Some argue that showing 2023 rate liftoff at the March 17 FOMC would be counter-productive, and that it would be better to manipulate the dots lower to strengthen the forward guidance.
Is lying sound central bank communication?
On the one hand, the Fed is trying hard to be accommodative, and the new core element in the Fed's framework is not to be preemptive, and instead wait for realized (inflation) outcomes, before embarking on tightening. Hence, you want low dots.
On the other hand, some FOMC participants may indeed think that inflation will hit their objective (2%, and on a path to exceed it) within the forecast horizon. Hence, you can argue, within the framework, that it is logical then to show 2023 lift-off in that scenario.
For the record, 2023 lift-off is not an idea that has been entirely taboo among FOMC participants, even after the new framework was adopted in August 2020. The last dot plot from December already had 5 dots above zero.
To be clear, everybody at the
Fed has signed up to the new framework (and its lack of preemptive tightening). Hence, the outlier-early-lift-off dots should be seen as reflecting those FOMC participants with the higher inflation forecasts (>2%), not opposition to the framework.
There will be be significant upward revisions to the Fed's forecasts. Certainly to the growth growth (fully embedding two rounds of BIG fiscal stimulus). And some feedthrough to the inflation forecast is also likely, although how much is uncertain [see the Jan minutes]
There is even more uncertainty about feedthrough to the policy rate path. Each FOMC participant may have slightly different view of what "inflation moderately above 2 percent for some time" means. But as the PCE forecast moves up, so should the dots (all else equal).
Should the Fed (the individual participants in connection with the dot plot) suppress their actual views on the likely policy path in the future, to enhance the forward guidance now? As some observers now seem to recommend?
That would ultimately create a credibility problem in the future, if the Fed decides to hike when the economy realizes a certain outcome (but had lied about what it would do in that scenario). It would shock the market then. Hence, a little gain now, would have a big cost later.
To enhance the forward guidance the Fed can, via the dot plot, reveal how much inflation overshoot it will tolerate. If it wants to anchor short-rate expectations more, it can put down higher PCE forecasts, with unchanged dots.
But it should only do so, if that truly (and honestly) reflect how they think about the reaction function under the new framework. And for some FOMC members that may indeed be the case. But then they have to stick to it.
There is a large literature on central bank credibility. While 2021 is about being pragmatic, expecting the unexpected, and de-learning false wisdom from the past, not all wisdom from the past is false.
Credibility takes a long time to build, but only a short time to undermine. I think central banks should be careful about lying. Not for religious reasons, but because their long-term credibility is key to them achieving their goals efficiently. END.
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A) The ownership structure of bitcoin is special. Institutions (hedge funds etc) have only gotten involved recently, and not in size yet. This is the reason there is no portfolio contagion, bitcoin selloffs do not create 'enough damage'.
B) as more institutions get involved (as all indicators are that they will during this year) the position size and relevance to institutional portfolios will grow. And then portfolio contagion is also likely to increase.
B2) It is even possible/likely that increased portfolio contagion will impact correlations, creating a more positive correlation to other risk assets (think SPX), and this could indeed be self-fulfilling, as higher correlation will mean more portfolio contagion.
We have a new substack out by @GeneralTheorist which digs into the core concepts of money supply, contrasting money expansion under QE (via the banking system) with digital currency (CBDC) provided directly to the public.
This may seem like an academic debate, and the presentation here is indeed conceptual. But central bank digital currency is potentially just around the corner in some jurisdictions. Hence, it is important to know how it can fundamentally alter the nature of monetary policy.
Digging into the accounting of digital currency also again highlights why 'asset swap QE' has such limited potency (outside a financial crisis). Digital currency provision blurs the border to fiscal policy, and that raises important legal issues, around central bank independence.
When I think about a country with testing issues, I think about Mexico, which has had a very high positivity ratio for its COVID testing through the entire pandemic (around 50%). But many US states are now seeing positivity rates really spike too, not far behind Mexico...
The trend higher in positivity rates / hit ratios (blue lines) are partly a function of less testing over the holidays. But it is still telling:
Ok, we are ready to officially launch our blog/substack called Money: Inside and Out. We have tested it and populated with 3 initial posts, and you can subscribe here:
One post, called "The Big Myth about Money and Inflation" touched on the conceptual misunderstandings around the link, and how the future may again shake things up, if monetary and fiscal expansion are (aggressively) combined.
Another post (from today) touched on the possibility of a liquidity crisis within the Eurosystem (written by our Advisor Chris Marsh aka @GeneralTheorist)
First, If one macro policy operates in isolation, it can be contradicted by ‘the other’ policy. This is especially relevant with monetary policy. In the past, expansive fiscal policy was often associated with monetary tightening (=not good, if you have spare capacity, low inf.)
Policy coordination, which ensures that monetary policy, and market rates, are not ‘fighting’ the fiscal policy can help solve this problem. =>coordination is good.