par Pancho Villa
publié dans :
Stephen Cecchetti
Federal Reserve may have hit speed limit
By Stephen Cecchetti
As the US Federal Reserve's Open Market Committee meets on Tuesday, Ben Bernanke, the chairman, and his colleagues face a difficult challenge. Inflation, as the chairman said recently, remains "uncomfortably high" at the same time that the real economy may be slowing significantly. What is a central banker to do? Raise interest rates further to ensure inflation comes down; lower interest rates to head off the chance of a recession; or do neither, hoping that everything will work itself out? While it is a close call, in the end I believe that somewhat tighter policy is warranted.
As the Fed is relying on economic slack to bring inflation down, the rate decision requires an estimate of the degree of slack going forward. Unfortunately, economic slack - really the gap between current and potential output - is hard to measure. Not only are estimates of the current level of gross domestic product revised for years after the fact, but the growth rate of potential output - that is, growth in the economy's capacity when resources are used at normal rates - tends to shift without warning.
Just because something is hard to measure does not let policymakers off the hook. Instead they do the best they can. Over the past decade, the Fed's best has been pretty good. The critical decision came around 1996 when Alan Greenspan, then Fed chairman, his colleagues and legions of staff economists realised that the economy's potential growth rate had risen by as much as 1 full percentage point from about 3 per cent to close to 4 per cent. A rising long-run growth rate makes it easier to lower inflation and keep it there.
Now, unfortunately, there are reasons to think that the US economy's potential growth rate has fallen as low as 2.5 per cent. This "speed limit" depends on three things: growth in the labour force, capital investment and technological progress. Half the story is demographics and the other half is investment. On the first, both the size of the working-age population and the fraction choosing to look for jobs is growing much less slowly. On the second, overall investment peaked at 18 per cent of GDP in early 2000 and has averaged 16 per cent since then. Corporations are using their hoards of cash to pay extraordinary dividends and buy back stock, not make capital investments. Importantly, most of that investment drop has come in computer equipment. So, to the extent that information technology is responsible for the productivity miracle of the 1990s, there is reason for added concern.
There is tremendous uncertainty about whether the economy's speed limit has fallen, though it may still be 3 per cent. But all the risks to this are on the downside and that is where policymakers should be focused.
Returning to the Fed's current challenge, regardless of how it is measured inflation is running about 1 percentage point above what policymakers refer to as their "comfort zone". If potential growth has fallen, then the recent slowing is not just part of a normal cycle, and there is virtually no slack in the economy. Without that slack, inflation will not come down unless interest rates rise further.
This sounds more straightforward than it is. The problem is that a lower speed limit also means a neutral interest rate is lower. With potential growth of 2.5 per cent, the neutral federal funds rate has probably fallen from 4.5 per cent to close to 4 per cent. So, while there may not be much slack now, the current 5.25 per cent fed funds rate target represents a tighter setting than we might have thought. Maybe interest rates do not have to rise after all.
I should note here that I disagree with those who argue that the threat of recession will drive the FOMC to ease quickly next year. At first glance, the decline in house prices seems to support this view. But on closer inspection we see that, as property prices rose over the past several years, consumption did not adjust fully. In the final quarter of 2002, net wealth was 5.2 times personal consumption - still above the average from 1975 to 1995. Recently, that same ratio was 5.8, meaning that residential property values can decline by an extra 20 per cent without creating a collapse of consumption.
A year ago I felt that bringing back the inflation trend to the Fed's comfort zone would require a fed funds rate of 6 per cent. But with mounting evidence that the US speed limit has fallen, I now believe that prudent management of the inflation risks continues to argue for at least one more tightening in the months ahead.
par Pancho Villa
publié dans :
Stephen Cecchetti
Inflation targeting is the best way forward for the Fed
Stephen Cechetti
Last week's announcement that Frederic Mishkin will join the Federal Reserve Board chaired by Ben Bernanke marks a turning point in US monetary policy. We can expect to see improvements in both the internal decision-making and external communication of the Federal Open Market Committee. The result will, I believe, be increased clarity and improved performance.
Together, Messrs Bernanke and Mishkin have provided much of the intellectual foundation for a monetary policy framework called "inflation targeting". Begun in New Zealand nearly 20 years ago, and now used in two dozen countries, including Australia and Mexico, this bypasses intermediate targets and focuses directly on the objective of low inflation.
Experience with inflation targeting is universally positive. No country that has adopted the framework has turned back. It has weathered the test of financial sector shocks, commodity price shocks, big exchange rate movements and more. Importantly, different types of disturbances require different responses and inflation targeting has shown it can accommodate this.
Inflation targeting does not ignore fluctuations in such things as growth, employment and long-term interest rates. As Mervyn King, governor of the Bank of England and one of the earliest proponents of inflation targeting, said some years ago, any successful monetary policy framework must combine an inflation objective with a response to shock. The question is: following a disturbance to the economy, how fast should policymakers bring inflation back to its long-term objective? The faster they go, the more aggressive the interest rate reactions, the larger the fluctuations in growth and employment. The rate of response depends on both societal preferences for inflation versus output stability and the type of disturbance. Importantly, because the economic landscape is constantly changing, inflation targeting does not lead to a hard-and-fast rule for interest-rate setting - a substantial element of judgment is involved.
Inflation targeting enhances long-term economic performance for a host of reasons. First, an agreed and publicly announced objective focuses the monetary policy committee's internal debate. It is clearly easier to make a decision when everyone agrees on the objective. Second, by providing a natural language to explain monetary policy actions, inflation targeting enhances communication with politicians, financial market participants and the public at large. Third, and most importantly, it creates an environment in which everyone believes policymakers will keep inflation low, anchoring long-term inflation expectations. This means wage increases remain contained and a vicious cycle from higher prices to higher wages to yet higher prices cannot get started.
My guess is that Mr Bernanke sits in his office thinking that if only he had an explicit inflation objective there would be much less concern over his inflation-fighting credentials. Alan Greenspan, his predecessor, was successful with only a clear but implicit commitment. But the transition to a new Fed chairman, coinciding with energy price increases and dollar depreciation, has created unnecessary uncertainty. The touchstone of an explicit medium-term inflation target would give Mr Bernanke and his FOMC colleagues a natural vocabulary for communicating their actions. They could make clear, for example, their belief that inflation is likely to return to their objective in the next year or two, thereby avoiding tightening policy just to appear credible.
An explicit objective combined with statements about economic analysis would, as Mr King noted in a speech last month, make guidance about the near-term path of the policy-controlled interest rate less necessary. While central bankers need a sense of what policy is "neutral", and an estimate of how long it will take to get there, their month-to-month decisions are driven by data as they arrive. By contrast, the decisions of individuals and companies rely not on the exact short-term interest-rate path but on the expectation that policymakers will meet their long-term inflation objective.
Inflation targeting is best practice in 21st-century monetary policymaking. It is my hope that chairman Bernanke, governor-designate Mishkin and their Federal Reserve colleagues can convince Congress that low and stable inflation provides the foundation for maximum sustainable growth and employment, and in doing so join the growing ranks of inflation-targeting central banks.
par Pancho Villa
publié dans :
Stephen Cecchetti
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Les 'sciences' sociales (ah, quel terme tellement hais par les 'ricains?' (mais Sardou?, c'est bien un 'blicain'...ah tiens! quel paradoxe! hein?)) peuvent-elles etre des sciences exactes? |
OUI!
P.S.: Oui, quand les poules auront des dents...
par Pancho Villa
publié dans :
Stephen Cecchetti
