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‘This Is How Policy Mistakes Are Created’
On Tuesday, at an ECB event in Frankfurt, Adriana Kugler said she doesn't know the location of the neutral rate. What she does know -- or, more aptly, what she claims to know -- is that the Fed funds rate is currently "way above it."
I've been over this -- "this" being the logical fallacies Fed officials regularly traffic in when discussing r-star -- but I'm compelled to revisit the issue in light of the suddenly vociferous debate about what the Fed should do at its November policy meeting in c
Well here are some guides. Inflation now running 2-3%. Some central banks exclude imputed rent. Ours includes it. Fine funds are 4.75-5% That’s a real rate of 2-3%. Commodity prices are pretty stable. Dxy, the dollar is as well. Of course both fluctuate. Job growth is steady excluding if you average the last 3-6 months. Last month’s number way over, previous under. Yield curve was inverted until recently, but credit spreads are still pretty tight. Consumption growing steadily. The Fed cut 50, because they missed a 25 in July. The fact is that r* fluctuates too. So monetary policy, absent a crisis, works best as an iterative process. The balance of the data suggests funds are too high. But it’s not a slam dunk. So the Fed is right to ease slowly and reassess. Which pardon me, Larry Summers, chair of hindsight capital, is what the fomc is doing.
Virtually all economic and financial variables fluctuate, daily, hourly … You can’t actually say any number is actual except for an infinitesimal instant. Besides, according to the Heisenberg (him, too) Uncertainty Principle, measurement alters reality, so FOMC members should probably talk softly and stay out of sight.