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Sunday, March 5, 2017

Not A Fan Of Fed Communications

The Federal Reserve has undertaken another one if its semi-random shifts in messaging, and an immediate rate hike has been priced in. I was enjoying spring break in lovely and historic Quebec City, and then doing a lot of coding for my SFC models package, so I did not get a chance to react. I may write a longer piece on the cyclical outlook in the coming days, but I have not yet seen any reason for a drastic shift in the policy stance.

If the Federal Reserve had its act together, it would just hike rates by 25 basis points every second meeting. This would end the amateur hour theatrics that we have been suffering through, and people could focus on what matters -- what will happen on a multi-year time frame?

Even though I believe the economy is a long way away from overheating, hiking rates at 100 basis points a year is not going to make any measurable difference for the economy for a long time. (If we accept some heterodox arguments about the effects of rate hikes -- which this previous article hinted at -- moderate rate hikes may increase interest income and aid growth. I am agnostic about that debate, but this logic explains why I am unconcerned by rate hikes at present.)

Lousy Political Strategy

Lurches in the stance of monetary policy is not doing the Federal Reserve any favours. If they reverted to an autopilot mode of hiking every second meeting, and everyone expected that not to change for a few years, it might take the heat off of the Fed. The problem appears straightforward, at least to anyone outside of the bubble of mainstream economics and politics.
  • The Republican Party base increasingly loathes Federal Reserve interventions, particularly to the extent that it appears to benefit Wall Street.
  • Theatrics by Fed officials gives the Republican base even more reason to get mad.
  • The modern Democratic Party has a proven track record of losing elections. A couple more state governments going Republican raises the possibility of a Constitutional amendment crushing New Keynesian fantasies about all-powerful independent central banks.


The pace of expected rate hikes appears mild; my initial guess is that it is mainly priced into the fixed income markets. I should take a deeper look at the outlook in the coming days.

I also noted the discussion of as empirical paper released last week that suggests that inflation expectations and labour market slack are broken as inflation indicators. This is interesting, but my initial impression is that this work is not giving us much new information.

SFC Modelling Work

Recently I've mainly been working on the sfc_models framework (and obviously not Fed-watching). I have been revamping the code base, which is extremely important in the long run, but does not add new economic functionality (and thus provides limited fodder for my website). This code base rebuilding is nearly complete, which will allow me to move onto other topics.

From the point of view of potential users, getting that work finished was important. I made a lot of changes to the code interface (which would be upsetting if people had written a lot of code using the old interface). Going forward, the interface should remain relatively stable, and so I am now in a position to find more users of the package. (The fact that I expected the interface to be be overhauled explains why I did not bother writing a lot of user documentation earlier.)

(c) Brian Romanchuk 2017

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