Economics One

The President of the Federal Reserve Bank of St. Louis, James Bullard, posted a very clear analysis of this question, addressing whether the Federal Reserve had raised the federal funds interest rate enough. The title of his analysis is what I used to title this blog.

His analysis is based primarily on the Taylor Rule. He concludes that the federal funds rate is just barely high enough: https://www.stlouisfed.org/publications/regional-economist/2023/june/is-monetary-policy-sufficiently-restrictive.

I recommend this piece. It refers to the paper he gave at the annual monetary Policy Conference at Hoover and Stanford last month. It shows that there is still uncertainty, and, in my view based on the Taylor Rule, there is still room to raise the federal funds rate, but of course much less that before the Fed began to adjust.

Yesterday to travelled to Washington, DC and testified at the Cannon House Office Building before the House Committee on the Budget. The Chairman was Jodey Arrington, the Ranking Member was Brendan Boyle, and many other members of the Committee on the Budget were there for the very important topic “The Fiscal State of the Union.”  I was pleased to offer my assessment. I have testified many times in the past fifteen years before both the House Budget Committee and the Senate Budget Committee, and I drew on some of those conclusions in my testimony. A video of the whole hearing (with a shorter version of my written testimony) is here https://www.hoover.org/research/john-taylor-testifies-house-budget-committees-fiscal-state-union.

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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: https://www.bloomberg.com/news/videos/2023-02-15/-bloomberg-markets-the-close-02-14-2023 .

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 https://www.hoover.org/news/economic-policy-working-group-reaches-15-year-milestone. 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:

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.

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: https://www.hoover.org/events/policy-seminar-john-cochrane-mickey-levy-kevin-warsh-and-john-taylor 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: https://www.hoover.org/events/roundtable-economic-policy-john-cochrane-mickey-levy-kevin-warsh-and-john-taylor  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.

Informative NPR interview and discussion with me https://www.npr.org/2022/11/02/1133720724/john-taylors-formula-for-the-fed 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 https://www.npr.org/transcripts/1133720724.