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U.S. Inflation Is Not Too Low

Michael D. Bordo | March 20, 2015

The Federal Reserve is preparing to normalize monetary policy and has plans to raise its policy rate from zero in the very near future. Economic conditions have improved markedly in the past year. This is seen in respectable economic growth and the unemployment rate has been falling below 5.5%, the Fed’s estimate of the natural rate. Until earlier this year the FOMC has been reluctant to normalize monetary policy and raise the federal funds rate because it felt that labor market conditions were still too soft. That reason is vanishing very quickly.

Current Conditions and the Policy Problem

Peter Ireland, Mickey Levy, Charles W. Calomiris | Central Banking | February 19, 2015

The Federal Open Market Committee’s Policy Statement from its January 27-28 meeting provides a favorable outlook for the US economy with solid economic growth and strong job gains and renewed momentum heading into 2015.

Real gross domestic product, our broadest measure of inflation-adjusted income and spending, advanced at a 2.5 percent rate during the past year, weighed down considerably by the severe weather-related decline in 2014Q1; real GDP growth exceeded 4 percent in the final three quarters of 2014.. This healthy growth generated more than three million new jobs during 2014, and the Employment Report for January 2015 brought even more good news from the American labor market. 257,000 new jobs were created and upward revisions to already strong gains in prior months lifted the cumulative 3-month job gain above one million. At 5.7 percent, the unemployment rate is down almost a full percentage point from a year ago, and wage growth rebounded in January, suggesting that December’s puzzling decline was an anomaly.


Full Report

Scott Winship Testimony Before the House Subcommittee on Human Resources

Scott Winship | February 11, 2015

While policymakers face real economic challenges—including a secular rise in the duration of jobless spells, a recovery that until recently seemed to taunt us, poorer job prospects for workers with limited skills, and the continually expanding federal disability rolls—the ability of the U.S. economy to provide work for those who seek it has not diminished. Policies to help low-income individuals and families should not presume that the American job-creation machine is broken, or that our recent cyclical challenges portend a “new normal” in the coming decades.

Forward Guidance: Theory versus Reality

Michael Belongia and Peter Ireland | e21 | February 9, 2015

Mainstream monetary economics posits that the Federal Reserve influences economic activity by shaping expectations about the future.  According to theory, when the Fed provides “forward guidance” about the future course of monetary policy, consumers and producers adjust their spending, hiring, and investment decisions accordingly.  Forward guidance, in turn, can be communicated to the public via statements from Fed officials or public understanding of a policy rule that leads the Federal Open Market Committee to adjust its target for the federal funds rate.

Have 91% of Gains During the Recovery Gone to the Top?

Scott Winship | Forbes | January 27, 2015

Forgive me for going out of order and not taking up the Economic Policy Institute’s productivity/compensation chart as promised in my inaugural column in this series. But Berkeley economist Emmanuel Saez has published the latest estimates on income concentration in the United States, extending a series he has produced with Thomas Piketty.

Welfare in America, 1998–2013: The Case for Further Reform

Diana Furchtgott-Roth | Economics21 | January 13, 2015

This paper examines the evolution of major U.S. welfare programs since 1998—shortly after the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA), the 1996 federal welfare reform signed into law by President Clinton, went into effect.

The paper chronicles the average amount of aid provided, as well as length of time on public assistance, focusing on the following programs: SNAP; Temporary Aid to Needy Families, or TANF (established by PRWORA); Medicaid; and Section 8 Housing Choice Vouchers (HCV). The paper also reports on how welfare eligibility and enrollment have expanded significantly since the Great Recession began in late 2007.

Indeed, while the U.S. economy has since improved, participation in such programs has generally not declined. This paper concludes that there is ample scope for states to reform welfare, and it proposes two substantial changes: (1) cap welfare spending at the rate of inflation and the number of Americans in poverty; and (2) allow states to direct savings from welfare programs to other budget functions.

While politically challenging, such changes would allow states greater flexibility to better target the neediest, as well as stem the increasing flow of money into such programs. For instance, this paper finds that federal savings through 2013 would, after accounting for inflation and the number of Americans in poverty, total $1.3 trillion had welfare funding remained at 1998 levels.

Did Inequality Rob Middle-Class Households Of $18,000?

Scott Winship | Forbes | January 13, 2015

Last week, the Economic Policy Institute released a report on trends in wages, earnings, and incomes called, “Wage Stagnation in Nine Charts.” The report, by EPI president Larry Mishel, Elise Gould, and Josh Bivens is a greatest-hits compilation of EPI’s attempts to show that the American middle class is in trouble because of rising inequality.

Exiting from Low Interest Rates to Normality: An Historical Perspective

Michael D. Bordo | Mortimer Caplin Conference | January 12, 2015

The recent financial recession ended in 2009. It has been followed by close to six years of abnormally sluggish growth. To allay the crisis and contraction, the Federal Reserve drove short-term interest rates to the zero lower bound. To continue stimulating the economy, the Fed has followed a policy of quantitative easing (QE) which has more than tripled its balance sheet. The policy has kept both short-term and long-term interest rates at historically low levels. The U.S. economy is finally showing meaningful signs of recovery and, thus, the Fed stopped its QE policy at the end of October 2014. However, debate continues over the effectiveness of QE and the timing of the Fed’s return to normality either through an increase in its policy rate or by other means. This paper examines the exit debate by looking back at the experience of the 1930s and 1940s when the Fed, under Treasury control, kept interest rates at levels comparable to today and its balance sheet increased similarly.

Does Immigration Increase Economic Growth?

Diana Furchtgott-Roth | December 2, 2014

The question of how many legal immigrants should be admitted to the United States—and what level of skills these immigrants should have—is among the most divisive issues in the current U.S. domestic policy landscape. Much of the controversy that it sparks can be traced to a single question: Do immigrants help or harm the economy?

Black Friday Letter from Richard Trumka

AFL-CIO | November 25, 2014

Kroger UFCW Contract

UFCW | November 25, 2014

An Emerging Consensus: Medicare Advantage Is Working And Can Deliver Meaningful Reform

November 6, 2014

This was originally published in Health Affairs.

European Headwind: ECB Policy and Fed Normalization

Athanasios Orphanides | SOMC | November 3, 2014

It has been five years since the epicenter of the global financial crisis that erupted in late 2008 moved from the United States across the Atlantic.  Since then, while the U.S. economy has enjoyed recovery with steady growth, the euro area economy has languished, going through a double dip slump and currently at risk of falling back to an unprecedented triple dip recession.  The mismanagement of the euro area crisis has converted a relatively small and potentially easily manageable fiscal problem that originated in Greece into a systemic crisis for the euro area as a whole.

Rate Hike Fears Are Unwarranted

Mickey D. Levy | SOMC | October 31, 2014

How often have we heard the phrase “if the Fed hikes rates too early, the economic recovery will be derailed”?  It’s ingrained into the Fed’s mindset and statements like it appear frequently in the media.  Yet the history of Fed rate hikes during prior economic expansions suggest that such fears are unwarranted, and the current 5 ½ year old expansion is on sound footing and would fare just fine and even be enhanced if the Fed began hiking rates.  Normalizing interest rates should be welcomed, not feared by the Fed.

Monetary Policy as a Carry Trade

Marvin Goodfriend | SOMC | October 31, 2014

Quantitative monetary policy at the zero interest bound should be understood as a “bond market carry trade.” Net interest earnings on the front end of the monetary carry trade should be retained—to guard against the central bank having to create reserves (or borrow) to pay interest on reserves or managed liabilities on the back end, and to show that interest expenses are paid for in large part by earnings from the front end. In the United States, the Federal Reserve balance sheet reflects the front end of a carry trade in that by the end of 2014. The Fed has long asserted independent authority to retain net interest income thought necessary as surplus capital against prospective exposures on its balance sheet. The Fed recognizes that the retention of net interest earnings to build up surplus capital incurs no resource cost for the Treasury or taxpayers. Yet, the Fed has chosen not to build up surplus capital against the carry trade exposure and risk on its balance sheet, jeopardizing the operational credibility of monetary policy for price stability.

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