Jim, it is not complicated – NGDP tells you NOT to hike

This is what St. Louis Fed president James Bullard today told CNBC:

“there’s a powerful case to be made that it’s time to raise interest rates. And the case is not complicated. … Policy settings are [in] an emergency. The economy itself, the goals of the committee, have essentially been met.”

Bullard goes on to talk about the labour market and talk about low oil prices is helpful for the US economy. It all very much sounds like Bullard has made up his decision BEFORE he has looked at any data.

In fact it is hard to see what monetary policy rule Bullard is advocating and he seems to be cherry picking data to make an argument for rate hike. It is frankly speaking not very impressive.

But why doesn’t Bullard just look at nominal GDP? After all back in May he co-authored a Working Paper in which he essentially argued that the Federal Reserve should to target nominal GDP!

So lets have a look at how nominal GDP has been developing:

NGDP level 20102015

NGDP has since mid-2009 essentially been on a straight line growing on average slightly less than 4% a year and in Q2 2015 was slightly below this trend.

Why doesn’t Bullard just acknowledge that? He should be happy – the Fed is doing what he said it should be doing. But of course that would mean that there would not be any arguments for hiking interest rates. After all prediction markets (such as Hypermind) presently are forecasting around 3.5% NGDP growth for all of 2015 and in that sense the Fed is slightly undershooting it’s post-2009 de fact NGDP rule.

Jim, I was very happy to see you advocated NGDP targeting back in May – why have you already changed your mind??

PS Bullard talks about interest rates being at “emergency” setting. I guess Bullard has forgot what Milton Friedman told us about why low interest rates. Jim, interest rates are low because monetary policy has been tight.

If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail: roz@specialistspeakers.com. For US readers note that I will be “touring” the US in the end of October.

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  1. My feelings Lars, is that FED is changing the regime, Mrs Yellen is very orthodox, she does not like the NGDP model, even though Phillips Curve have being there for a while, she stick with it. Unemployment data give no conclusive reasons to rise interest rates, the estructure of employment gains in the last years is not symmetric with the employment looses during the financial crises. In a order 2:1.66, every 2 full time employment lost during the crises has been “recovered” by just one plus something partial time, the number of hours lost, is still 35% behind what it was before the crisis. I believe “pure” Keynesians are not happy with that, they want more, but more QE, however it needs bigger stomachs, they could move to China, although there it might get indigested.

  2. TravisV

     /  October 8, 2015

    Mr. Christensen, you might be interested in these passages from Bernanke’s new book (Chapter 19 on QE1). I think they contradict each other.


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