Is this the beginning of a long tightening cycle?
In this paper Iqbal and Bullard look at the pace of the current recovery, and compare it to the past cycles. They argue that over the past 30 years in each business cycle the peak in the Federal Funds Rate (FFR) has been lower than the previous cycle, i.e. the FOMC has offered larger stimulus for a longer duration in each recession relative to the prior cycle. During the current cycle the estimated magnitude of the current monetary stimulus has already crossed the previous cycle’s level, and as a result by Q2-2021 the available pool of unconventional resources to jump-start the economy from a recession dropped to 58.3% the lowest level since 1990. So going forward what should the Fed’s monetary policy be?
The authors present a new framework utilizing a threshold between the fed funds rate and the 10-year Treasury yield, and that threshold has predicted all recessions and changes in the monetary policy stance since 1954. For the current cycle they find that only one rate hike by the Fed would breach the threshold, which implies according to their model, that the FOMC would reverse its monetary policy stance in roughly 18 months after only one or two rate hikes.
Is This Time Different for Monetary Policy?
Authors: Azhar Iqbal, Sam Bullard
From: Wells Fargo Corporate & Investment Banking
The Fed is now behind the curve
This is a roundtable discussion among John Cochrane (Hoover Institution), Mickey Levy (Hoover Institution), Kevin Warsh (Hoover Institution) and John Taylor (Stanford University) on how did the Fed get into the difficult position that is now, whether it is behind the curve, and how to get back on track. Highlights from the video:
Cochrane [1:06]: Higher interest rates will not succeed in lowering inflation unless they come with a fiscal contraction. This hinges upon whether people think that future deficits will be repaid or just inflated away.
Mickey Levy [8:46]: Inflation is rising and will continue to remain elevated. The Fed is understating inflation expectations and the wage-inflation feedback loop which is intensifying.
Kevin Warsh [20.19]: FOMC minutes indicate that the Fed plans to reduce the size of its balance sheet and yet they keep on buying assets and expanding the balance sheet. The Fed has been confusing people by assuming the responsibility of other goals and hence loosening its commitment to price stability.
John Taylor [30:17]: According to the Taylor rule with the current level of inflation at 4%, output gap at -2%, equilibrium interest rate at 1% and an inflation target at 2%, the Fed Funds Rate should increase to 6%!
Policy Seminar With John Cochrane, Mickey Levy, Kevin Warsh, And John Taylor
Organized by the Hoover Institution
