Monday, January 13, 2014

What's the Fed doing? One view

Torsten Slok of Deutsche Bank Research, showed me a slide deck he prepared for evaluating the US economy. Here are a few fascinating graphs. Sorry, the slide deck isn't public -- you have to pay DB for this kind of art!

Most hilariously, "forward guidance" seems to be getting harder.

Torsten also makes the case that interest rates are much below the Fed's usual "Taylor rule." Implicitly, it's supply now not "demand." The market of people who are working looks recovered, the large number of people out of the labor force is the problem, and addressing that is, at least, a deviation from usual policy.

The rest of Torsten's slide deck makes a persuasive case that strong growth may finally be just around the corner, a warning to anyone spending a lot of time on "secular stagnation" models!

No editorial here, I just thought the graphs were really interesting. Thanks to Torsten for allowing me to post them.


  1. “…the large number of people out of the labor force is the problem…”.

    Where are all these people? Mom’s basement is only so big.

    1. Actually, according to Torsten (Census) the fraction of 18-34 year olds living with their parents rose from 27 to 34% since 2005, which he takes as a sign of pent up housing demand.

    2. Young people living at home are a sign of pent-up housing demand like excess reserves are a sign of pent-up consumer demand. Unfortunately, both are a sign of not enough money in not enough wallets and that trend line looks pretty bad.

      Rents are exploding higher and mortgage apps are moribund. Get ready for the Resident Protection and Affordable Housing Act. Sign up for your ObamaPlace at I wish I were just kidding.

      Trailer parks and manufactured homes might be an attractive option. Manufactured homes cost 1/3 as much as stick-built. There is also a liquid secondary market where repos can be bought for pennies on the dollar. Rent is much cheaper than an apartment by hundreds of dollars/month.

      Trailer parks have a certain stigma but so do low-rent apartment buildings.

  2. It would be interesting to see a partial equilibrium model where it is costly for firms to decipher policy rules and regulation so they trade off reducing uncertainty with the cost of gathering information (at the expense of investment).

  3. The first slide clearly proves that the Fed is full of $#;+ about monetary policy. Not surprising to me.

    "strong growth may finally be just around the corner"

    The same place that it has been for the last 5 years. But somehow or the other, bad news always comes "unexpectedly"

    "a warning to anyone spending a lot of time on "secular stagnation" models!"

    The US is experiencing secular stagnation just like it did in the 1970s, and for the same reason -- bad policy.

    Torsten should add this slide to his deck:

  4. I'm curious about the Taylor rule comment. Using the original TR (targeting 2% inflation + real output gap) I get this: Unless he's using some unspecified augmented version, I suspect the FFR is still above the Taylor rate.

  5. "....warning to anyone spending a lot of time on "secular stagnation" models!"

    I have seen the words "secular stagnation" used, but I have never seen such a model. Does one exist, other than in the work of Alvin Hansen, which I think was just words?

    1. I had in mind the Taylor-Summers debate at AEA, and several other papers trying to get prolonged slumps out of new keynesian models. Fun stuff, but writing research about current events in a profession where things take 5 years to publish is always tricky. No deep point

  6. Sure, the Fed does not affect the employment participation rate directly. But long-term strong growth pulls people into the work force, and you get rising employment to population ratios--good for everybody, btw.

    Let us hope the Fed does not do a Bank of Japan---quit QE too early.

    John Taylor, btw, raved--gushed!---about the BoJ's QE policy 2001-2006, and you can read his paper on his website. But when the BoJ stopped QE, they went right back to mild deflation. Inflation wa never a problem, even after five years of QE.

    Mild deflation seems to wreck the modern economy, whatever the theorists say.

    Right now, in the USA, one might guess the Fed--like the BoJ---is actually targeting 0 percent inflation. We are at 0.9 percent and sinking, and I see soft commodities markets for years, soft labor markets for years, and strong international competition in everything for years. Commercial rents outside of a few regions are soft too.

    If you think the Fed "should fight inflation" then this Fed is the best ever. We are running in the 1 percent range for the last five years. And that may overstate the case.

    You may find, however, that the goal of perfect 0 percent inflation reaps psychic rewards, but material ones are in the negative range. If you are a central banker, you may think that your psychic income balances the material gains lost in the real world.

  7. Torsten Slok was quoted in the NY Times yesterday. He advocated raising interest rates because "some of the [wage pressure] measures are starting to point upwards." And he warned of "very substantial inflation" if the Fed does not act quickly.

    His comments were immediately repudiated by Dean Baker at CEPR. And these views have been repeatedly denounced by Paul Krugman and others.

    By the way, this is the guy who published a DB research note in June 2008 predicting that "the US economy...should avoid serious recession" and the "housing overhand should begin to drop significantly in the next several quarters."


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