It’s been easy to lose track of the dueling research papers and notes published in the last year that have tried to discern the causes behind the demographic-adjusted fall in the US labour force participation rate.
The resulting confusion, specifically about whether those causes are mainly cyclical or structural, has led to uncertainty about what the Fed will do if the unemployment rate falls to or below the 6.5 per cent threshold (the rate is now at 6.7 per cent). Consequently it has weakened the FOMC’s commitment to keeping rates low for as long as its members have forecast. Read more
This argument is brought to you by Deutsche Bank. Their analysts don’t much like inflation targeting, which essentially entails the central bank aiming to minimise the output gap. They argue that it has led to excessive credit growth which eventually bred financial instability.
More specifically (emphasis ours): Read more
1. The central bank bashing doesn’t start and end with Bernanke.
Central banks just about everywhere make fantastic political punching bags, and the popularity of this tactic is growing. For example:
Market expectations for US inflation have dropped to their lowest level in a year and are now below the Federal Reserve’s unofficial target, as investors respond to the central bank’s latest attempt to stimulate the economy, the FT reports. The expected rate of inflation over the next 30 years, as measured by the difference between Treasury Inflation Protected Securities, Tips, and cash government bonds, dropped as low as 1.85 per cent in recent days from 2.73 per cent since last month. The rate was just under 2 per cent on Tuesday. The drop in long-term inflation expectations came after the Fed announced Operation Twistlast week, a policy aimed at driving down long-term interest rates. So far it has not approached the lows of summer 2010, when investors feared the economy was in danger of tipping into deflation.
We’ve written in some detail about price-level targeting and how it would differ from targeting the inflation rate — and also about our frustration with Ben Bernanke’s refusal to discuss it despite some support for the idea from within the FOMC.
This week’s Economist has an article looking more closely at the drawbacks of price-level targeting that’s worth looking into a bit more for what it says about quantitative easing as a whole — especially given that this Wednesday is, well, you know what. Read more
The Federal Reserve’s war against falling inflation continues.
The latest from the Wall Street Journal’s Fed-watcher Jon Hilsenrath: Read more