So, one thing that's really been gnawing at me, is this: What on Earth is the Fed thinking? One way to proxy this is to see what conservative economists think.
Let's surf over to Greg Mankiw's blog. Oh, let's see, recently he's had plenty of time to plug for his textbook, but he hasn't got an opinion about the Fed's obviously too contractionary policy, or Ben Bernanke's Comedy of Errors as Fed Chairman.
Let's surf over to the Freakonomics Blog. Go there if you need to buy something for an economist for Christmas, but MIT Grad Levitt has no opinion on the Feds Folly. The Freakonomics boys' are only concerned with plugging for their book.
Marginal Revolution? No opinion. Got all these posts on the minimum wage, which is a total non-issue, but nothing about the Fed. Becker-Posner post about the Fed, but just snippets, and neither think the Fed has been too tight with money.
To see what conservatives are thinking about this (to the extent they are even thinking about this), we have to go to Will over at the Ambrosini Critique, with whom this blog has crossed swords with in the past.
Let's see what Will has to say. His points are three: 1) the price level increases are accelerating (he plots what looks like a CPI inclusive of food/energy), 2) Output is increasing, and 3) And "unemployment is not decreasing".
To which I then point out (posting on his blog), that 1) the dip last month in the unemployment rate was noise -- large revisions in the previous two months data plus perhaps people leaving the workforce, and that to have flat unemployment w/out revisions or other special items you can't count on every month, we'd need employment to grow about 150,000/month, so that we cannot yet say that unemployment is "not increasing". The Ambrosini did not address this point in my response, so I assumed he conceded that unemployment is still increasing (although i added that, due to the SA factor, we're likely to be there in January/February...).
2) I then noted that the Core CPI was flat in November.
The Ambrosini Critique responds: "TV, what data are you looking at? The only “core” number that I see flat is CPI excluding energy and food, not seasonally adjusted (and this is entirely due to decreases in food prices). Otherwise, overall CPI is up, core CPI seasonally adjusted is up and the PPI is way up. Is there a good reason to think that NSA core CPI (or food prices more specifically) is more important than all the others?"
To which I point out that the "CPI excluding energy and food" is the "core CPI" and that the 0.0% change in November is the core CPI SA, not the NSA version. (The NSA version was -.2%, for those interested.)
I also added, incorrectly, that the "PPI, last two months was up a total of .1% if i remember correctly…"
Smelling blood, Ambrosini critiques: "TV, you don’t have to remember anything. PPI is reported on the front page of bls.gov and its up 2.1% over the last two months… 2.1% over two months is over 13% on an annual basis. I’m not sure your position that policy is too tight is supported by the core inflation data."
Ouch! Had by the Ambrosini Critique... Or was I. I check the numbers myself, and I was wrong -- the core PPI numbers the past two months were -.1%! And so I write: "You were nearly right and I was wrong: Core PPI last two months is -.1%.
Core CPI in November: 0.0%.
The PPI swings much more than the CPI, so the core CPI is the far and away the single most important inflation number published. That doesn’t mean we don’t also look at food and energy, or the PPI, but these other numbers bounce all over the place, and so if you want to know if inflation is getting picked up in the system or not, you look at the Core CPI.
The Core CPI was flat in November.
This was below the Fed’s forecast. The Fed’s forecast for next year is for the Core CPI to be between 1.4-1.7%. That’s below the Fed’s own target, which itself is too low."
So, I don't know what conservatives are thinking. It appears they are just confused over which rates are appropriate for policy analysis and how the unemployment numbers are made. But this cannot be Bernanke's issue, can it?
I think it is more that they fear that once the economy turns around, banks will suddenly start lending out their excess reserves, and if they did, we would have really high inflation. The problem with this is that, first, on the other side, we've got 10% unemployment which gives firms bargaining power over workers, which should hold down wage growth. The second issue is that in between having a flat CPI and hyperinflation, there would be months of very high growth, reductions in unemployment, moderate growth in the core CPI, and a spike in long-term interest rates, which are not now predicting much inflation. During these months, the Fed could reign in its QE, raise the Federal Funds rate, slow the recovery and stamp out any inflation. The key is that the Fed needs to get over the hump first, and we are not over the hump. Maybe we'll get lucky and be there in a few months, but the fact is we are not there yet. There is scant sign of inflation starting to take off, and employment is not yet to the point where we will see sustained reductions in the unemployment rate.
This "fear of the coming hyperinflation" has been going on for a year now. During that time, the unemployment rate has gone from 7 to 10% and the core inflation rate has been well-contained.
Schedule for Week of January 26, 2020
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