Jeff thinks markets don’t believe in the Fed’s ability to avoid a recession. We think markets believe way too much in the Fed’s ability to produce a recession.
Great post. I am new to your work. In suggesting the Fed has the ability to pull the economy higher by holding rates higher it sounds like you are giving the Fed more credibility than Jeff is, just in an opposite way. Is the suggestion that higher rates increase deficit spending into the economy and are stimulative because deficit spending is stimulative and that is why you call it 'fiscal dominance.' ? A Warren Mosler / MMT type argument? If so, yes, I agree that higher deficit spending, whether caused by increased interest payments paid by the government into the economy or any other form of deficit spending is stimulative and this is fiscal dominance in steering the economy. I agree that QE and QT are pointless, but disagree that they have caused huge distortions in bond curves. Maybe QE tightened MBS spreads for a period but why would the curves still be distorted by QE/QT?
Yep. The Fed CAN achieve credibility (getting whatever it wants) but ONLY if it uses its rate lever correctly. Right now it isn't, because it thinks low rates and ZIRP are expansionary. So it relies on the credibility it has stored up to achieve the outcome it wants.
The MMT argument is one way to get to "raising rates is expansionary". The broader umbrella of these arguments is the Neofisherian school, which is that keeping rates near zero for extended periods of time effectively makes it near-impossible for banks to function normally, and chokes credit creation for the economy.
On the QE distortions, George sees the distortions as a result of the Fed over 15 years implicitly de facto managing the entire curve by offering to buy bonds at a price it chooses. At the very least, the "distortion" we see today is markets giving credit to the Fed that it could, at any moment, re-assert where it wants the curve to be.
Thank you Ritik. I have just found the MF substack a few days ago after listening to MH and GR debate on Forward Guidance. Missed the earlier interviews. So, I am reading the whitepapers first. Not sure if that is a good day to start.
I have some questions, nagging questions if you will after reading most of the white papers :)
So, I was wondering if you can please help:
1. Question for you guys: If FED has the credibility, then why they can't induce a recession? Is it the plumbing that matters more than the credibility? I don't think I could understand why by reading this post. Apology, if I have missed.
"Yep. The Fed CAN achieve credibility (getting whatever it wants) but ONLY if it uses its rate lever correctly. Right now it isn't, because it thinks low rates and ZIRP are expansionary. So it relies on the credibility it has stored up to achieve the outcome it wants."
a. Quote "Jeff thinks the Fed will induce a recession. We think the Fed cannot induce a recession, i.e. the Fed is dead. "
b. Quote "We see the Fed has having too much credibility. Jeff sees the Fed as having no credibility." & "We think the Fed has a credibility glut. Jeff thinks the Fed has a credibility shortage."
c. Quote "Monetary policy in the current paradigm is all about credibility. Without it, the Fed’s working model for stimulating or cooling the economy (interest rates, QE, etc.) has been repeatedly shown, since around 2012, the be almost entirely ineffective."
d. Quote "We see markets as giving the Fed way too much credibility in its ability to produce are recession. Jeff sees markets as giving the Fed no credibility that it won’t produce a recession." - Again, if they have enough (?) credibility, then they can produce a recession IF that is what they need, psych-op or otherwise?
2. Quote "We think the rate hikes were an ease. Jeff thinks the rate hikes were not an ease."
Question: Do you have the data to support this? I understand why you would think it is an ease (the MMT argument as above? increased interest income is one example). However, it is also interest expense to others. So, interest income minus interest cost is additional money in the economy in aggregate - do we have the data for this?
3. Quote "We agree that if you take the Treasury yield curve at face value, it is pricing in deflationary and stagnating economic conditions. We don’t agree, however, on why the yield curve is shaped how it is: we see it as a reflection of the distortive effects of the Fed’s QE, which has dislocated the Treasury yield curve from the true risk-free curve, which is positively sloped and reflects a growing economy."
"Our views that stocks will rise more, and that bonds will fall more, arises from our interpretation of current market pricing as reflecting weak conditions, not goldilocks conditions. The difference in interpretation arises from the particular markets we prioritize looking at. More on this shortly."
"On the QE distortions, George sees the distortions as a result of the Fed over 15 years implicitly de facto managing the entire curve by offering to buy bonds at a price it chooses. "
Question: I don't really understand why you think bonds will fall? Is it bond prices or yields that will fall? How is that expansionary? Especially this part "the Fed’s QE, which has dislocated the Treasury yield curve from the true risk-free curve, which is positively sloped and reflects a growing economy."
Who would sell to the FED "at a price it chooses."? The Treasury?
interesting teasing out of others' views in comparison. i have always thought that nominal rates rising was inflationary- until something 'breaks' - and then the path is determined by the reaction function of the CBs and governments
As a follower of Jeff's work, I very much appreciate this post. How do we make a conversation/debate between George and Jeff happen? Given that they agree on so many things, but also disagree on a some, it would be so valuable to hear them talk it out.
Suggestion for next comparison: Michael Howell (@crossbordercap)
Beautiful post, keep it up!
wow!
Top post!👏👏👏
Great post. I am new to your work. In suggesting the Fed has the ability to pull the economy higher by holding rates higher it sounds like you are giving the Fed more credibility than Jeff is, just in an opposite way. Is the suggestion that higher rates increase deficit spending into the economy and are stimulative because deficit spending is stimulative and that is why you call it 'fiscal dominance.' ? A Warren Mosler / MMT type argument? If so, yes, I agree that higher deficit spending, whether caused by increased interest payments paid by the government into the economy or any other form of deficit spending is stimulative and this is fiscal dominance in steering the economy. I agree that QE and QT are pointless, but disagree that they have caused huge distortions in bond curves. Maybe QE tightened MBS spreads for a period but why would the curves still be distorted by QE/QT?
Yep. The Fed CAN achieve credibility (getting whatever it wants) but ONLY if it uses its rate lever correctly. Right now it isn't, because it thinks low rates and ZIRP are expansionary. So it relies on the credibility it has stored up to achieve the outcome it wants.
The MMT argument is one way to get to "raising rates is expansionary". The broader umbrella of these arguments is the Neofisherian school, which is that keeping rates near zero for extended periods of time effectively makes it near-impossible for banks to function normally, and chokes credit creation for the economy.
On the QE distortions, George sees the distortions as a result of the Fed over 15 years implicitly de facto managing the entire curve by offering to buy bonds at a price it chooses. At the very least, the "distortion" we see today is markets giving credit to the Fed that it could, at any moment, re-assert where it wants the curve to be.
Thank you Ritik. I have just found the MF substack a few days ago after listening to MH and GR debate on Forward Guidance. Missed the earlier interviews. So, I am reading the whitepapers first. Not sure if that is a good day to start.
I have some questions, nagging questions if you will after reading most of the white papers :)
So, I was wondering if you can please help:
1. Question for you guys: If FED has the credibility, then why they can't induce a recession? Is it the plumbing that matters more than the credibility? I don't think I could understand why by reading this post. Apology, if I have missed.
https://substackcdn.com/image/fetch/f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F0040bb51-9544-4225-84ae-2b5523bc0c3c_872x280.png
Is the answer as above (and below)?
"Yep. The Fed CAN achieve credibility (getting whatever it wants) but ONLY if it uses its rate lever correctly. Right now it isn't, because it thinks low rates and ZIRP are expansionary. So it relies on the credibility it has stored up to achieve the outcome it wants."
a. Quote "Jeff thinks the Fed will induce a recession. We think the Fed cannot induce a recession, i.e. the Fed is dead. "
b. Quote "We see the Fed has having too much credibility. Jeff sees the Fed as having no credibility." & "We think the Fed has a credibility glut. Jeff thinks the Fed has a credibility shortage."
c. Quote "Monetary policy in the current paradigm is all about credibility. Without it, the Fed’s working model for stimulating or cooling the economy (interest rates, QE, etc.) has been repeatedly shown, since around 2012, the be almost entirely ineffective."
d. Quote "We see markets as giving the Fed way too much credibility in its ability to produce are recession. Jeff sees markets as giving the Fed no credibility that it won’t produce a recession." - Again, if they have enough (?) credibility, then they can produce a recession IF that is what they need, psych-op or otherwise?
2. Quote "We think the rate hikes were an ease. Jeff thinks the rate hikes were not an ease."
Question: Do you have the data to support this? I understand why you would think it is an ease (the MMT argument as above? increased interest income is one example). However, it is also interest expense to others. So, interest income minus interest cost is additional money in the economy in aggregate - do we have the data for this?
3. Quote "We agree that if you take the Treasury yield curve at face value, it is pricing in deflationary and stagnating economic conditions. We don’t agree, however, on why the yield curve is shaped how it is: we see it as a reflection of the distortive effects of the Fed’s QE, which has dislocated the Treasury yield curve from the true risk-free curve, which is positively sloped and reflects a growing economy."
"Our views that stocks will rise more, and that bonds will fall more, arises from our interpretation of current market pricing as reflecting weak conditions, not goldilocks conditions. The difference in interpretation arises from the particular markets we prioritize looking at. More on this shortly."
"On the QE distortions, George sees the distortions as a result of the Fed over 15 years implicitly de facto managing the entire curve by offering to buy bonds at a price it chooses. "
Question: I don't really understand why you think bonds will fall? Is it bond prices or yields that will fall? How is that expansionary? Especially this part "the Fed’s QE, which has dislocated the Treasury yield curve from the true risk-free curve, which is positively sloped and reflects a growing economy."
Who would sell to the FED "at a price it chooses."? The Treasury?
Much appreciated.
Thank you.
interesting teasing out of others' views in comparison. i have always thought that nominal rates rising was inflationary- until something 'breaks' - and then the path is determined by the reaction function of the CBs and governments
Excellent write-up. I appreciate the due respect shown to Jeff. This stuff is not easy to figure out.
As a follower of Jeff's work, I very much appreciate this post. How do we make a conversation/debate between George and Jeff happen? Given that they agree on so many things, but also disagree on a some, it would be so valuable to hear them talk it out.
Awesome.