Archives for Federal Reserve



What can Eeyore and Tigger Teach Bernanke About Monetary Policy?

What can Eeyore and Tigger tell us about the current state of monetary policy?  A lot.  At least that’s the argument that Betsey Stevenson and I make in our new column for Bloomberg View.

The Fed is now engaged in the game of “forward guidance”—they’ve announced that they anticipate keeping interest rates at zero, until late 2014—and hope that it will shape the recovery.  But what effects will this announcement have?  To figure this out, let’s visit two of the greatest ever Fed Chairmen: Eeyore and Tigger. Read More »



What Does Your Fed Valentine Say?

One of the most wonderful things about Twitter is the spontaneous conversations that start around almost anything. And so, inspired by the hilarious #HealthPolicyValentines, I began a new hashtag on Twitter this morning: #FedValentines.  Folks are tweeting all sorts of Fed-themed valentine’s wishes. As I write, it’s the second-top trending hashtag in the U.S.  

Given that it’s Friday, I figured it worth sharing the fun.  Here’s what I came up with: Read More »



Dear Occupy Wall Street: Are You Sure You’re in the Right Place?

I get it – people are angry. Very, very angry. I’m angry too. And Wall Street sure makes a great scapegoat, hence the Occupy Wall Street protest. Wall Street is a symbol of the “greed and corruption” that took over America and caused this whole mess.

But let’s take a minute to examine the facts and see if we can’t find some better scapegoats:

In 1997 Andrew Cuomo, the Secretary of Housing and Urban Development under Bill Clinton, allowed Fannie Mae to reduce the standards by which they would secure loans. This helped create the entire subprime category. Was this a bad thing? Of course not – it allowed more people to leave the ghetto, move to the suburbs, and achieve the American Dream of owning a home. Who knew that “Dream” would turn into a nightmare in a mere decade. Andrew Cuomo is not Nostradamus. We can blame him of course, but he had good intentions despite the negative results. Read More »



Operation Twist 101

Given the confusion about Operation Twist, here’s an explanation.

What is Operation Twist? Basically the Fed can’t reduce short-term interest rates any further—they’re already at zero. So they want to reduce long-term interest rates instead. They do this by buying long-term bonds. When you buy more of something, you raise the price. And when you raise the price of a bond, you lower the interest rate. So what the Fed is doing, is lowering long-term interest rates.

How does the Fed pay for these bonds? With QE1 and QE2, the Fed effectively just printed the money. (They “expanded their balanced sheet.”) Instead, they are selling short-term bonds, and using the proceeds to buy the long-term bonds. Now selling a bunch of short-term bonds will—usually—lower their price, raising short-term interest rates. That’s why people call this “Operation Twist”—it should “twist” the yield curve—lowering long-term interest rates (which is what matters when you buy a house, or when a firm borrows to buy new machinery), but it also raises short-term interest rates.

Raising short-term interest rates is a bug, not a feature. But fortunately, this time, the effect on short-term interest rates will be small. Why? The Fed has already committed to keeping short-term interest rates near zero for the next couple of years. And so given this commitment, the 2-year bond will also be close to zero. Read More »



Bernanke Speaks. But What Did He Say?

So Ben Bernanke finally spoke today. And as I predicted yesterday, all the early headlines are expressing disappointment that Ben didn’t announce QE3. But this disappointment is misplaced. New policy announcements are for the Federal Open Market Committee, not the Chairman. The most he could do is give an indication of where he thinks things will go.

And he thinks they should ease policy.  Soon.

Here’s the case he made:

1. Unemployment is too high. This is the usual argument for easing monetary policy.

2. Inflation is below target. The usual constraint preventing this doesn’t bind.

3. The possibility that high long-term unemployment may persist “adds urgency to the need to achieve a cyclical recovery in employment.” There’s a special reason to be more aggressive. Read More »



Previewing Jackson Hole: Why Markets Are Setting Themselves Up for Disappointment

On Friday all econ-loving eyes will be focused on Jackson Hole, Wyoming. Think of it as Oscar night for macroeconomists. Except with sensible shoes rather than plunging necklines. But the anticipation and gossip is just as intense. Markets are convinced that Ben Bernanke’s going to make a major announcement. I disagree.  Here’s why:

1.       Central bankers generally try to be more boring than their audience wants them to be. That won’t change.

2.       The run of data since the last Fed meeting hasn’t really changed, so why would monetary policy?

3.       Given the slim governing coalition, Ben can’t get too far ahead of the rest of the committee. So look for all the action to come from official Fed statements, rather than cryptic hints at Jackson Hole.

4.       Sometimes Fed Chairmen are accidentally more interesting than they mean to be. At last year’s conference Big Ben shared some of his thinking about alternative monetary tools. This was news in 2010, and it excited the markets. But today, we’ve all thought long and hard about the alternatives, so it’s hard to see a surprise coming. Read More »



Interpreting the Fed: How Did it Lower Rates This Time?

I’ve found a lot of the recent discussion about the Fed to be, frankly, confused. So I thought it worth trying to put the issues into a broader context.

Read the Fed’s latest statement, and you’ll see many of the themes I’ve talked about recently. They’ve learned that the economy is not only weak, but that—as I’ve been forecasting for some time—“economic growth so far this year has been considerably slower than the Committee had expected.” Turn to the labor market, and they somewhat dryly note “a deterioration in overall labor market conditions.” And while they won’t use the word double dip, they do note that “downside risks to the economic outlook have increased.” Also, “inflation has moderated.” So there’s plenty of room for them to try to goose the economy. But how? Read More »



Dollar Coins for Airline Miles? Bon Voyage!

A few weeks ago, we wrote about the Fed’s $1 billion stash of unwanted coins, and the Federal government’s seemingly failed experiment to get us to trade in our dollar bills for dollar coins. The folks over at NPR’s Planet Money got inside access to see the pile of coins, which so far has cost $300 million to manufacture. Despite the clear failure to create demand, the program, authorized by Congress in 2005, won’t end until 2016.

Now it seems some folks have found an easy way to profit from all those unwanted coins. Planet Money reports that people have started buying the coins with their credit cards, thereby earning lots of airline reward miles. The coins are sent to them by the government for free. The buyers then deposit the coins in their bank accounts, pay off their credit card bill… et voila, a free plane ticket to Paris. While the U.S. Mint is a bit miffed by the scheme, a spokesman admits that there’s nothing illegal about it.