Chicago Fed president Charles Evans has gone from dissenter to intellectual leader in just a year. The future of the recovery might be at stake.
Some revolutionaries wear Guy Fawkes masks and talk about the 1 percent, and some revolutionaries wear suits and talk about policy thresholds. Chicago Fed president Charles Evans is one of the latter.
A year ago Evans was the rare dovish dissenter at the Fed. He didn't think it was taking the unemployment half of its dual mandate seriously enough, so he proposed a new, eponymous rule for it to do better. He certainly wasn't the first Fed president to have his own ideas about monetary policy, but a funny thing happened on his way to heterodoxy -- his ideas quickly became the consensus. Now, just a year later, the Fed has fully embraced the so-called Evans rule by linking interest rates to the unemployment rate.
Ain't no revolution like a monetary policy revolution.
It's been a brave, old world for central banks the past four years. Short-term interest rates have been stuck at zero, which, outside of Japan, hasn't happened since the 1930s. It's what economists call a liquidity trap, and it means central banks can't stimulate growth like they normally do by cutting short-term interest rates. They can't cut below zero. This doesn't mean central banks are powerless, just that they have to try new things.
These new things come in two varieties: promises and purchases. Central banks can pledge to hold short-term rates at zero even after the recovery accelerates, or they can buy long-term bonds to push down long-term rates; the former is what Paul Krugman calls "credibly promising to be irresponsible" and the latter is what we call "quantitative easing." These sound like big changes from standard operating procedure, but the goal with both is the same as normal -- to reduce interest rates. It's just harder to do in a liquidity trap. Central banks have to increase expected inflation to lower inflation-adjusted rates when nominal, that is headline, rates are at zero. That's the point of these promises and purchases, and that's been the point of the Fed saying it expects to keep rates at zero through mid-2015 and buying $85 billion of mortgage and Treasury bonds a month. But as much as the Fed has done, there's still much more it can do -- like making its promises more explicit -- which it started to do with its latest policy move. Let's break it down into two pieces.
(1) THE EVANS RULE
The Fed's big announcement was that it won't raise rates before unemployment falls to 6.5 percent or inflation rises to 2.5 percent. Notice the word "before" here. The Fed won't automatically raise rates if unemployment or inflation hits one of these thresholds, but it won't do so until at least then. These are the exact thresholds Evans endorsed a few weeks ago, which are modest tweaks from his original thresholds last year of 7 percent unemployment and 3 percent inflation.
Why all the fuss? This Evans rule doesn't seem to tell us anything the Fed wasn't already telling us. Just look at the Federal Open Market Committee's (FOMC) latest economic projections. The Fed doesn't think unemployment will fall below 6.5 percent until 2015 -- and it never thinks inflation will rise above 2 percent -- which implies rates will stay at zero until then. That's exactly what they were saying before.
In truth, the Evans revolution is less a revolution itself and more a significant step on the way to the actual revolution -- NGDP targeting. We'll come back to this larger point, but first let's talk about why the Evans rule matters. Its virtue is it should make the Fed's decision-making more transparent, and that should affect people's expectations more. Contrast the Evans rule with what the Fed told us before -- say from October -- about how long zero interest rates would last.
[The Fed] currently anticipates that exceptionally low levels for the federal runds rate are likely to be warranted at least through mid-2015.
Is this a promise, maybe? That's how most people interpreted it, but it's not entirely clear. Read it again. The Fed was saying it expected the economy to be crummy enough to justify zero rates until mid-2015. But what if the economy picked up before then? Would the Fed raise rates then? Good question! The Evans rule clears this up a bit -- though not entirely -- but more importantly, it clears up whether the Fed has a 2 percent inflation target or ceiling.
The Fed has been trying to answer that question for the past year. As Greg Ip of The Economist pointed out, the Fed rather significantly announced back in January that it thought the inflation and unemployment halves of its mandate were equally important, and changed its long-run inflation target from 1.5-2 percent to 2 percent. This was the Fed's way of saying it wouldn't necessarily raise rates if inflation crept over 2 percent as long as unemployment was still high and long-run inflation expectations didn't rise. In other words, the Fed's inflation target was not a 2 percent speed limit on the recovery. Or was it? Look at that table again. The Fed doesn't project inflation to go above 2 percent at all. That sure looks like a ceiling, still. The Evans rule tries to correct this -- though it would help if these latest projections were symmetrical around 2 percent -- by explicitly saying the Fed really, seriously will tolerate inflation as high as 2.5 percent in the short run.
But there's plenty that still isn't clear. Like how and whether this will work. The Evans rule sounds straightforward enough, but these thresholds are not. The Fed left itself a bit of wiggle room. When it comes to unemployment, the Fed will look at other labor force measures like the participation rate. In other words, it will consider whether unemployment is falling because people are finding jobs or because people have given up on finding jobs. It gets murkier when it comes to inflation. The Fed will use its 1-2 year inflation forecasts for its threshold. Yes, forecasts. That gives the Fed some needed flexibility to ignore commodity surges, like oil in 2011, but it's not the clearest of guides.
Remember, clarity is supposed to be the point. The idea is that the more markets understand the Fed's plans, the more the Fed's plans will shape markets' expectations. It's a bit like a Jedi mind trick. If people think things will be better in the future, then things will be better in the future, because that will get them spending and investing more now. Making us expect a better tomorrow might be the best the Fed can do today. Especially when you consider how short-lived the effects have been from the Fed's other unconventional easing. You can see that in the chart below that looks at market-based inflation expectations for 1, 2, and 10 year periods. Inflation expectations rise every time the Fed does something, and then retreat a few months later.
(Note: These break-evens measure the differences between Treasury and TIPS, or inflation-protected, bonds. They aren't always reliable because TIPS are so lightly traded -- their nickname is "terribly illiquid pieces of," well, we'll let you figure out the rest -- but they're a decent proxy. All data is from Bloomberg).
Inflation expectations should tick up again, especially if we disarm the austerity bomb known as the fiscal cliff, but the overall pattern of peaks and valleys probably isn't going to go away yet.
(2) ASSET PURCHASES
The Fed's other (slightly less) big announcement was that it will continue its $85 billion of monthly asset purchases, albeit with a slight, um, twist. Here's what hasn't changed: the Fed will buy $45 billion of Treasury bonds and $40 billion of mortgage bonds each and every month until unemployment "substantially" improves. What has changed is how the Fed will pay for its $45 billion of Treasury bond purchases. Before, the Fed had been selling $45 billion of short-term bonds to pay for the $45 billion of long-term bonds it was buying, which went by the dramatic name of "Operation Twist". It was a way to lower long-term borrowing costs without printing money, back when more Fed members were worried about potential inflation. But with its supply of short-term Treasuries running, well, short, the Fed will turn Twist into QE. In other words, it will now print money to pay for the $45 billion of Treasuries it buys. The Fed's balance sheet will grow more than before, though its monthly flow of purchases remains the same.
It's okay if you have that Animal Farm feeling. There's been a revolution, but nothing has changed. The Fed still thinks it's first rate hike will come in 2015-ish, and it's still buying $85 billion of bonds a month. This is a true fact. But it undersells the intellectual shift at the Fed. It's gone from mostly thinking about inflation to creating a framework to guide its thinking about inflation and unemployment. And it's done that in just a year. This framework, the Evans rule, is really just a quasi-NGDP target. It's not exactly the catchiest of phrases, but NGDP, or nominal GDP, targeting would be a real revolution in central banking. In plain English, it's the idea that central banks should target the size of the economy, unadjusted for inflation, and make up for any past over-or-undershooting. In theory, a flexible enough inflation target should mimic an NGDP target, which is why the Evans rule is so historic. It's an incremental step on the way to regime change at the Fed.
That doesn't mean we should expect the Fed to move towards NGDP targeting anytime soon. A risk-averse institution like the Fed will want to see another country try it first -- and it might get that chance soon. Incoming Bank of England chief Mark Carney, who currently heads the Bank of Canada, endorsed the idea in a recent speech, and British Treasury officials indicated they might be open to it too -- which is significant because the British Treasury can unilaterally change its central bank's mandate. It might not be long till NGDP targeting comes to Britain, and from there, the world. If it does, you can be sure that Charles Evans will be figuring out how to make it work here.
The Evans rule won't save the economy today, but it might tomorrow -- if it leads to better central banking. It should. It's a big conceptual step forward. And it's a big conceptual step forward we're going to need if Evan Soltas is right that we're likely to hit the zero bound more often in the future.
A new survey suggests the logistics of going to services can be the biggest barrier to participation—and Americans’ faith in religious institutions is declining.
The standard narrative of American religious decline goes something like this: A few hundred years ago, European and American intellectuals began doubting the validity of God as an explanatory mechanism for natural life. As science became a more widely accepted method for investigating and understanding the physical world, religion became a less viable way of thinking—not just about medicine and mechanics, but also culture and politics and economics and every other sphere of public life. As the United States became more secular, people slowly began drifting away from faith.
Of course, this tale is not just reductive—it’s arguably inaccurate, in that it seems to capture neither the reasons nor the reality behind contemporary American belief. For one thing, the U.S. is still overwhelmingly religious, despite years of predictions about religion’s demise. A significant number of people who don’t identify with any particular faith group still say they believe in God, and roughly 40 percent pray daily or weekly. While there have been changes in this kind of private belief and practice, the most significant shift has been in the way people publicly practice their faith: Americans, and particularly young Americans, are less likely to attend services or identify with a religious group than they have at any time in recent memory.
Two decades ago, Osama bin Laden officially launched al-Qaeda’s struggle against the United States. Neither side has won.
Exactly two decades ago, on August 23, 1996, Osama bin Laden declared war on the United States. At the time, few people paid much attention. But it was the start of what’s now the Twenty Years’ War between the United States and al-Qaeda—a conflict that both sides have ultimately lost.
During the 1980s, bin Laden fought alongside the mujahideen in Afghanistan against the Soviet Union. After the Soviets withdrew, he went home to Saudi Arabia, then moved to Sudan before being expelled and returning to Afghanistan in 1996 to live under Taliban protection. Within a few months of his arrival, he issued a 30-page fatwa, “Declaration of War Against the Americans Occupying the Land of the Two Holy Places,” which was published in a London-based newspaper, Al-Quds Al-Arabi, and faxed to supporters around the world. It was bin Laden’s first public call for a global jihad against the United States. In a rambling text, bin Laden opined on Islamic history, celebrated recent attacks against U.S. forces in Lebanon and Somalia, and recounted a multitude of grievances against the United States, Israel, and their allies. “The people of Islam had suffered from aggression, iniquity and injustice imposed on them by the Jewish-Christian alliance and their collaborators,” he wrote.
A hotly contested, supposedly ancient manuscript suggests Christ was married. But believing its origin story—a real-life Da Vinci Code, involving a Harvard professor, a onetime Florida pornographer, and an escape from East Germany—requires a big leap of faith.
On a humid afternoon this past November, I pulled off Interstate 75 into a stretch of Florida pine forest tangled with runaway vines. My GPS was homing in on the house of a man I thought might hold the master key to one of the strangest scholarly mysteries in recent decades: a 1,300-year-old scrap of papyrus that bore the phrase “Jesus said to them, My wife.” The fragment, written in the ancient language of Coptic, had set off shock waves when an eminent Harvard historian of early Christianity, Karen L. King, presented it in September 2012 at a conference in Rome.
Never before had an ancient manuscript alluded to Jesus’s being married. The papyrus’s lines were incomplete, but they seemed to describe a dialogue between Jesus and the apostles over whether his “wife”—possibly Mary Magdalene—was “worthy” of discipleship. Its main point, King argued, was that “women who are wives and mothers can be Jesus’s disciples.” She thought the passage likely figured into ancient debates over whether “marriage or celibacy [was] the ideal mode of Christian life” and, ultimately, whether a person could be both sexual and holy.
Intensely emotional and uncompromising, the singer’s long-awaited new album meditates on the passage of time.
Frank Ocean is still thinking about forever. One of his two new albums is called Endless, even though its songs all seem to end too soon. The more significant release, called either Blonde or Blond depending on where you acquire it, repeatedly laments nights, season, and years that can never be retrieved. The first time his unadorned vocals appear on that album, Ocean sings, “We'll let you guys prophesy / We gon' see the future first.” The line comes across as a challenge to get on his level and unhitch from the present—a necessary step before accessing the deep pleasures of his uncompromising new music.
Ocean’s obsession with time has been well-documented by now. His 2011 debut had the self-explanatory title Nostalgia, Ultra and his 2012 breakout, Channel Orange, was inspired by a teenage summer that, he said, seemed “orange.” He’s like the memory machine in Pixar’s Inside Out, processing the past into gemlike objects that can be sorted by visual cue and emotional essence. The blonds and blondes of Blond(e) are, on one level of interpretation, ex-boyfriends and ex-girlfriends. He references car models—Acuras, Ferraris, X6s—as shorthand for life phases. And on the luminous new track “Ivy,” he describes a callous breakup but keeps saying that when he thinks about the relationship, “the feeling still deep down is good.” Good: one simple word explains and colors all the complexity he’s sung about elsewhere in the song.
Polling within the margin of error among African Americans, the Republican tries new outreach—but his approach seems doomed to failure.
Although Donald Trump has long claimed to “have a great relationship with the blacks,” the polls tell a different story, with Trump frequently polling in the single digits among black voters. Over the last few days, the Republican nominee has added a new passage to his stump speech, reaching out to the African American community.
Our government has totally failed our African American friends, our Hispanic friends and the people of our country. Period. The Democrats have failed completely in the inner cities. For those hurting the most who have been failed and failed by their politicians—year after year, failure after failure, worse numbers after worse numbers. Poverty. Rejection. Horrible education. No housing, no homes, no ownership. Crime at levels that nobody has seen. You can go to war zones in countries that we are fighting and it's safer than living in some of our inner cities that are run by the Democrats. And I ask you this, I ask you this—crime, all of the problems—to the African Americans, who I employ so many, so many people, to the Hispanics, tremendous people: What the hell do you have to lose? Give me a chance. I'll straighten it out. I'll straighten it out. What do you have to lose?
The Republican nominee is pledging to follow an approach that resembles President Obama's.
Donald Trump is stepping back from one of the main themes of his presidential campaign: a promise to crack down on illegal immigration. He is now pledging to pursue an immigration policy that resembles President Obama’s.
On Monday night, Trump said in an interview on Fox News that “the first thing we’re going to do if and when I win is we’re going to get rid of all of the ‘bad ones.’” As for the immigrant population as a whole, “we’re going to go through the process,” Trump said, adding, “What people don’t know is that Obama got tremendous numbers of people out of the country. Bush, the same thing. Lots of people were brought out of the country with the existing laws. Well, I’m going to do the same thing.”
A look at the many conflicts over the precious, tasty mineral that humans need to survive
Salt is a magical substance. It reduces bitterness, enhances sweetness, boosts flavor, and preserves perishable foods. Without it, we would die: The human body can't make sodium, but our nerves and muscles don't work without it. It was considered rare until quite recently, so it's hardly surprising that, throughout history, salt has been the engine behind empires and revolutions. Today, there's a new battle in the salt wars, between those who think that we eat too much of it and it's killing us—and those who think most of us are just fine. Join us for a serving of salt, seasoned with science, history, and a little politics.
Chain restaurants, which for so long used their decorations to celebrate America’s past, are now focusing on a (clutter-free) future.
T.G.I. Friday’s is losing its flair. In place of the casual-dining restaurant’s traditional, signature look—a little bit Antiques Roadshow, a little bit Hoarders—the chain announced earlier this year that it would be adopting a new, modernized aesthetic: blond wood, clean lines, bright-but-soft lighting. In appearance, decidedly sleek; in vibe, decidedly Upscale Cafeteria.
In that, Fridays’ is going to be looking a lot like … Applebee’s, which recently announced a similar update to its front-of-the-house situation. And Chili’s. And Ruby Tuesday. And Olive Garden. And also like fast-food chains, which are, like their up-market competitors, embracing the strategically pared-down style that you might call “high meh-dern”: McDonald’s recently unveiled a series of new “design concepts” for its stores, all of them replacing the chain’s signature primary-colored formica with, yep ... blond wood, clean lines, and bright-but-soft lighting. Burger King has been giving its restaurants similar facelifts. So has Wendy’s. And Arby’s. And KFC. And Taco Bell.
The president, facing criticism that he remained on vacation during the historic flooding, toured some of the worst-hit areas on Tuesday.
NEWS BRIEF President Obama visited Louisiana Tuesday, the site of recent historic flooding that has displaced tens of thousands of people, damaged scores more homes, and is blamed for the death of 17 people.
The president arrived in Baton Rouge, the state capital, amid criticism for not cutting short his annual vacation to travel to affected areas and see the damage firsthand; when the flooding was at its worst last week, Obama and the first family were in Martha’s Vineyard in Massachusetts. They returned to Washington on Sunday. (Governor John Bel Edwards, a Democrat, had said he’d prefer Obama to wait a “week or two” to visit because of the resources that would need to be diverted for a presidential visit.)
We’ve been flying around the country for the last three years, visiting dozens of towns that are reinventing themselves after some kind of big economic or demographic change. I have also, in a way, matched those flights stroke by stroke in America’s public swimming pools. On our first day on the ground in any town, I search for a public pool. I started swimming around the country as a way to maintain some sense of normal in my physical activity after all that flying. And then I came to appreciate it as another window into the culture and spirit of the towns we visited. I wish Ryan Lochte could share some of my experience.
Like much of America—and I’m betting most of the many hundreds of kids I have seen swimming in pools around the nation, too—I was glued to the Olympic swimming events. Katie Ledecky, Maya DiRado, Michael Phelps, truth-teller Lilly King. And then, enter Ryan Lochte.