Archive for the ‘federal reserve’ Category

Declare victory and taper?

19 December 2013

Wednesday the Federal Open Market Committee did the expected, by announcing a “tapering” off of its $85 billion monthly purchases of long-term Treasury bonds and mortgage-backed securities (MBS’s), citing “the cumulative progress toward maximum employment.” Thursday the BLS announced that weekly jobless claims rose to their highest level in nine months. Ouch.

Granted, the spike in jobless claims might not mean much, as they can be volatile, especially around holiday time, and indeed the four-week average of jobless claims “only” rose to its highest level in one month. Even so, the “progress toward maximum employment” has been glacial, if it can be called progress at all. The media have trumpeted the good news in the Bureau of Labor Statistics’ (BLS) latest employment report, which found that the standard unemployment rate fell from 7.3% to 7.0%, its lowest level in five years, and employers added 203,000 jobs. That’s fine, but it’s also just one month. Let’s look at the past year, from Nov 2012 to Nov 2013, using the Households Survey numbers in the employment report.

In the past year the adult US population grew by almost 2.4 million. The number of people “Not in labor force” (neither employed nor actively looking for a job) also grew by slightly more than 2.4 million. The total US labor force actually fell by 25,000, and the employment-to-population ratio also fell slightly, from 58.7% to 58.6%. While it’s good news that total employment rose by 1.1 million and unemployment (and people who say they currently want a job) fell by 1.1. million, the biggest growth sector by far is “Not in labor force,” again with 2.4 million. The employment/population ratio is exactly the same now as it was four years ago, in Nov 2009. This is not progress.

I wouldn’t be an economist if I never said “On the other hand,” however, and on that hand we have the “Establishments Survey” that furnishes the other half of the BLS report. The unemployment and employment/population rates come from the Households Survey; the payroll numbers (e.g., 203,000 jobs added) come from the Establishments Survey. Average monthly payroll growth for the past year was 191,000 jobs, or more than double the puny job growth in the Households Survey (1.1 million / 12 months = 92,000 jobs per month).

What would victory look like on the jobs front? I would say 5% unemployment, which the economy had for 35 straight months in the mid-2000s, or less. (And I would want the reduction to come from job growth and not from people leaving the labor force.) How far are we from 5% unemployment? The Atlanta Fed’s handy jobs calculator has the answer. If the economy keeps on adding 191,000 jobs per month, we return to 5% unemployment in three years. If it adds just 92,000 jobs per month, we never get back to 5% unemployment, unless the labor force does a whole lot of shrinking. If we split the difference and figure the correct figure is right in the middle at 141,500, then we get there in seven and a half years, in early 2021.

Back to the taper. The labor data suggest a need for more, not less, monetary stimulus, but how much stimulus were those emergency bond-buying programs providing? All we know is that they created $85 billion in new bank reserves each month. For the programs to work, banks needed to loan out those reserves. Not much of that has been happening:



Real estate and consumer loans are flat. Business loans are rising but not fast enough to return to their trend level. (Which, by the way, is true of just about every other macro aggregate — household consumption, business investment, etc.) Just as the fastest-growing occupational category is Not In Labor Force (NILF?), the most dramatic growth on bank balance sheets is excess reserves:


This is what pushing on a string looks like. Maybe the taper is causing the volume of loans, however meager, to be larger than it otherwise would be, but it’s hard to believe it’s making a world of difference. An oft-cited study published by the Brookings Institution found that the MBS purchases had managed to lower mortgage rates but that the Treasury bond purchases had not lowered long-term Treasury rates. And lowering long-term interest rates, as the bond buying is supposed to do, is only part of the game. Banks have to make loans at those rates. As we saw in the first graph, not nearly enough of that is happening. And the economy probably has to improve a lot more before banks are eager to lend and people are eager to borrow. Catch-22, yes.

All in all, the slight taper, from $85 billion to $75 billion a month, is unlikely to do noticeable harm, since the bond-buying program doesn’t seem to be making a big difference in the first place. Declaring victory, or even declaring substantial progress, on the employment front is foolish, but tapering is another story. Alternative policies, like ending the payment of interest (currently 0.25%) on bank reserves, might be preferable to the long-term bond-buying, but it’s clear from the last few years that Fed cannot be the main driver on the road to recovery. Congress could, through fiscal policy, but won’t, preferring austerity to stimulus, when it isn’t shutting down the government entirely. It looks like we’ll have to cross our fingers and hope for the “natural forces of recovery” to work their magic.


Greenspan Sees No Bubble in Dow 16,000

28 November 2013


Well, that settles it.

Heavy sarcasm aside, we do have the major stock indexes hitting record highs in a still-lousy economy. And thanks to that lousy economy and the Fed’s expansionary monetary policies in response to it, we have interest rates near record lows, which by itself does a lot to raise stock prices. (You can explain this either as borrowing costs to buy stock being cheaper than ever, as the returns on a major stock substitute [bonds] being at record lows, or as the low interest rates raising the intrinsic, or present discounted, value of future stock earnings. These explanations are not mutually exclusive.) But does that make the current stock market an out-of-control bubble? The Fed has cut interest rates many time over the decades without creating stock bubbles. Let’s take a closer look.

Since there is normally some inflation in the economy, a better way to look at stock prices is to adjust them for inflation. J.C. Parets has done this. His index was last updated for Sept 2013, at which time the real (inflation-adjusted) S&P 500 index was 1729.86 (these numbers seem to be in 2011 dollars). Parets emphasized that this amount was 20% below the real peak value of the S&P, from March 2000. But March 2000 was no ordinary peak but the height of the dot-com bubble. The market could still be grossly overvalued yet be 20% below that amount. And the market has continued to soar in the two months beyond Sept 2013; the S&P is up another 8%, so now it’s about 12% below its all-time bubblicious peak. Two lessons I draw: (1) stocks have been a lousy investment over the past 13.5 years, averaging about -1% per year in real terms, with a ton of volatility; (2) stocks could well be a bubble right now, but how large a bubble?

A still-better way to look at the stock market is the price-earnings (P/E) ratio. The measure here compares the current prices of the 500 stocks in the S&P index to their companies’ profits over the past 12 months. This chart is updated every trading day, but right now the P/E ratio is 19.87, compared with the historical averages of 14.5 (median) and 15.5 (mean). The all-time high was 123.8 in May 2009, and the all-time low was 5.3 during WWI. One could compare the current P/E of 19.87 to the historical averages and conclude that the market is about 28% overpriced (19.87 / 15.5 = 128%).

But we’re still not done. The appropriate P/E is not the same at all times. When interest rates on corporate bonds (the leading alternative to stocks) are very low and expected to stay that way for a long while, the P/E should be higher. Right now the interest rate on A-rated 20-year corporate bonds is 4.71%. An economist-approved way to compare stocks and bonds is to compare the P/E on stocks to 1/i, or 1 divided by the long-term interest rate. If investors were indifferent between bonds and stocks and cared only about their expected return, P/E and 1/i should be equal. (The 1/e ratio gives you the present-day value of a fixed-income investment that pays you $1 per year forever when the interest rate is i forever.) Right now, 1/i = 1/.0471 = 21.23, which would suggest that stocks are a bit under-priced relative to bonds. Except (if you can stand yet another about-face) there is no good reason why investors should be indifferent between bonds and stocks. Most people are risk-averse and would therefore prefer a guaranteed real return of, say 2% on bonds than an expected 2% return on stocks that could wildly fluctuate. So with normal, risk-averse investors, P/E should be somewhat less than 1/i. And with interest rates expected to rise someday, even if not any day soon, we should probably plug in a somewhat larger value of i than 4.71%. If we plug in 5% instead, then 1/i = 1/.05 = 20, just a tad higher than the current P/E of 19.87, which now looks too high. Not necessarily scary-bubble high, but overvalued just the same.

So when you think the market is a little overvalued but not necessarily a lot, should you dump your stocks? I guess that I just don’t know.

Companies love misery

22 October 2013

“Dow up on optimism tepid jobs report keeps Fed stimulus going”
headline, CNBC, today

In other words, a lousy labor market is good QE-bait.

Like I said before.

Dammit Janet, I love you!*

9 October 2013

I am very pleased with the president’s nomination of Janet Yellen to be the next Federal Reserve Chair. Ms. Yellen has impeccable credentials, the best economic forecasting record of any recent Fed official, and appears to take the regulator part of the Fed Chair job seriously.

This last part is important. Larry Summers, the original front-runner for the job, helped push through the key deregulation of the late Clinton years, has dismissed the idea that it contributed to the bubble or crash, and has basically never admitted a mistake in this area. Alan Greenspan was essentially hostile to financial regulation, and bears as much responsibility as anyone for the housing bubble of the 2000s. Ben Bernanke has acknowledged that the Fed failed as a regulator during the housing bubble, but he was a Fed governor for most of that bubble and Chair for the last two years of it. Economist Bill Black finds Bernanke to have been sorely lacking as a regulator. The Fed’s main regulatory task is to try to detect and reduce systemic risk, i.e., risky activities that threaten the larger financial system and economy. Granted, Yellen told the Financial Crisis Inquiry Commission in 2010 that she failed to see several of those risks (securitization, credit rating agencies, Special Investment Vehicles) when she was San Francisco Fed President in 2004-2010, but on the other hand she was among the first at the Fed to publicly call attention to the housing bubble

Granted, monetary policy, not financial regulation, is the main part of the job. I agree with those who have said she will probably be very similar to Bernanke as far as that goes, and I’d call that a good thing. The Fed needs to do what it can to pull us out of this Little Depression, and since interest rates cannot fall below zero, additional measures like buying long-term bonds and mortgage-backed securities (i.e., quantitative easing, or QE) make sense, as long as they work. Yellen is often stereotyped as a “dove” because in recent years she favored expansionary policy and did not state that inflation was an imminent risk, but those recent years were the Little Depression that began in 2008. When unemployment is not the nation’s biggest problem, Yellen is more concerned about inflation. Such as in the roaring 1990s, when Yellen was Clinton’s Chair of the Council of Economic Advisers and then a Fed governor. With unemployment down to its lowest levels in decades, Yellen was an inflation “hawk,” as Matthew O’Brien details.

Whether the Senate is capable of that much nuance as it considers her nomination remains to be seen. I expect she’ll win majority support, including a handful of Republicans, and that Republicans will resist the temptation to filibuster her nomination. The right-leaning American Enterprise Institute offers several reasons why an anti-Yellen filibuster would be a disaster. Then again, flirting with disaster seems to be the Congressional Republicans’ game plan of late.

PS Here is a recent (Nov 2012) interview with Janet Yellen.

* Title stolen from EconoMonitor, who of course got it from Rocky Horror:

No taper, no problem

18 September 2013

The Federal Open Market Committee concluded one of its most anticipated meetings in a long time with the expected decision to keep its federal funds rate target near zero (0 – 0.25%) and, less expectedly, not to “taper,” i.e., announce that it would gradually reduce its monthly purchases of mortgage-backed securities and longer-term Treasury bonds. Those purchases are otherwise known as “quantitative easing” (QE).

From various market surveys and betting sites, it appeared that about half the market was expecting a taper. Just why is hard to figure. Excessive asset purchases by the Fed can be inflationary, but excessive is in the eye of the beholder, and inflation has been under, not over, the Fed’s target of 2%. There is the argument that these new and unusual QE policies are damaging to investor confidence, but they’re not that new anymore, and the investors in the stock market seem remarkably undamaged — the S&P 500 has more than doubled since early 2009, i.e., since shortly after the first round of QE was implemented. Then there is the opposite argument that QE has created a “sugar high” in the stock market and maybe the housing market, too. This last argument has to be taken seriously, in view of how the 2000s housing bubble was stoked in part by the Fed’s easy-money policies circa 2004, when economic recovery was well underway.

But not too seriously. The S&P 500 is only about 15% higher now than it was mid-2007; adjusting for inflation, it’s hardly any higher at all (and the jury’s still out over whether stocks, as opposed to housing, were a bubble in 2007). Moreover, corporate profits are at record highs, so the fundamentals look rather good. Home prices are rising fast, but they’re still at 2004 levels, and monthly mortgage payments are cheaper than rents. A true speculative bubble is when people are obviously overpaying for assets, especially when they do so knowingly, with the plan of selling to a greater sucker later on. Is there evidence of that here?

The evidence about the general state of the economy is much stronger, and the evidence is that it’s still pretty weak. In particular, employment — the indicator that the Fed is supposed to focus on, along with inflation — is dismal. The employment-to-population ratio is still under 76%, or 4 points below where it was before the crisis. (The graph below, by the way, is of the “prime-age” population, 25-54 year-olds; if it included 16-24 year-olds, it would look even worse.)


For more on unemployment and tape:


7.4%: Good news you can’t use

4 August 2013

Another first Friday, another BLS employment report, and the headline news is pretty good: In July the official unemployment rate fell to its lowest level, 7.4%, since 2008. If you were a White House publicist that morning, you could have noted that fact and also that the comprehensive U-6 unemployment rate (which includes discouraged job-seekers and involuntary part-timers) also fell, from 14.3% to 14.0%. And then you could have taken the rest of the day off.

The improvement in the U-6 unemployment rate was not enough to cancel out the previous month’s 0.5% point jump. The U-6 rate was below 14% in March, April, and May. The improvement in the official (U-3) rate was exactly counterbalanced by an 0.1% point drop in the labor force participation rate (to 63.4%). The employment/population ratio was unchanged (at 58.7% for all adults, and 75.9% for prime-age (25-54) year-old adults). The decline in participation defies easy explanation, as it involves three distinct subgroups — adult white males, white teenagers, and adult black females — but not others. (A notable recent trend, by the way, is for fewer people, especially young women, to not enter the work force.)

The unemployment rates come from the BLS’s survey of households. The BLS’s other survey, of employers (the “payroll survey”), is disappointing relative to the previous month’s. June’s report showed the economy with net job growth of 195,000, plus upward revisions of 70,000 jobs to the previous two months. July’s report has net job growth of 162,000, and downward revisions of 26,000 to the previous two months. At this month’s pace, it would take us a year longer to get back to 6% unemployment than at last month’s pace (using the handy Jobs Calculator of the Atlanta Fed).

The stock and bond markets seem to have gotten this report about right. The stock market barely budged, and the 10-year Treasury bond rate actually fell somewhat, from 2.72% to 2.60%, despite the improvement in the official unemployment rate. Both markets watch the employment reports with an eye toward the Fed’s next move on interest rates and “quantitative easing” (“QE”; special purchases of long-term bonds and mortgage-backed securities), all the more so after the Fed recently announced that it would start “tapering” off QE when unemployment falls to about 7.0% and start raising its key interest rate when unemployment falls to about 6.5%. While we’re a notch closer to those rates now, the trend does not look good. Treading water is about all this labor market is doing, and the markets seem to get that.

Fed talk is anything but cheap

24 June 2013

After last Wednesday, I bet Ben Bernanke can relate to this observation by George Carlin about his Catholic upbringing:

If you woke up in the morning and said, “I’m going down to 42nd street and commit a mortal sin!” Save your car fare; you did it, man!

It’s the thought that counts! The Fed didn’t “do” anything last Tuesday and Wednesday at its Federal Open Market Committee meeting. Bernanke’s concluding comments about the continuing slump were not much more specific than “This too shall pass, someday,” combined with the obvious point that normal times will bring normal monetary policies. The main news was that he thought normal times would come sooner than many people expected. But that was enough. Evidently, the bond market was expecting the economy to be flat on its back for most of the next decade: 10-year Treasury bond rates had lately been in the range of 2.1-2.2%, whereas the recent historical norm is about 5%. After Bernanke’s remarks, the rate jumped by 30 basis points (0.30% point) to a Friday close of about 2.5%. It jumped further this morning to 2.6%.

Two observations:

(1) Just as in Carlin’s church, Bernanke doesn’t actually have to do anything to tank the long-term bond market. Just thinking about it aloud is enough.

(2) The long-term bond market is really not the economy’s friend. What tanked the bond market is the prospect of interest rates rising a bit sooner and faster than expected, on account of the Fed reacting to a stronger economy. So in a weird sense the spike in bond rates is good news: Bernanke said better times were coming, the markets believed him, and they acted accordingly. Not to say that their action was malicious, just that it was predictable: if you are expecting interest rates to rise in the future, you should buy bonds in the future, not now.

The ZIRP walk

12 December 2012

Today’s news from the Fed is that they will continue their zero interest rate policy (ZIRP) until the unemployment rate falls to 6.5%. To be precise, the Federal Open Market Committee (FOMC) announced that they believe the current 0 – 0.25% range for the federal funds rate “will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.”

This replaces the Fed’s statement from six weeks ago, which was that they expected to continue the ZIRP “for a considerable time after the economic recovery strengthens” and said they thought the ZIRP would continue at least through mid-2015.

I think the new policy is better, first of all because it’s specific. Of course they’re going to raise rates when the economy’s better, but how do they define better? They just told us — 6.5% unemployment (it’s now 7.7%).

The new statement also is better because it’s a fairly clear policy rule, tied to an actual, observable number, as opposed to a prediction about when the ZIRP medicine will no longer be needed. Including a date like mid-2015 is problematic partly because predictions have a way of being wrong, but also because they have a way of creating bubbles. “Through mid-2015” was widely reported not as a prediction but as a fixed commitment by the Fed, which it wasn’t. If enough people in the financial community believe the Fed will keep rates low through mid-2015, there could be a problem. Because if they know that short-term interest rates will be low for the next three years, then they may be more likely to borrow massively in the short-term money market and invest it in longer-term risky assets while rolling over their short-term debts for the next three years. (Some people say we’re already in a stock-market bubble right now, thanks to today’s low interest rates.) Granted, “borrowing short and lending long” is what banks do, but usually it’s without the certainty of near-zero interest rates for the next three years. (more…)

Tired of defending it

1 December 2011

Chris Rock has a great bit where he says he still loves rap music but is tired of defending it, the misogynistic lyrics in particular. I’ve been a longtime advocate of the Federal Reserve and continue to defend it against various conspiracy-mongers, but I really can’t defend this at all: “Secret Fed Loans Gave Banks $13 Billion Undisclosed to Congress.”

The story is not from a conspiracy peddler or a grandstanding politician, but from Bloomberg News, and actually involved investigative reporting. The $13 billion figure is the profit the banks earned from subsidized low-interest loans, etc. The Fed’s total commitment, including loan rollovers, guarantees, and lending limits, was an eye-popping $7.7 trillion. Now, when I first heard a similar figure presented by Congressman Bernie Sanders a few months ago, it looked like a distortion, because it included rollover loans (if I loan you $100 and you pay me back a month later and get a new loan and so on for 12 months, have I loaned you $100 or $1200?) and the total assets on the Fed’s balance sheet have never been much larger than $2 – 2.5 trillion, with a maximum of $1.5 trillion that could be loans to banks. But the non-rollover figures are still staggering. The banks “required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day.”

Other areas for concern (or outrage, take your pick):

  • These loans covered a much longer period that one might think. They were greatest at the height of the fall 2008 crisis, but they began in August 2007 and lasted until April 2010. Was such a massive amount of subsidized lending justified this whole time?
  • The identities of the banks were kept secret, until Bloomberg obtained them via a Freedom of Information Act request. Now, the Fed’s usual lender-of-last-resort apparatus, the discount window, is supposed to keep borrowers’ identities secret, but traditionally there was at least supposed to be some stigma attached to discount loans, so that banks didn’t take advantage of the Fed’s low interest rates by borrowing too much. The Fed wouldn’t out them, but it might audit them. While there is a rationale for keeping the borrowers’ names secret — you don’t want to spark a panic by signaling that these banks are in trouble — surely this secretiveness should have some limits? Last year’s Dodd-Frank financial reform bill requires disclosure of discount loans after a two-year lag. This seems modest to me, but tellingly, Fed officials are wringing their hands and saying this will destroy discount lending.
  • What kind of lender of last resort charges the lowest interest rate in town? The interest rates on these loans got as low as 0.01%. This is a huge subsidy to banks that supposedly can’t get loans anyplace else. A few years ago the Fed reset its discount rate (the rate it charges its borrowers) a notch above the federal funds rate (the rate banks charge each other), presumably so that banks wouldn’t take advantage of the Fed’s low rate. Yet the big banks got to borrow at interest rates below that, and below what anyone else was offering.
  • The loans appear to have been completely unconditional. This could maybe be justified at the peak of the 2008 crisis, when it seemed like fast action was needed, but before and after too? The Federal government’s TARP loans to banks (which, at $700 billion, now appear puny by comparison) were basically unconditional but at least attempted to impose some restrictions on banker bonuses. With the benefit of hindsight and time, more meaningful restrictions, like radically changing the pay structure so as to discourage taking wild risks with other people’s and taxpayers’ money, and limits on leverage, could be devised, and the Fed wouldn’t have worry about getting them through Congress.

I still favor an independent central bank, with minimal political meddling. But these loans don’t look like the work of an independent entity at all. They scream “regulatory capture” by big banks. Gigantic, secret, and unconditional subsidies like these are a recipe for moral hazard that could make the next financial crisis one of those sequels that’s bigger, costlier, and suckier than the original.

Audit the Fed? Yeah, why not.

UPDATE, 2 DEC. 2011: Felix Salmon and Brad DeLong teach me that my point that the lender of last resort should not have the lowest rates in town was made a long, long time ago, by Walter Bagehot: “Lend freely, but at a penalty rate.” DeLong writes:

“Without the Fed and the Treasury, the shareholders of every single money-center bank and shadow bank in the United States would have gone bust.”

How do you do it?

16 November 2011

Count me among the skeptics who believe the Fed has pretty much already done all it can to pull the economy out of the deep hole that it’s in. Zero short-term interest rates, purchases of longer-term bonds to keep long-term rates at historic lows, backstopping various asset markets, emergency loans to banks, etc. It’s helped avert a Second Great Depression, which is nothing to sneeze at. Some economists who I usually agree with are convinced that aggressive new policies could pull us out of the current Little Depression, too. They’re smarter than I am, but they have yet to convince me that these policies could work.

The tonic du jour is nominal GDP targeting, by which the Fed would try to reach a certain level of nominal GDP — say, $16. 3 trillion (the current level of potential GDP assuming that, as I’ve read, current GDP is 7% below its potential. Do the math and that’s a $1.1 trillion gap between current and potential GDP). Christina Romer, Obama’s first head of the Council of Economic Advisors, recently backed this approach in a New York Times op-ed. Scott Sumner has been pushing it all along, and there’s now a whole new school of macroeconomics, “market monetarism,” which revolves around nominal GDP targeting. (Economists: see here for Ed Dolan’s helpful explanation of how nominal GDP targeting is a form of Milton Friedman-style monetarism.)

Now, once the Fed announces this new target, how does it actually get there? Romer provides the clearest answer I’ve seen yet:

‘Though announcing the new framework would help, it probably wouldn’t be enough to close the nominal G.D.P. gap anytime soon. The Fed would need to take additional steps. These might include further quantitative easing, more forceful promises about short-term interest rates, and perhaps moves to lower the exchange rate. . . .’

‘Nominal G.D.P. targeting would make it more likely that the Fed would take these aggressive actions.’

That’s clear, but so is weak tea. None of these actions sound all that different from what the Fed is already doing. Proponents of nominal GDP targeting seem to be counting on a huge “announcement effect,” i.e., that people will hear about the Fed’s commitment to raising GDP and will assume that Fed will make it happen. Yet the Fed’s goals already include maximum sustainable employment, which is the employment rate you’d have at potential GDP, so why should this change the public’s behavior? (Although there is a difference between monetary policy goals, like low unemployment, and targets, which now include interest rates, it’s a rather subtle one. I don’t see why it would move markets.)

Another popular tonic is a higher inflation target. Right now the Fed’s unofficial but almost universally acknowledged inflation target is 2%, and for the past few years the core inflation rate has been below or near 2%. When inflation is very low, real interest rates (nominal interest rates minus inflation) can still be high even when nominal rates are also low. In the U.S. in the early 1930s, for example, nominal rates plunged toward 0%, but deflation was raging, so real interest rates were actually quite high. Economic historian Nick Crafts, in a Financial Times op-ed, says that Britain’s recovery from the Great Depression was greatly aided by a combination of low nominal interest rates and rising inflation rates — i.e., negative real interest rates — which promoted homebuilding. Crafts says targeting a higher inflation rate — say, 4% — could do the trick today.

Again, I just don’t see how you get there. Would I like to see lower real interest rates? Sure. But for 4% inflation to happen, a lot of other things have to happen first. Banks need to loan out their excess reserves, people and businesses need to buy stuff with those loans, the money needs to be redeposited in banks,  more loans need to be made, etc. That’s how monetary policy works — when it works. Right now, the banks have over a trillion dollars in excess reserves that they’re just sitting on. Banks are not eager to lend, and businesses and households are not eager to borrow. Classic liquidity trap.

Nominal GDP targeting and higher inflation targets sound radical, but are they? Chicago Fed President Charles Evans said in a speech this week that he viewed the 2% inflation target as a medium-run target, not a short-run target, saying that as long as inflation averaged out to 2% over a multi-year period, higher inflation rates would be acceptable in the short term. That statement is consistent with either a nominal GDP target (shoot for low inflation when real GDP is high, tolerate higher inflation when real GDP is low) or an inflation target (let inflation rise when unemployment is high), which suggests that neither of those policies is all that new. Both seem to promise much more than they could ever deliver.