Powell Ready to Cut Rates to "Effective Lower Bound" via "Conventional" Policy

-edited

Powell gave a speech today showing his resolve to support the markets. He suggested retiring the word "unconventional".

Let's tune into to statements Powell made today at a "Conference on Monetary Policy Strategy, Tools, and Communications Practices". Emphasis is mine.

I’d like first to say a word about recent developments involving trade negotiations and other matters. We do not know how or when these issues will be resolved. We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2 percent objective. My comments today, like this conference, will focus on longer-run issues that will remain even as the issues of the moment evolve.

While central banks face a challenging environment today, those challenges are not entirely new. In fact, in 1999 the Federal Reserve System hosted a conference titled "Monetary Policy in a Low Inflation Environment." Conference participants discussed new challenges that were emerging after the then-recent victory over the Great Inflation. They focused on many questions posed by low inflation and, in particular, on what unconventional tools a central bank might use to support the economy if interest rates fell to what we now call the effective lower bound (ELB). Even though the Bank of Japan was grappling with the ELB as the conference met, the issue seemed remote for the United States.

The next time policy rates hit the ELB—and there will be a next time—it will not be a surprise. We are now well aware of the challenges the ELB presents, and we have the painful experience of the Global Financial Crisis and its aftermath to guide us. Our obligation to the public we serve is to take those measures now that will put us in the best position deal with our next encounter with the ELB. And with the economy growing, unemployment low, and inflation low and stable, this is the right time to engage the public broadly on these topics.

For a reference point, at the time of the 1999 conference, the United States was eight years into an expansion; core inflation was 1.4 percent, and the unemployment rate was 4.1 percent—not so different from today. Macroeconomists were puzzling over the flatness of the Phillips curve, the level of the natural rate of unemployment, and a possible acceleration in productivity growth—questions that are also with us today.

The big difference between then and now is that the federal funds rate was 5.2 percent—which, to underscore the point, put the rate 20 quarter-point rate cuts away from the ELB. Since then, standard estimates of the longer-run normal or neutral rate of interest have declined between 2 and 3 percentage points, and some argue that the effective decline is even larger.6 The combination of lower real interest rates and low inflation translates into lower nominal rates and a much higher likelihood that rates will fall to the ELB in a downturn.

In a lengthy dissertation, Powell discusses three question, not really answering any of them

Three Questions

  1. Can the Federal Reserve best meet its statutory objectives with its existing monetary policy strategy, or should it consider strategies that aim to reverse past misses of the inflation objective?
  2. Are the existing monetary policy tools adequate to achieve and maintain maximum employment and price stability, or should the toolkit be expanded?
  3. How can the FOMC's communication of its policy framework and implementation be improved?

Unconventional is No Longer Unconventional

As part of the answer to question number two, Powell openly admitted that the unconventional isn't so unconventional anymore.

Perhaps it is time to retire the term "unconventional" when referring to tools that were used in the crisis. We know that tools like these are likely to be needed in some form in future ELB spells, which we hope will be rare. We now have a significant body of evidence regarding the effectiveness, costs, and risks of these tools, including those used by the FOMC and others tried elsewhere. Our plans must take advantage of this growing understanding as assessments are refined.

Expect the Unexpected

Powell referenced the "Dot Plot" in regards to the question on communication.

A focus on the median forecast amounts to emphasizing what the typical FOMC participant would do if things go as expected. But we have been living in times characterized by large, frequent, unexpected changes in the underlying structure of the economy. In this environment, the most important policy message may be about how the central bank will respond to the unexpected rather than what it will do if there are no surprises. Unfortunately, at times the dot plot has distracted attention from the more important topic of how the FOMC will react to unexpected economic developments. In times of high uncertainty, the median dot might best be thought of as the least unlikely outcome.

Least Unlikely in Pictures

For a discussion of the "least unlikely" setup, please consider Dot Plot Fantasyland Flashback vs Current Rate Cut Expectations.

Note that the "least unlikely" thing as of the September 26, FOMC meeting was for the Fed to hike interest raters to a median expectation of 3.00 to 3.25%.

Is that comforting?

Ridiculous Discussion

The entire discussion is ridiculous.

Instead of making the unconventional the conventional and wondering how much to err on the opposite side, how about explaining the absurd reverence to the two percent inflation itself.

We Have Questions

Jerome, you asked but did not answer three questions. And you missed the important ones.

Here's my open letter to the Fed: Hello Jerome Powell, We Have Questions

How about some answers?

Mike "Mish" Shedlock

Comments (30)
No. 1-20
JonSellers
JonSellers

The fed's done a bang-up job given what they've had to work with. With the 10-year, Mr. Market is telling the Fed that rates are too high and need to go down. The Fed should listen. Inflation is well under control in non-third party payer areas (health, education, housing). Unemployment is low. And employment rates are low meaning there is an army of excess labor in the wings if populace gets uppity and starts wanting to be middle class again. It's the best of times.

KidHorn
KidHorn

For every dollar borrowed that pays interest, there's a dollar owed that collects interest. So lowering rates really does nothing in terms of putting money in peoples pockets in aggregate. The borrowers save the exact same amount as the lenders lose.

I guess the idea is you want to discourage saving and promote borrowing. You take money out of the hands of responsible people and put it in the hands of those who have little patience. Which may give a short term boost, but long term it kills the economy.

If you look at what happened in Japan. Enormous debts were incurred, Interest rates dropped to near 0 and instead of creating a booming economy, people used whatever money they had to pay down their debts. This has been going on for decades. The US has been repeating this since the Lehman collapse. No matter how low interest rates go, the principle payments remain the same and those who struggle with paying the principle won't take on any more principle.

Maximus_Minimus
Maximus_Minimus

"In fact, in 1999 the Federal Reserve System hosted a conference titled "Monetary Policy in a Low Inflation Environment." Conference participants discussed new challenges that were emerging after the then-recent victory over the Great Inflation." No kidding. 1999 was the hight of the dot-com bubble. Didn't pay much attention then, but stock market leverage was probably out the wazoo. Yet, these peeps were counting beans. The only way to stop this daily drip of insanity is end the FED, and let the market set rates.

Casual_Observer
Casual_Observer

Mish you expect too much from the Fed. Stop it already. There is no more 'splainin left to do.

we_will_be_Ok
we_will_be_Ok

Ha-ha, weaponization of Fed. So, Trump knew what Fed would do when he tweeted about Mexico.

Maximus_Minimus
Maximus_Minimus

Don't know if it's just me, but notice cryptocurrency news having a comeback. It couldn't possibly be a coincidence?

thimk
thimk

Talk about moral hazards . feds will back stop bad government policy (i.e. trade wars). Create a huge disruption to the financial markets, no problem, Feds to the rescue. this recent rally and good prospects for 2020 victory , will embolden trump to continue/expand tariffs and sanctions.

lol
lol

To the fed money does grow on trees,after a decade of borrowing (printing) and pretending this is where we are,moar borrowing (printing)moar pretending......with this new round of NIRP/QE will we see a negative unemployment "rate"?will we see 10% plus GDP "rate"?will the inflation "rate"turn negative? Make no mistake...the fed is preppin to drop a money printing nuclear strike!!!No more off the books printing and shoving it under the table to the treasury to drive "permanent recovery"!They're gonna print till the bearings on the presses melt!

ksdude
ksdude

Ive heard several people say at some time they have to raise rates. I dont think it will happen. They'll keep low and go negative and sustain the game till all of us are living in huts with dirt floors and it still wont be enough.

Sechel
Sechel

Should the Fed really attempt to counter the last bad Presidential policy or more succinctly put can the Fed reasonably keep attempting to deal with the latest shiny object or problem du jour. Every medicine has a side effect. Every action has a reaction.

Blacklisted
Blacklisted

You should know that the CB's are hopelessly stuck, and asking questions of these self-interested buffoons is about as useful as asking a serial killer why they kill. The focus needs to be on reforms after the system implodes, as nothing proactive will be done.

Before thinking about the reforms you would recommend, one must first understand the Fed's original charter, not the one hijacked by politicians. I would start by searching Federal Reserve at Armstrong's site. Here is a starter on the reforms -

Blurtman
Blurtman

Death Race 2019.

Menaquinone
Menaquinone

You don't get appointed to the Federal Reserve without a closet full of blackmail skeletons. It help to have the intelligence of a cauliflower.

Ted R
Ted R

I guess the Fed has never heard of the term 'debt saturation'?

Casual_Observer
Casual_Observer

Sechel
Sechel

In my opinion its not the Fed's job to try to reduce impact of bad economic policy coming from the white house. a lot of moving parts here and low rates distort decision making and foster mal-investment. we already have a bubble forming in leveraged loans(clo's)

TheLege
TheLege

This is end of times stuff. The Fed must know the jig is up. A bit of jawboning here, a bit of jawboning there ... just to keep the illusion going. I can't wait for the wholesale implosion. This can only go on for so long.

bradw2k
bradw2k

The Put Promise

Sechel
Sechel

What Powell is simply doing is enabling bad economic policy on the part of Trump.