They go up, they go down. It doesn't sound confusing. But it is. Even for economists. Just ask James Bullard, the president of the St. Louis Federal Reserve.
Let's step back for a moment. What does the Federal Reserve do exactly? The story you usually hear is all about interest rates. The Fed raises rates when the economy is too hot, and lowers them when it's too cool. But there's a problem. The Fed can't cut short-term interest rates now. They've been stuck at zero since 2008. But longer-term interest rates aren't. So the Fed has tried to push those longer rates down to spur stronger growth.
The big question now is whether the Fed should do more. This shouldn't be a big question if the Fed believes its own economic projections -- which show inflation staying too low and unemployment too high for years to come. So why did the Fed basically sit pat at its latest meeting? For one, Ben Bernanke wants to see more data confirming a slowdown before doing more. For another, James Bullard -- and some other FOMC members -- don't think the Fed needs to do more.
Bullard thinks Europe is doing the Fed's job for it. Or something. Here's what Bullard had to say recently about why he doesn't think further easing is called for:
Treasury yields have gone to extraordinarily low levels. That took some
of the pressure off the FOMC since a lot of our policy actions would be
trying to get exactly that result.
In other words, the Fed doesn't need to push down long-term interest rates because long-term interest rates have already been pushed down by investors looking for a financial safe haven. This would be right if the point of Fed policy was lower interest rates. But the point of Fed policy isn't lower interest rates.
The point is more growth. Lower interest rates only matter insofar as they promote more growth. Lower interest rates do not matter unto themselves. Think about it this way. Interest rates might fall for good or bad reasons. The Fed buying bonds is a good reason. Investors buying bonds due to fears of eurogeddon is a bad reason. They are not equivalent.
Don't take my word for it. Ask the markets. The chart below from Bloomberg gives us a sense of how much inflation markets have expected in five years time.
So-called breakevens just take the borrowing costs on normal Treasury bonds and subtract the borrowing costs from inflation-protected Treasury bonds. That difference should be a decent proxy of expected inflation. That's not always the case because inflation-protected Treasury bonds are traded so little that they're prone to fairly violent swings.
But why do we care about inflation? Well, when the Fed pushes up growth, it also pushes up inflation. Breakevens have jumped dramatically whenever the Fed has eased -- whether that was QE2 in late 2010, Operation Twist in late 2011, or extended guidance in early 2012. But breakevens are falling dramatically now. In other words, markets expect less growth and less inflation right now. That's a weeee bit different than what happens when the Fed eases.
And that brings us to the paradox of interest rates. (Feel free to skip to the next paragraph for the big reveal, if your'e so inclined.) Take a look at the breakeven chart again. Whenever the Fed eases, it says that it's trying to reduce long-term borrowing costs. For breakevens to rise while Treasury yields fall, inflation-protected Treasuries would have to fall even more. Now, that's happened a bit. But not enough to explain the rise in breakevens.
In other words, Treasury yields rise when the Fed eases. Huh? Isn't the whole point to lower interest rates? Technically, yes. But if the Fed succeeds in reducing borrowing costs, that increases inflation. And when inflation increases, investors demand higher yields on Treasuries. So if the Fed succeeds, we'd expect interest rates to rise. If the Fed fails, we'd expect interest rates to fall. It's an upside down world.
There's no big mystery why our economic recovery hasn't felt like much of one. The Fed has run far too tight a policy for far too long. The worst part is that too many Fed officials don't seem to understand that. They think policy has been loose. That's a shame.
Maybe it's time for them to start doing the opposite.
It’s a paradox: Shouldn’t the most accomplished be well equipped to make choices that maximize life satisfaction?
There are three things, once one’s basic needs are satisfied, that academic literature points to as the ingredients for happiness: having meaningful social relationships, being good at whatever it is one spends one’s days doing, and having the freedom to make life decisions independently.
But research into happiness has also yielded something a little less obvious: Being better educated, richer, or more accomplished doesn’t do much to predict whether someone will be happy. In fact, it might mean someone is less likely to be satisfied with life.
That second finding is the puzzle that Raj Raghunathan, a professor of marketing at The University of Texas at Austin’s McCombs School of Business, tries to make sense of in his recent book, If You’re So Smart, Why Aren’t You Happy?Raghunathan’s writing does fall under the category of self-help (with all of the pep talks and progress worksheets that that entails), but his commitment to scientific research serves as ballast for the genre’s more glib tendencies.
A professor of cognitive science argues that the world is nothing like the one we experience through our senses.
As we go about our daily lives, we tend to assume that our perceptions—sights, sounds, textures, tastes—are an accurate portrayal of the real world. Sure, when we stop and think about it—or when we find ourselves fooled by a perceptual illusion—we realize with a jolt that what we perceive is never the world directly, but rather our brain’s best guess at what that world is like, a kind of internal simulation of an external reality. Still, we bank on the fact that our simulation is a reasonably decent one. If it wasn’t, wouldn’t evolution have weeded us out by now? The true reality might be forever beyond our reach, but surely our senses give us at least an inkling of what it’s really like.
Nearly half of Americans would have trouble finding $400 to pay for an emergency. I’m one of them.
Since 2013,the Federal Reserve Board has conducted a survey to “monitor the financial and economic status of American consumers.” Most of the data in the latest survey, frankly, are less than earth-shattering: 49 percent of part-time workers would prefer to work more hours at their current wage; 29 percent of Americans expect to earn a higher income in the coming year; 43 percent of homeowners who have owned their home for at least a year believe its value has increased. But the answer to one question was astonishing. The Fed asked respondents how they would pay for a $400 emergency. The answer: 47 percent of respondents said that either they would cover the expense by borrowing or selling something, or they would not be able to come up with the $400 at all. Four hundred dollars! Who knew?
For some, abandoning expensive urban centers would be a huge financial relief.
Neal Gabler has been a formative writer for me: His Winchell: Gossip, Power, and the Culture of Celebrity was one of the books that led me to think about leaving scholarship behind and write nonfiction instead, and Walt Disney: The Triumph of the American Imagination was the first book I reviewed as a freelance writer. To me, he exemplifies the best mix of intensive archival research and narrative kick.
So reading his recent essay, "The Secret Shame of Middle-Class Americans," was a gut punch: First, I learned about a role model of mine whose talent, in my opinion, should preclude him from financial woes. And, then, I was socked by narcissistic outrage: I, too, struggle with money! I, too, am a failing middle-class American! I, too, am a writer of nonfiction who should be better compensated!
The team, which had 5,000-to-1 odds of winning the English Premier League, has pulled off the biggest upset in sports history.
Much to everyone’s disbelief, the Leicester City soccer club was crowned the champion of the English Premier League Monday.
The team’s chances last summer were small, to say the least. Back then, William Hill, a British betting group, put the odds of the Foxes of Leicester City, a fledgling team based two hours north of London, of winning at 5,000-to-1. Essentially, the team had a .0002 percent chance of being the best team in the league of 20. Except for the 25 people who bet a combined total of just $243 on the team through William Hill, no one expected this from Leicester City.
Here’s some perspective: William Hill once put the odds of Elvis being found alive and well at 2,000-to-1 and an acknowledgment by the U.S. government that the first moon landing was faked at 500-to-1.
Three Atlantic staffers discuss “Home,” the second episode of the sixth season.
Every week for the sixth season of Game of Thrones, Christopher Orr, Spencer Kornhaber, and Lenika Cruz will be discussing new episodes of the HBO drama. Because no screeners are being made available to critics in advance this year, we'll be posting our thoughts in installments.
The U.S. president talks through his hardest decisions about America’s role in the world.
Friday, August 30, 2013, the day the feckless Barack Obama brought to a premature end America’s reign as the world’s sole indispensable superpower—or, alternatively, the day the sagacious Barack Obama peered into the Middle Eastern abyss and stepped back from the consuming void—began with a thundering speech given on Obama’s behalf by his secretary of state, John Kerry, in Washington, D.C. The subject of Kerry’s uncharacteristically Churchillian remarks, delivered in the Treaty Room at the State Department, was the gassing of civilians by the president of Syria, Bashar al-Assad.
“A typical person is more than five times as likely to die in an extinction event as in a car crash,” says a new report.
Nuclear war. Climate change. Pandemics that kill tens of millions.
These are the most viable threats to globally organized civilization. They’re the stuff of nightmares and blockbusters—but unlike sea monsters or zombie viruses, they’re real, part of the calculus that political leaders consider everyday. And according to a new report from the U.K.-based Global Challenges Foundation, they’re much more likely than we might think.
In its annual report on “global catastrophic risk,” the nonprofit debuted a startling statistic: Across the span of their lives, the average American is more than five times likelier to die during a human-extinction event than in a car crash.
Partly that’s because the average person will probably not die in an automobile accident. Every year, one in 9,395 people die in a crash; that translates to about a 0.01 percent chance per year. But that chance compounds over the course of a lifetime. At life-long scales, one in 120 Americans die in an accident.
The newly discovered worlds are now the most promising targets in the search for life among the stars—and the race to take a closer look at them has begun.
The robot telescope settles on its target, a star that sits closer than all but a tiny fraction of the tens of billions of stellar systems that make up the Milky Way. Its mirror grabs light for 55 seconds, again and again. The robot telescope—called TRAPPIST—will observe the star for 245 hours across sixty-two nights, making 12,295 measurements. Eleven times, it will see the star dim, ever so slightly. This dip in luminosity, called a transit, has a straightforward astronomical explanation: It’s a planet passing in front of the star, blocking just a bit of its light. In this case, the transits tell us that 3 planets orbit the star.
“So what?” you might think.
Astronomers have been spotting planets around distant stars for years now, using the transit method, among others. Not a month goes by without a headline, touting the discovery of new “exoplanets.” But these planets are different, and not only because they’re near. Like the Earth these planets could potentially permit liquid water to persist on their surfaces—which is thought to be a key pre-condition for the emergence of life. Today, when their discovery is published in Nature, they will instantly become the most promising planets yet found in the search for life among the stars.