The Best Ten Online Stanford Courses — All on edX

Here are the ten courses that have been chosen by as the best Stanford University courses to take online. And Economics 1 at Stanford is on the list. They are all on edX. As they say: “All products featured are independently selected by the editors and writers.”

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Great Bloomberg Interview: Now How to Get Back

In a Bloomberg TV interview today, Romaine Bostick @romainebostick and Scarlet Fu @scarletfu asked me great questions about the just-released inflation rate and the implications for Fed policy. During the interview, which goes for about 7 minutes from 3:50 to 11:13, I argued that the Fed was not done, that they needed to raise the Federal Funds interest rate some more, and that they should not give up on their 2% inflation target.

I referred to the book –“HOW MONETARY POLICY GOT BEHIND THE CURVE AND HOW TO GET BACK”–that has the proceedings of a conference we held a year ago, when the funds rate was only 25 basis points. The message of the conference was that the Fed was behind the curve. Well, a year later they have raised the funds rate, and they are much less behind the curve. The question now is “how to get back, and that will be the focus of our next conference.

Here is a video that contains the interview: .

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A Very Big 15-Year Anniversary

We just reached a big anniversary:  “Economic Policy Working Group Reaches 15-Year Milestone in Providing Rigorous Policy Analysis and Solutions for American Prosperity,” as the Hoover Daily Report headlined in a just-published article. Here is the article It provides a beautiful summary of the people, seminars, working papers, and, of course, the books. And the “Rigorous Policy Analysis” and the “Solutions for American Prosperity” are key, and we have always emphasized the international benefits to the world. Here is the list of books, starting with the latest:

How Monetary Policy Got Behind the Curve–And How to Get Back, 2023

Choose Economic Freedom: Enduring Policy Lessons from the 1970s and 1980s, 2021

Strategies for Monetary Policy, 2020

Currencies, Capital, and Central Bank Balances, 2019

Structural Foundations for Monetary Policy, 2018

Rules for International Monetary Stability, 2017

Central Bank Governance and Oversight Reform, 2016

Making Failure Feasible: How Bankruptcy Reform Can End “Too Big To Fail,” 2015

Frameworks for Central Banking in the Next Century, JEDC, 2014

Across the Great Divide: New Perspectives on the Financial Crisis, 2014

Government Policies and the Delayed Economic Recovery, 2012, 

Bankruptcy Not Bailout: A Special Chapter 14, 2012

Ending Government Bailouts as We Know Them, 2010

The Road Ahead for the Fed, 2009

And we are just getting started: Last Wednesday at the Economic Policy Working Group (EPWG), Peter Henry talked about “The Global Infrastructure Gap: Potential, Perils, and a Framework for Distinction,” and next Wednesday Michael Bordo will speak about “Muddling Through or Tunneling Through: UK Monetary and Fiscal Exceptionalism During the Great Inflation,” and then  on February 15, 2023 Ellen McGrattan will speak about “On the Nature of Entrepreneurship,” and the following Wednesday Erik Hurst will talk about “The Distributional Impact of the Minimum Wage in the Short and Long Run”

The Working Group’s meetings are now on a virtual platform. As the article states: “the level of participation from policy makers and scholars across the nation and the world has grown substantially.” And we will have another big conference on May 12, 2023. It is so important to keep up the work.

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Four Talks and More Thoughts on Fed and Policy

This week, on January 4, 2023, John Cochrane, Mickey Levy, Kevin Warsh & I spoke by Zoom at a policy roundtable on the increase in inflation and possible causes at the Hoover Economic Policy Working Group. It was an important follow-up to a meeting we held a year ago on January 5, 2022. Each of us covered similar ground: Cochrane talked about the fiscal side, Levy about inflation measures, Warsh about regime change, and Taylor about the big deviations in policy from standard monetary policy rules. Many of us had written about these issues since the last group session in January 2002. The aim was to give different perspectives on a common theme: that recent high inflation over the past year was brought about by an extra low policy interest rate, the high money growth, or the big balance sheet expansion.

I talked about how the Fed got into this difficult situation, and I hope that brought back memories of the 1970s where the critique was similar, but also different in important ways. All agreed a year ago that the Fed was behind the curve, and the question was when and how rapidly to get back on track. This was also the title of the Hoover Institution book entitled: “How Monetary Policy Got Behind the Curve — and How to Get Back,” published in May 2022, and edited by Michael Bordo, John Cochrane and John Taylor.

During the past year the Fed had indeed tried to get back on track, and it increased the federal funds rate from near zero to a bit over 4 percent. Some–including most of the speakers and participants–said that more was needed. The event again had many commentators and guests–including monetary experts such as Mervyn King, Andrew Levin, Bob Hall, and David Papell, who spoke out on this theme from different perspectives.

The whole Zoom event from January 4, 2023 was video-recorded, and can be found here: along with a list of participants and the slide presentations. It is fascinating to compare the session this year (Jan 2023) with the session last year (Jan 2022) which had the same group of speakers and many of the same participants:  It is most fascinating in my view because the theme is similar except that Fed has begun to catch up. How will the economy–and indeed the world economy–look in January 2024? That depends on the Fed and other central banks.

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John Taylor’s Formula for the Fed

Informative NPR interview and discussion with me conducted by Darian Woods and Mary Childs on the Fed’s decision to raise rates and the Taylor Rule. Good questions and good answers with excerpts from Jay Powell and Janet Yellen. Here is the

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New Book on the Fed and Recent Monetary Policy

The book is entitled HOW MONETARY POLICY GOT BEHIND THE CURVE — AND HOW TO GET BACK and is based on conference held on May 6. The conference is described here: The book on the conference has many insightful papers, great commentary, and excellent press coverage. Current and former Federal Open Market Committee Members gave critical assessments and debated with Fed watchers from the markets and academics.

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Triple Take with Hyde, Riggs, Basak, & Taylor Rule

Good in-depth interview on Bloomberg’s Triple Take with me fielding terrific questions from Caroline Hyde, Taylor Riggs, & Sonali Basak about Taylor Rule, Fed’s being behind curve, and how to get back. Video ointerview is here from 0.25 to 13.05 minutes:

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40 Years of Lessons Learned: Jackson Hole 1982 & 2022

The stock market reaction to the Kansas City Fed meeting in Jackson Hole today was not so pleasant. The Dow Jones Industrial Average was down over 1,000 points or by over 3 %. The S&P 500 was down 3.4 percent. The markets started to fall with Chairman Powell’s speech in which he said “We must keep at it until the job is done,” and he emphasized credibility almost as if in a full policy rule-like mode.

But the emphasis of the market commentary was not much on the benefits of credibility of monetary policy. Rather it was that the Fed will simply keep raising the federal funds rate until we really see inflation coming down.

Here it is important to think about history, with the perspective of 40 years. It is not easy. I attended the 1982 Jackson Hole Conference and gave a paper called “The Role of Expectations in the Choice of Monetary Policy,” which stressed the importance of expectations.

The year 1982 was so much different than the year 2022. Inflation had been high for 15 years in 1982, not 15 months as today, and inflation had set in. The wage price spiral was in full bloom. It took a big change in monetary policy too bring inflation down, and that is what had happened. But today inflation is not so entrenched as it was in the 1970s when higher interest rates caused big recessions. An expectation of a credible disinflation policy will prevent pass through to wages and other prices. The emphasis should be on credibility and expectations, and on a clear understanding of how different policy and the economy have been recently compared with the 1960s and 1970s. Yes, the Fed has to adjust the interest rate some more to bring inflation down to levels consistent with the the 2 percent target. But a more credible Fed policy will make the adjustment much smoother and with the main impact on inflation, not on the real economy.

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Essays in Honor of Marvin Goodfriend: Economist and Central Banker

A beautiful book, edited by Robert King and Alexander Wolman, with original essays in tribute by Alfred Broaddus Jr., Donald Kohn, William Poole, Kartik Athreya and Stephen Williamson, Ben Bernanke, Michael Bordo and Edward Prescott, Douglas Diamond, Michael Dotsey, Andreas Hornstein, and Alexander Wolman, Huberto Ennis and John Weinberg, Vitor Gaspar and Frank Smets, Mark Gertler, Robert Hetzel, Athanasios Orphanides and John Williams, Charles Plosser, Sergio Rebelo and Pierre-Daniel Sarte, Thomas Sargent, Lars Svensson, John Taylor, Mark Watson, Michael Woodford, Robert King and Yang Lu

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Play By The Rules

Federal Reserve Chair Jerome Powell’s testimony at the House and Senate this week again had much to say about monetary policy rules. The focus on policy rules is encouraging, as it is a way to both get back on track and prevent further harmful deviations in the future, as was the focus of our recent May conference at Hoover and Stanford University

Consider for example the exchange at the Senate Committee on Banking. Housing and Urban Affairs between North Carolina Senator Thom Tillis, the acting ranking member, and Chair Powel on Wednesday June 22. 

According to the written record of his remarks, Senator Tillis said in his opening that: “Regarding the Fed specifically – though I am pleased you have begun taking the drastic action necessary to right the U.S. economy – these actions are long-overdue and monetary policy remains too loose. CPI inflation now stands at 8.6% per year but the Fed funds rate sits at only 1.6%. According to the Fed’s semiannual report, the rate should be over 6% under the Taylor rule. This disparity indicates not only the lengths the Fed has yet to go to normalize monetary policy, but also the fact that the Fed has largely boxed itself into a menu of purely reactive policy measures. Unless the Fed works quickly to move away from their discretion-based monetary policy approach that has remained consistently well-behind the curve, I am concerned the Fed will lose its credibility to effectively manage the national economic situation.”

Then, at 55 minutes into the hearing according to a recorded videotape, Senator Tillis said further that “By the Fed’s own analysis of various policy rules, including the Taylor Rule, the revised Taylor rule, the balanced approach rule, and the balanced approach short fall rule, rates should have begun to rise long before they did. According to the Fed’s own analysis of these rules, the fed funds rate should currently be above 6 percent; this is in the Report to Congress. Yet the rate currently stands at 1.6 percent. Likewise, the same rules could—should—have prompted the Fed to begin raising rates Q4 last year Q1 this year. I’m concerned that the Fed has opted out of rules-based to discretionary monetary policy. As the Fed reviews monetary policy strategy, Chair Powell, will you commit to considering an increased weight for rules based strategy for its decision making and if not why.”

Chair Powell answered: “We do use policy rules like the various forms of the Taylor rule in all of the analysis that we do.  If you are thinking about how monetary policy will affect the economy, you have to have some sort of a rule like that. The Fed has never really used them in a prominent way to actually set policy in real time. But that is not to say that they do not shed light. We do consult them on an ongoing basis. The rules all called for a deeply, deeply, negative rates during the pandemic, and we didn’t do that. They did call of course for rates to move up, and rates now really are moving up much closer to where the Taylor rule—various form of the Taylor rule—are.  And I think by the end of the year will be pretty close to where some of the Taylor rule iterations are.  It is something we consider. I think in a couple of years when we look at our framework again, that’s something we could look at.” 

Senator Tillis then responded: “Chair Powell could you just briefly explain the variance between rules-based decision making being at 6 and where we are today. What are the factors coming into play?”

Chair Powell answered: “Taylor rules don’t keep, they don’t take into consideration changes in financial conditions. They just look at the overnight policy rate. As I mentioned earlier, we began signaling, and we are set up now to signal policy changes going forward with the summary of economic projections that we do four times a year. So markets priced that in, and you are getting a lot of policy tightening well in advance of actually raising rates. As you pointed out we are 1.6 percent only on the federal funds rate, but look out the rate curve, all the…very substantial additional rate hikes are already priced in with financial conditions and they have been for several months. So that’s one way of thinking about it. It’s really only at the very short end of the curve where rates are still in negative territory from a real perspective. If you look farther out, real rates are positive right across the curve. That’s really what we are trying to achieve with policy. In a situation like this where we have forty year highs in inflation, and we know we need restrictive policy. And that is where we are headed.”

The press also covered the hearing. In an article called GOP to Powell: Play by the rules Kate Davidson of Politico wrote on June 23 and said that

“We expected Republicans to press Federal Reserve Chair Jerome Powell on the need to tighten policy faster at his Senate hearing Wednesday. But we were struck by how they used the occasion to revive an old GOP talking point: the Fed has too much discretion.”

“Sen. Thom Tillis (R-N.C.), who sat in as the ranking Republican at the session, argued that the Fed should be bound by formalized rules in its interest rate decisions, our Victoria Guida wrote. And he pointed to a formula, named after Stanford economist John Taylor, suggesting that the central bank’s main policy rate should be much, much higher than it is.” “The Fed has largely boxed itself into a menu of purely reactive policy measures,” Tillis said. “Unless the Fed works quickly to move away from their discretion-based monetary policy approach that has remained consistently well behind the curve, I am concerned the Fed will lose its credibility to effectively manage the national economic situation.

And in an article Assessing Monetary Policy Through The Taylor Rule by Blu Putnam, Chief Economist, CME Group, said : “In policy circles this trade-off is embodied in what is known as the Taylor Rule, which argues that the Fed should raise rates in line with a simple formula for an assumed inflation-jobs trade-off.… Of note, the Taylor Rule today, and for some time in the past, has been suggesting the Fed needs to start removing accommodation, which is what the Fed is now doing.”

And the discussion went global.  Here as an article about the Bank of England entitled Bank of England’s Interest Rate Should be Closer to 10% says Swiss Re written by Gary Howes “The most significant central bank tightening cycle in decades has begun and we expect much more policy tightening to come this year and next,” says Jérôme Haegeli, Swiss Re Group’s Chief Economist. “Approximations of an adequate interest rate policy, proxied by our estimates of the Taylor rule, suggest that almost all major advanced economy central banks are at least 2ppts below interest rate levels that would be warranted given the current economic environment,” says Haegeli. “The Taylor rule is an equation that prescribes the central bank policy rate as a function of inflation and economic slack such as the output gap or the unemployment gap.”

To conclude this post, the above is just a sampling of the commentary, and much of it is promising. Much has already been written over the years about monetary policy rules, which answers some of the points raised by Jay Powell. These issues will be covered and analyzed in future writings, as will the recent promising renewal of the focus on rules.

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