people, including Tim Duy, and some regional Fed Presidents, are alarmed by the flattening yield curve, and the issue entered the policy discussion at the last FOMC meeting.What’s going on? While it’s typical to focus on the margin between 10-year Treasuries and 2-years, I think it’s useful to capture the very short end of the yield curve as well. I would use the fed fund rate for the short end, but that’s sometimes contaminated by risk, so the 3-month t-bill rate, which most of the time seems to be driven primarily by monetary policy, seems like a good choice. Here’s the time series of the 3-month T-bill, the 2-year Treasury yield, and the

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Fed Balance Sheet Policy, and Treasury Debt Management

July 6, 2018

I happened to be entertaining myself, reading the FOMC minutes from the June 12-13 meeting, when I ran across this, in a discussion led by the people from the New York Fed who manage the System Open Market Account (SOMA): The deputy manager followed with a discussion of money markets and open market operations. Rates on Treasury repurchase agreements (repo) had remained elevated in recent weeks, apparently responding, in part, to increased Treasury issuance over recent months. In light of the firmness in repo rates, the volume of operations conducted through the Federal Reserve’s overnight reverse repurchase agreement facility remained low. Elevated repo rates may also have contributed to some upward pressure on the effective federal funds rate in recent weeks as lenders in that market

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Fed Balance Sheet News

July 4, 2018

There have been some interesting developments in US financial markets over the last few months, that I think have an important bearing on how we should be thinking about large central bank balance sheets, quantitative easing, and the choice between floor systems and corridor systems for central banks. To really do a good job on this issue, one needs to know monetary economics, financial economics, and the intricacies of institutional details and regulation in overnight markets, but I’ll do the best I can, and maybe some people can help fill in the spaces.This post is a bit on the long side. If you want the executive summary, here goes. Recently, overnight financial markets have tightened up considerably, in the sense that the interest rate on excess reserves (IOER) is close to all

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Jawboning Makes a Comeback

June 23, 2018

What’s jawboning? Well, this Smithsonian Institution piece claims that, in the early part of the Great Depression, Herbert Hoover resorted to jawboning. Specifically, …he convened a series of “conferences” with business leaders urging them to maintain wages and employment through the months to come.In the article, it’s claimed that: Hoover’s overriding commitment in all his years in government was to prize cooperation over coercion, and jawboning corporate leaders was part of that commitment.Jawboning was a practice later on as well. This op-ed in the New York Times in 1978, by Russell Baker is a commentary on the jawboning practices of then-President Jimmy Carter: Better economists than I are saying President Carter is going to have to start jawboning if he wants to Stop inflation. All

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What Does “Serious” Mean?

June 19, 2018

A week ago I wrote this in a tweet: I’m puzzled by the infatuation with NGDP targeting. We have good reasons to care about the path for the price level and the path for real GDP. Idea seems to be that if you smooth Py that you get optimal paths for P and y. That’s hardly obvious, and doesn’t fall out of any serious theory I’m aware of.The proximate cause of that outburst was this blog post by David Beckworth who, as you might know, is a proponent of nominal GDP (NGDP) targeting. I’ve written before about NGDP targeting – for example I found this post from six years ago. It turns out that not much has changed since then. My views haven’t changed, and the promoters of NGDP targeting are more or less the same ones that were around six years ago – and I don’t get the sense they’ve come up

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Sovereign Money, Narrow Banks, Digital Currency, etc.

June 13, 2018

The recent Vollgeld (full money) or sovereign money referendum in Switzerland, which was just voted down, is quite interesting, as it raises several fundamental issues in monetary economics and central banking. What’s money? Is "money" a useful concept to be bandying about? Who should have the right to issue money? What’s a bank? Are banks inherently unstable? What’s a central bank for anyway?I read a few blog pieces and news reports on Vollgeld. Some of the blog pieces, like David Beckworth’s, contained essentially nothing I could agree with. Others, like one by Morgan Ricks, were pretty interesting.What was the Vollgeld proposal? In Switzerland, as you may know, they like referenda. These are conducted for all three levels of government, and there are typically several a year at the

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Inflation, Interest Rates, and Neo-Fisherism In Turkey

May 22, 2018

In most respects, President Erdogan of Turkey is not known for his progressive instincts, but in economic policy he may be the only convinced Neo-Fisherite on the planet who potentially has any power over monetary policy decisions. Erdogan has been at odds with the Central Bank of Turkey, and seems intent on changing the Bank’s approach to inflation policy. In a recent interview in the UK, and recent speeches, Erdogan has made clear that he thinks that high nominal interest rates are the cause of high inflation in Turkey, and that disinflation can be achieved if the Central Bank reduces its policy rate.Erdogan’s views have been derided by market participants, and some panic ensued, manifested in a depreciation in the Turkish currency. But, apparently Erdogan’s ideas aren’t coming out of

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Natural Rates

May 9, 2018

The natural rate of unemployment is not something we hear a lot about in academic circles these days, and it’s out of fashion even in some central banks. I was out of town when this happened, but when I was working for the St. Louis Fed, Larry Meyer showed up at the Fed to talk to economists in the Research Department. One of things he wanted to know was our estimate of the natural rate of unemployment. Meyer seemed offended, apparently, that we had never thought about it. He didn’t know that it’s hard to find anyone at the St. Louis Fed who would take the Phillips curve, let alone the natural rate of anything, seriously.I was reading Paul Krugman’s blog, and he is saying that recent evidence "seems to have brought skepticism about the natural rate to critical mass." That sounds

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Neo Fisherism: Look, it Works!

May 6, 2018

We know that Neo-Fisherism works in our models. In baseline macroeconomic models in which money is neutral, increases in inflation and increases in nominal interest rates go hand-in-hand. If we incorporate standard types of frictions that give rise to monetary non-neutralities in our models, for example New Keynesian sticky prices or segmented markets, an increase in the central bank’s nominal interest rate target will in general raise inflation – in the short run and in the long run. See for example Cochrane (2016), Rupert and Sustek (2016), and Williamson (2018). And note that these theoretical predictions don’t come from some freakish concoction of a demented neo-Fisherian, but from the mainstream modern macroeconomic models widely used by academics and central bankers.But these

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