Just a quick follow up on this morning’s meanderings about the Fed, QE (quantitative easing, or the Fed’s asset purchasing program, currently winding down), inequality, and that sort of stuff.
I mentioned the President of Boston Fed, Eric Rosengren, and here he is again saying very cool things in my hometown paper. For example, this is much the same point I made this AM about how you’d want to think about the net impact of QE:
There’s no disputing the fact that asset prices have gone up as a result of what we’re doing,” Rosengren acknowledged, and that “disproportionately helps somebody who has enough wealth that they have, for example, stocks.” But “on balance” he “thinks the net benefits outweigh the net costs in terms of income inequality” for a simple reason: “the one thing that really contributes to income inequality is to have no income at all.”
Better yet, on the unemployment rate consistent with full employment (my bold):
“we’re at 5.9 percent unemployment now, and there’s not much wage pressure.” Indeed, “if anything,” he went on, “I would expect inflation maybe drifting down over the next two quarters, because not only are wages not going up, but oil prices and other commodities are going down [don’t forget the strengthening dollar…JB]. So it may be that when we get to 5.25 percent unemployment, if we’re not having any inflationary pressure, I’d be willing to probe further.”
That’s because full employment is “not a theoretical concept, it’s really an empirical observation: at what point is there enough tightness in the labor market that we start seeing wages and prices going up consistent with a 2 percent inflation target.” And the answer is: it depends. Since there are still so many people working part-time for economic reasons, “it may be that when we hit 5.25 percent unemployment, there’s actually more slack, which would mean we’d be comfortable waiting a little longer before we should fully tighten up monetary policy.”
Finally, Rosengren holds forth a bit on the possible need for a higher inflation target. Here’s the logic, and I think it’s sound. The current recovery is getting a bit long in the tooth and hopefully the liftoff of the Fed Funds Rate (FFR) is a ways off and, when it occurs, will be very gradual.
Now, when you hit a downturn, you want your FFR to be at a high enough perch such that it can be lowered to create the necessary monetary stimulus without hitting its lower bound of zero, at which point it can’t go lower even if negative real rates are what it would take to help get us out of the next ditch (this problem, btw, is at the heart of the “secular stagnation” hypothesis).
As Larry Ball has emphasized, and Rosengren give a hat-tip to this type of thinking, a higher inflation target acts as insurance against this possibility (since the real interest rate is the nominal rate minus inflation, at the ZLB, the real interest rate is the negative of the inflation rate).