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So why not just get rid of thinking
about all of that and simplify the whole situation down to say the Fed Funds target?


Because interest rate centrism is like a virus in the minds of otherwise healthy humans. It makes seemingly reasonable investors slip into off-the-reservation jelly doughnut analogies and perfectly respectable economists see inflation under their rapidly depreciating beds. There is so much that is counterintuitive about money-as-rates.

1. It seems to fool people into thinking low rates somehow represent "easy money." It doesn't have to fool people. It doesn't fool everyone. Michael Woodford knows. But it fools a shocking number of otherwise brilliant and even qualified people. We just spent the better part of ten years with well more than half the world talking about how accommodating the Fed was being while repeatedly falling short of its nominal target, primarily because interest rates were lower than historical norms. This is an amazing mass delusion that we got to witness live, and I attribute most of it to rate centrism.

2. Words are convenient because they summarize things. Naturally they also screw us over because they sometimes summarize too much and draw sneaky, arbitrary lines in doing so. Then we spend all our time arguing over those lines instead of thinking clearly. "Rates" are a poster girl for that. People easily slip into the idea that rates are a singular thing, temporarily forgetting that rates are gross summaries of many prices. The prices of time and risk, both nominal and real. Rates are also just as endogenous in equilibrium as M3. A dovish central bank who "lowers rates" is really trying to raise rates in equilibrium. Well, they are at least trying to raise the component of rates represented by long term nominal expectations and likely nominal term premia. They are probably also trying to raise real rates (on safer assets like Treasuries) in the sense that the full employment world they seek might portend higher marginal returns on investment and lower risk spreads, but that is open to debate. These nuances of a CB trying to lower some rates in a counterfactual scenario in order to raise some rates in the desired equilibrium combine with sticky short run prices to really screw up the way people talk about monetary policy. Especially, in my experience, investors who don't have a lot of experience force feeding themselves the general equilibrium implications or even economists who aren't good at switching between models and intuition. It is possible to talk only in the language of rates and have effective conversations but here on the ground it's a unicorn.

3. Rates have a zeroish bound. People who are used to talking about rates had to leave their dictionaries behind when we started doing strange things like QE and Twist and the improvising wasn't impressive. Or, worse, they kept thinking about rates as if the rate implications from attempting to kink the ten-year with QE are identical to the "rate" implications from conventional Fed Funds operations. MyCo is a more flexible framework. You easily can imagine a world where so much common is issued that current Flair value is zero (the ZLB with massive excess reserves) and MyCo tries to switch to swapping even more reserves for some of its ten year converts. You can also easily separate the potential impact of this on MyCo's stock price into (1) Whether you can create some weird Sargent-Wallace violation by bidding up whatever term Convert you happen to buy (2) The signaling effect of reducing expectations of future, conditional expected Flair Value, even with no ability to reduce current Flair Value.

4. But this doesn't mean you can leave rates behind altogether and just swim happily in the equilibrium like the neo-fisherites ("raising rates is dovish"). Rates are still a language used by central banks in communicating their plans and that communication is almost always important. A good model allows you to understand what the lord of the focal point is saying but still translate it into a useful, flexible model that can apply to Zimbabwe, QE, the Zero Bound, IOR or conventional OMO.

To some extent, I don't think that the Fed has much control on something like inflation. Short term
interest rates - yes; inflation/price level - too much mysticism.


Yeah if you believe this then you are not going to like MyCo or anything else I have to say on this topic. I think Central Banks have almost as much control over inflation as they do over daylight savings time, subject to the government budget constraint violations you see in places like Venezuela and Zimbabwe which I tried to include in the MyCo model. I think it's no coincidence that many Central Banks around the world picked 2%ish and mostly got 2%ish for several decades, and also that there is absolutely nothing more "natural" about 2% than 4% or 6% or 12% that we've seen in places like Central and South America. But, you know, some people think that fiat prices are just this thing that floats out in ether, buoyed by some strange equilibrium coordination process, with the government and central banks just standing by whispering impotently into the maelstrom. I don't.
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