FED, Director Of Research, Srinivasa discussed on Odd Lots
He's the director of research at the Jerome Levy Forecasting Center great voice and great insights on markets and economics six. And today. We're going to be talking a little bit about the Fed. Monetary policy bubbles economic volatility. And things like that. There's a lot of There's a lot of belief out there that the Fed contribute to instability bubbles. But a lot of the thinking is kind of muddled Sort of overly simplistic ideas. There's about a low rate just lead to surgeons speculation SRINIVASA has some more insightful complex ideas about the nature of central banking over the last several decades and how it's contributed to less than ideal outcomes in the economy and I was GonNa talk to him now so Sri thank you very much for joining us. Thank thank you thank you John. Good to be back interesting Before we get into you wrote this paper the recently on inflation targeting but before we get into that it's funny I was looking at a chart recently of just inflation. You can measure it. Obviously several different ways. Try things over the last fifteen years as in prior further about oil prices. It's almost impossible to find any meaningful upper down trend at all even the the economic collapse collapse the boom or whatever it's like there's inch it. It kind of just stays the same flat you read like this always strikes me. They get really excited like gone. Three months annualized rate of change in core. CPI excluding healthcare services is that it's fast level in three years and they get really excited but then you zoom zoom out. It's like inflation hasn't changed dynamics in years. Yeah and we've got used to that. You know that that stability I mean that that even a small teacup in the three months. Begets yes I did. You know how much they can be attributed to fed policy in your view. The fact that inflation trends are so stable. I mean what happens when inflation trends are stable. How much would it be attributed to fed? I think certainly fed has contributed to it. And if you look at the Fed policy in the last twenty twenty thirty years What it has done is implicitly? Not trying to I mean a lot of people are a lot of motives to fan. I just wanted to be careful. Not trying to do anything they are within their mandate now it may be the framework is wrong which is what I believe But what they have tried to do. Who is the TC two things very seriously low and stable? The stable part of it is is a lot more problematic than just a low part. In my opinion it's if if you have low with a little bit of volatility around that would be okay probably. Okay maybe you need to cheat it up a little bit but but you keep the stability that you're pointing out is The is is partly the feds doing. So let's start. You wrote this paper and you took aim at a particular particular approach to monetary policy or framework. I guess maybe long recall it called inflation targeting. What is inflation targeting? When did it start? When did the Fed adopt this current framework? In your view defense. I actually officially started inflation targeting. Only in two thousand twelve but implicitly. If you look back they probably have been doing it since the early ninety s or maybe mid ninety s at least have been doing that. And even before that you know if you look at the Seventies when people really got of course upset about inflation so the original Humphry Kazakh actually called for low and stable inflation inflation to be like zero or eventually they said that two zero is not possible to supercenter over a long period of time So it's been dead implicitly. We have been doing inflation targeting in one form or the other pieces the Mid Ninety S. What what what is it? What ah it's just this idea that it's not enough to just have low inflation but that they should really worry about any sort of volatility and that is what is there Eh? What's the main approach to achieving that goal so demean approach to achieving this goal and this is the tricky part because the mechanism is never really clarified? You know the new OSC monitors so when you ask economists they would tell you. It's also expectations but these expectations channels. I mean if you really look at expected inflation expectations. They have really not changed Macho. They don't seem to have any relation to reality sometimes. So you know. I don't know how that expectation channel works except in textbooks but the basic idea between being the expectations channel is through some magic. I know they would never say magic that we all expect inflation to be low and maybe around two percent percent and if everyone sort of accepts that and if we all accept that the Fed will do whatever it takes to keep it there in that has the effective actually keeping at their right and probably the main way sort of mechanically that the Fed keeps it. There is by being very vigilant raising rates at any sort hint that inflation might be picking up to reinforce this notion among consumers among businesses that they will do it it takes that I that is that is that is clear there signaling aspect of it apart from raising rates. All the talk that goes along with it is one aspect of it to be sure you know I mean of course people to some extent you know. There is a set expectation that prices go up by two percents get revenge wage hikes about two percent. People are happy and you know that's what gets set in the pricing thing mechanism. But it doesn't work through expectations way that a lot of people think it works. But that is that's how they sort of explain it or that is in theory now you they say. Inflation targeting officially only has existed since twenty twelve defacto. It's existed since the mid nineties. Okay so then. And what was the pre the earlier approach. How does that substantively differ? From what the Fed did and sixties or the seventies or the sixties decent seventy S. They were not particularly in the seventies was a little bit different but in the fifties and sixties when they would see economy heating up and inflation starting to pick up. They were just slam the brakes but didn't particularly have an ex specific target in mind. We're not trying to target inflation. But it was also much more From the industrial l. site Much more you know like a German type economy. There were large unions and would be large unit eibar gaining so the price mechanism was a little bit different region. You didn't place mechanism. We don't have that kind of thing. So you know I mean prices were not more closely aligned with wages and productivity okay so they they still fought inflation. They still want to low inflation. And then did you say the Humphrey Hawkins mandate required them to have that. But it wasn't like we have this number number two about two percent and we were going to do what it takes. We just don't want inflation to go up and if it looks like it's going up we're starting to go up we're GONNA fight it. That is I think the the difference Prince in in the post nine thousand nine hundred zero is especially post nine thousand nine hundred ninety. Let's say That's put that as a cutoff is the mandate on on stable inflation and what they think contributes to the inflationary pressures see in the past. They used to have some kind of immune. If you try to recast it into immortal and try to F- Back fit the data. They did some terrible rule kind of thing all through up to nine hundred ninety. They have been doing that ever since as well but they also have an extra emphasis on not just the output gap but on how fast. You're eating output gap. I mean so you'd let's say you have a huge Joe put gap. Let's say not yet for simplicity. Sake night who is five. Percent Unemployment is ten percent is huge right and that night. who made self overstate in an unemployment employment? I mean the the natural rate. But that's a huge gap but let's say you're accelerating should the FBI worried. Right should should economies accident and should be worried because the gap so big but they seem to impact work shows that they seem to be really concerned. You're accelerating very fast. Even if the gap is yeah so even if there's it's clear earlier that all right everyone thinks that ten percent is a very long way from full employment like what we saw obviously in the immediate during the crisis there is almost no oh level if if if we got hot growth. It doesn't matter. How big that gap is that makes fed officials nervous at this right and you? Who've you saw that early in the in the expansion right they were not people? Keep seeing now in hindsight all the Fed should have been more accommodative. They should have said this at that. But you'll like foreign two thousand twenty six years ago when they put put anthem thing. I mean you know when things heat up a little bit they react to the heating up and I kind of knew that isn't new so you did not. Let's see that in the sixties and Seventies. It was a big output gap. If it was clear that there was a lot of people who are left to come back in the workforce they would be they would welcome. Yeah fast-growth because that would get to yes absolute so is that Greenspan who sort of beat was the first I mean in a way I mean. Sometimes it's interesting because Greenspan's legacy I think over the years as I think people deteriorated a little bit too. Sometimes I think he made some interesting choices and was certainly certainly seemed to tolerate the boom a little bit in a way that maybe modern central bankers will be more uncomfortable. Yeah the longer you stay the greater that's under your remit get started on Yeah I mean he did in the one thousand nine hundred eighty two to some extent for sure he led the boom boom run. Yeah and and that's right. I mean there are two aspects to letting the boom ron is is is not necessarily bad but the problem with letting the boom run in backdrop of an inflation framework with the Fed says. It's going to keep inflation. Control leads to build up and leverage and the financial exist. That's the issue right and so this gets to you kind of one of your key points but also sort of what seems like the unspoken or increasingly vocalized problem with all of this. which is is that so far? We've just been talking about this sort of Push pull relationship between unemployment and inflation right. But then there's this added dimension of Financial Leverage and speculation I so we had a very good economy throughout much of the ninety s right but when things are good for a long time people.