On the same theme: Wall Street Overwhelmingly Favors Yellen Over Summers For Fed Chair: CNBC Poll http://www.huffingtonpost.com/2013/07/26/wall-street-yellen-summers-fed-poll_n_3659823.html
On Mon, Jul 29, 2013 at 11:12 AM, Marv Gandall <[email protected]> wrote: > (The WSJ ran the story below on its front page, which is stark > contradiction to its editorial line and that of conservative Republicans > who are strongly opposed to the Fed's policy of quantitative easing. It > vindicates the Keynesians who suggested monetary easing would not lead to > inflation in a slack economy with high unemployment, and is a repudiation > of the nostrums peddled by the monetarist followers of Milton Friedman. The > irony is that the Journal's most loyal Wall Street readers, whatever their > ideological predilections, have benefited most from the Fed's robust asset > purchases since the near-collapse of the financial system in 2008, and any > hint of a Fed retreat has caused their stock and bond portfolios to > plummet. The Journal article lends support to those economists and > investors who have been warning against any tapering off of Fed bond > purchases, especially those who see monetary policy as a more palatable > alternative to fiscal spending. It will also lend support, intentionally or > otherwise, to Janet Yellen's candidacy for the Fed chair. If the Obama > administration is looking for right-wing cover to appoint Yellen ahead of > Larry Summers, which its liberal base has been demanding, the WSJ has just > provided it.) > > Federal Reserve 'Doves' Beat 'Hawks' in Economic Prognosticating > Slow Growth, Low Inflation Give Yellen, Dudley Upper Hand on Forecasts > By JON HILSENRATH and KRISTINA PETERSON > Wall Street Journal > July 29 2013 > > As the U.S. emerged from recession in the summer of 2009, Janet Yellen, > then president of the Federal Reserve Bank of San Francisco, took a grim > view of the economy's prospects. > > "I expect the pace of the recovery will be frustratingly slow," she said > in a San Francisco speech. A month later, addressing fears that money > flooding into the economy from the Federal Reserve would stoke inflation, > Ms. Yellen said not to worry in a speech to Idaho bankers: High > unemployment and the weak economy would tamp wages and prices. > > Others at the Fed spoke forcefully in the other direction. Unless the > central bank reversed the easy money course, Philadelphia Fed President > Charles Plosser warned in December 2009, "the inflation rate is likely to > rise to levels that most would consider unacceptable." > > Ms. Yellen was proved right. > > Predicting the direction of the U.S. economy with precision is impossible. > But the Fed must forecast growth, inflation and unemployment to guide its > decisions on interest rates. Central bank miscalculations—when the Fed > pushed interest rates too low or too high—have historically turned problems > into catastrophes, fueling the Great Depression, for example, and the > wealth-eroding inflation of the 1970s. > > The Wall Street Journal examined more than 700 predictions made between > 2009 and 2012 in speeches and congressional testimony by 14 Fed policy > makers—and scored the predictions on growth, jobs and inflation. > > The most accurate forecasts overall came from Ms. Yellen, now the Fed's > vice chair. She was joined in the high scores by other Fed "doves," policy > makers who wanted aggressively easy money policies to confront a weak U.S. > economy and low inflation. Collectively, they supported Fed Chairmen Ben > Bernanke's strategy to pump money into the U.S. economy. > > The least accurate forecasts came from central bank "hawks," those who > feared Fed policies would trigger rising inflation. > > Examining such predictions is more than a parlor game. Fed forecasts are > important now because the central bank is near a turning point that will > have a substantial impact on the U.S. economy. > > Fed officials are considering whether to scale back an $85-billion-a-month > bond-buying program this year, a move that could pull stock prices down and > send interest rates higher. > > If the Fed believes growth and hiring will pick up—and inflation will rise > to a more normal 2%—the central bank will start to pull back on the > purchases. > > But if forecasts are wrong—if the Fed overestimates the economy's strength > and pulls back too soon, for example—then economic growth could falter, > stalling an incipient housing recovery and fueling the jobless rate. > > "We should be keeping track of these forecasts and having some > accountability," said Mark Gertler, a New York University economist who > reviewed the Journal analysis. > > Of course, forecasting ability doesn't always translate into wise central > bank leadership. Arthur Burns, who led the Fed during the high inflation of > the 1970s, was known for his forecasting prowess. > > But New York Fed President William Dudley said forecasting errors have had > serious consequences. "We were consistently too optimistic about growth > over the 2009-2012 period," he said in a May speech. "As a result, with the > benefit of hindsight, we did not provide enough stimulus." > > Richard Fisher, the Dallas Fed president and another high scorer, took a > different view. He has said slow growth was evidence the Fed's easy money > medicine wasn't working and the economy needed less of it. > > The Fed issues a quarterly forecast based on the views of its 12 regional > Fed bank presidents and seven Fed governors. Over the past four years, > these forecasts included errors, mostly from overestimating the economy's > strength. None of the Fed forecast reports indicate who said what. > > To evaluate the performance of individual Fed officials, the Journal > looked at texts of speeches and congressional testimony. Forward-looking > comments about the economy were rated for accuracy. > > The Journal gave a mark ranging from -1.0—far off the mark—to 1.0—nearly > perfectly correct—for each comment and averaged the total. A final score of > zero showed someone was wrong as often as correct. > > The analysis was shared with the Fed policy makers. Five of the 19 policy > makers weren't ranked because they hadn't been at the Fed long enough or > hadn't spoken publicly enough about the economy. > > Ms. Yellen and Mr. Dudley—both in Mr. Bernanke's inner circle—ranked first > and second in the Journal analysis. Both predicted slow growth and low > inflation over the past four years. Ms. Yellen had the highest overall > score in the Journal's ranking, 0.52. Mr. Dudley scored 0.45. > > The lowest scores were tallied by Mr. Plosser, -0.01; St. Louis Fed > President James Bullard, 0.00; Richmond Fed President Jeffrey Lacker, 0.05, > and Minneapolis Fed President Narayana Kocherlakota, 0.07. > > Investors who closely follow every comment by Fed officials don't appear > to distinguish policy makers by the accuracy of their economic forecasts. > > Macroeconomic Advisers LLC, a research firm, determined Mr. Plosser, Mr. > Bullard and Mr. Lacker consistently moved markets more than Ms. Yellen. > Messrs. Plosser, Lacker and Bullard and Ms. Yellen declined to comment for > this article. > > Forecasts by Fed officials depend on their view of how the economy works. > Ms. Yellen, for instance, places great weight on the role of economic > slack—high unemployment or idle factories—in driving inflation. Lots of > slack, she has argued, holds down inflation. On the other hand, prices are > more likely to rise when there are few available workers and factories are > operating near capacity in this view. > > "With slack likely to persist for years, it seems likely that core > inflation will move even lower," Ms. Yellen said in September 2009. Her > views warrant scrutiny because she is a candidate to succeed Mr. Bernanke > when his term ends in January. > > Mr. Dudley did especially well forecasting growth. Some Fed officials > believed the current recovery would behave like past recoveries and the > economy would, for a while, grow faster than its long-term trend of 3.2%. > > But in May 2010, Mr. Dudley returned to his alma mater, New College of > Florida, with a grim counter argument during a commencement address. > > "The recovery is not likely to be as robust as we would like for several > reasons," he said, pointing to the fragile banking system and the debt > weighing down many households. He declined to comment for this article. > > Other Fed officials, including Mr. Bernanke consistently predicted that > faster growth was just around the corner. > > "Although the pace of recovery has slowed in recent months and is likely > to continue to be fairly modest in the near term, the preconditions for a > pickup in growth next year remain in place," Mr. Bernanke said in October > 2010, just before launching a bond-buying program. Growth slowed the > following year. > > Mr. Bernanke finished in the middle of the pack in the Journal's analysis, > in part because he often relayed the consensus of Fed officials. He > declined to comment for this article. > > Luck also played a role in forecasts. In 2011, for instance, the economy > looked like it was moving to faster growth when a tsunami struck Japan, > disrupting the global economy. > > The Fed's hawks had some of the worst forecasters. Mr. Plosser > overestimated growth, while Mr. Bullard, Mr. Lacker and Mr. Kocherlakota > warned of looming inflation. Their forecasts were wrong almost as often as > they were correct. > > While Ms. Yellen focused on the impact of slack on inflation, some hawks > focused on money. The late Milton Friedman, the Nobel Prize-winning > University of Chicago economist, said inflation was always and everywhere a > byproduct of monetary policy: Prices only shoot higher when a central bank > pumps too much money into the economy. > > Hawks worried the Fed's decision to pump trillions of dollars into the > U.S. financial system after the crisis would result in fast-rising prices. > They sometimes couched their worries as risks, rather than predictions. In > 2009, for instance, Mr. Bullard warned that the Fed's bond-buying programs > had created a "medium-term inflation risk." > > "The hawks have been issuing warnings, but there has been no sign of the > things they've been warning against," said Martin Eichenbaum, an economist > at Northwestern University and a Fed dove. > > Mr. Kocherlakota of the Minneapolis Fed changed his hawkish views in 2012. > "Inflation is not coming in as hot as I expected," he said in an interview > last year. "You have to learn from the data." He declined to comment for > this article. > > Mr. Bullard changed his focus at times. In 2010, and again more recently, > he signaled concern about inflation getting too low. A St. Louis Fed > spokeswoman said the Journal analysis failed to account for the role Mr. > Bullard's warnings played in formulating policies that helped to prevent > inflation from getting too high or too low. > > Some of the Fed's best forecasts came from noneconomists, including Fed > governor Elizabeth Dukeand Atlanta Fed President Dennis Lockhart—former > bankers—and Mr. Fisher, a former investment manager. Some of the Fed's most > brilliant Ph.D.s, including Mr. Kocherlakota, generated the most subpar > scores. > > Economists generally rely on economic models based on past behavior. These > models are used heavily by the staff at the Federal Reserve Board in > Washington and at regional Fed banks. But the recession and the current > recovery were unlike most past cycles. > > "The models have been wrong," Mr. Bullard, one of the Fed's many Ph.D. > economists, said in an interview with the Journal in November. > > James Hamilton, an economist at the University of California at San Diego > who also reviewed the Journal's analysis, warned against betting that the > doves' recent winning streak would continue. > > "This was a period of subpar GDP growth and low inflation," he said. > "Whether these same individuals would also prove to be better forecasters > during a period of strong GDP growth and rising inflation is difficult to > determine on the basis of the last four years." > > One reason the hawks have been wrong about inflation is that the money the > Fed has pumped into the financial system has tended to sit at banks without > being lent to customers. > > Economists say it is possible inflation can still catch fire if banks lend > more aggressively and money starts circulating more widely. > > If that happens, Mr. Eichenbaum said, the hawks would be proven right and > "everybody else is going to look real bad." > _______________________________________________ > pen-l mailing list > [email protected] > https://lists.csuchico.edu/mailman/listinfo/pen-l > -- Robert Naiman Policy Director Just Foreign Policy www.justforeignpolicy.org [email protected]
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