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.
Why haven’t more challengers entered the race to defeat the Iraq War hawk, Patriot Act supporter, and close friend of big finance?
As Hillary Clinton loses ground to Bernie Sanders in Iowa, where her lead shrinks by the day, it’s worth noticing that she has never made particular sense as the Democratic Party’s nominee. She may be more electable than her social-democratic rival from Vermont, but plenty of Democrats are better positioned to represent the center-left coalition. Why have they let the former secretary of state keep them out of the race? If Clinton makes it to the general election, I understand why most Democrats will support her. She shares their views on issues as varied as preserving Obamacare, abortion rights, extending legal status to undocumented workers, strengthening labor unions, and imposing a carbon tax to slow climate change.
In the name of emotional well-being, college students are increasingly demanding protection from words and ideas they don’t like. Here’s why that’s disastrous for education—and mental health.
Something strange is happening at America’s colleges and universities. A movement is arising, undirected and driven largely by students, to scrub campuses clean of words, ideas, and subjects that might cause discomfort or give offense. Last December, Jeannie Suk wrote in an online article for The New Yorker about law students asking her fellow professors at Harvard not to teach rape law—or, in one case, even use the word violate (as in “that violates the law”) lest it cause students distress. In February, Laura Kipnis, a professor at Northwestern University, wrote an essay in The Chronicle of Higher Education describing a new campus politics of sexual paranoia—and was then subjected to a long investigation after students who were offended by the article and by a tweet she’d sent filed Title IX complaints against her. In June, a professor protecting himself with a pseudonym wrote an essay for Vox describing how gingerly he now has to teach. “I’m a Liberal Professor, and My Liberal Students Terrify Me,” the headline said. A number of popular comedians, including Chris Rock, have stopped performing on college campuses (see Caitlin Flanagan’s article in this month’s issue). Jerry Seinfeld and Bill Maher have publicly condemned the oversensitivity of college students, saying too many of them can’t take a joke.
Conservatives want to defund the group, even if it means shutting down the government. And they’re holding the GOP leadership accountable.
It has become an annual harbinger of autumn in this era of divided government: The calendar swings from August to September, Congress returns from its long summer break, and Republican leaders try to figure out how to keep the federal lights on past the end of the month.
In 2013, John Boehner gave in to Senator Ted Cruz and his conservative allies in the House, and the government shut down for two weeks in a failed fight over Obamacare. A year ago, Boehner and Mitch McConnell succeeded in twice putting off a losing battle over immigration until after they could wrest control of the Senate from the Democrats.
With federal funding set to expire on September 30, conservatives are once again demanding a standoff that Boehner and McConnell are hell-bent on avoiding. This time around, the issue that might prevent an orderly—if temporary—extension of funding is Planned Parenthood. Along with Cruz, House conservatives insist that any spending bill sent to President Obama's desk explicitly prohibit taxpayer dollars from going to the women’s health organization, which has come under fire over undercover videos that purportedly show its officials discussing the sale of fetal tissue. Democrats have rallied around Planned Parenthood, and an effort to ax its approximately $500 million in annual funding is likely to fall short, either by running into a filibuster in the Senate or a presidential veto.
The NBC show isn’t casting its net wide enough when it comes to finding new players.
Since the departure of many of its biggest stars two years ago, Saturday Night Live has mostly avoided major cast changes. Yesterday, NBC announced the show would add only one new cast member for its 41st season—the near-unknown stand-up comic Jon Rudnitsky. SNL is, of course, a sketch-comedy show, but it keeps hiring mostly white stand-ups who have a markedly different skill set, with limited results. As critics and viewers keep calling out for greater diversity on the show, it’s hard to imagine the series’s reasoning in sticking to old habits.
As is unfortunately typical today, controversy has already arisen over some tasteless old jokes from Rudnitsky’s Twitter and Vine feeds, similar to the furore that greeted Trevor Noah’s hiring at The Daily Show this summer. But Rudnitsky was apparently hired on the back of his stand-up performances, not his Internet presence, similar to the other young stand-ups the show has hired in recent years: Pete Davidson, Brooks Wheelan (since fired), and Michael Che. It’s a peculiar route to the show, because SNL is 90 percent sketch acting, and unless you’re hosting Weekend Update (like Che), you’re not going to do a lot of stand-up material. So why hire Rudnitsky?
Many educators are introducing meditation into the classroom as a means of improving kids’ attention and emotional regulation.
A five-minute walk from the rickety, raised track that carries the 5 train through the Bronx, the English teacher Argos Gonzalez balanced a rounded metal bowl on an outstretched palm. His class—a mix of black and Hispanic students in their late teens, most of whom live in one of the poorest districts in New York City—by now were used to the sight of this unusual object: a Tibetan meditation bell.
“Today we’re going to talk about mindfulness of emotion,” Gonzalez said with a hint of a Venezuelan accent. “You guys remember what mindfulness is?” Met with quiet stares, Gonzalez gestured to one of the posters pasted at the back of the classroom, where the students a few weeks earlier had brainstormed terms describing the meaning of “mindfulness.” There were some tentative mumblings: “being focused,” “being aware of our surroundings.”
Though it wasn’t pretty, Minaj was really teaching a lesson in civility.
Nicki Minaj didn’t, in the end, say much to Miley Cyrus at all. If you only read the comments that lit up the Internet at last night’s MTV Video Music Awards, you might think she was kidding, or got cut off, when she “called out” the former Disney star who was hosting: “And now, back to this bitch that had a lot to say about me the other day in the press. Miley, what’s good?”
To summarize: When Minaj’s “Anaconda” won the award for Best Hip-Hop Video, she took to the stage in a slow shuffle, shook her booty with presenter Rebel Wilson, and then gave an acceptance speech in which she switched vocal personas as amusingly as she does in her best raps—street-preacher-like when telling women “don’t you be out here depending on these little snotty-nosed boys”; sweetness and light when thanking her fans and pastor. Then a wave of nausea seemed to come over her, and she turned her gaze toward Cyrus. To me, the look on her face, not the words that she said, was the news of the night:
The Islamic State is no mere collection of psychopaths. It is a religious group with carefully considered beliefs, among them that it is a key agent of the coming apocalypse. Here’s what that means for its strategy—and for how to stop it.
What is the Islamic State?
Where did it come from, and what are its intentions? The simplicity of these questions can be deceiving, and few Western leaders seem to know the answers. In December, The New York Times published confidential comments by Major General Michael K. Nagata, the Special Operations commander for the United States in the Middle East, admitting that he had hardly begun figuring out the Islamic State’s appeal. “We have not defeated the idea,” he said. “We do not even understand the idea.” In the past year, President Obama has referred to the Islamic State, variously, as “not Islamic” and as al-Qaeda’s “jayvee team,” statements that reflected confusion about the group, and may have contributed to significant strategic errors.
After calling his intellectual opponents treasonous, and allegedly exaggerating his credentials, a controversial law professor resigns from the United States Military Academy.
On Monday, West Point law professor William C. Bradford resigned after The Guardianreported that he had allegedly inflated his academic credentials. Bradford made headlines last week, when the editors of the National Security Law Journaldenounced a controversial article by him in their own summer issue:
As the incoming Editorial Board, we want to address concerns regarding Mr. Bradford’s contention that some scholars in legal academia could be considered as constituting a fifth column in the war against terror; his interpretation is that those scholars could be targeted as unlawful combatants. The substance of Mr. Bradford’s article cannot fairly be considered apart from the egregious breach of professional decorum that it exhibits. We cannot “unpublish” it, of course, but we can and do acknowledge that the article was not presentable for publication when we published it, and that we therefore repudiate it with sincere apologies to our readers.
If the Fourteenth Amendment means that the children of undocumented immigrants are not citizens, as Donald Trump suggests, then they are also not subject to American laws.
Imagine the moon rising majestically over the Tonto National Forest, highlighting the stark desert scenery along the Superstition Freeway just west of Morristown, Arizona. The sheriff of Maricopa County sips coffee from his thermos and checks that his radar gun is on the ready. A lot of lawmen wouldn’t have bothered to send officers out at night on such a lonely stretch of road, much less taken the night shift themselves. But America’s Toughest Sheriff sets a good example for his deputies. As long as he’s the sheriff, at least, the rule of law—and the original intent of the Constitution—will be enforced by the working end of a nightstick.
Suddenly a car rockets by, going 100 miles an hour by the gun. Siren ululating, the sheriff heads west after the speeder. The blue Corolla smoothly pulls over to the shoulder. The sheriff sees the driver’s side window roll down. Cautiously he approaches.
The super-cheap Foldscope carries on a centuries-long tradition of simple, curiosity-enabling microscopes.
It took about six months for the jungle to kill Aaron Pomerantz’s microscope.
Pomerantz, an entomologist working with Rainforest Expeditions, had been doing fieldwork in the remote Tambopata Research Centre, nestled within the Peruvian Amazon. At first, he had examined his minute specimens with the center’s fancy optical microscope. But thanks to the sweltering humidity, water started condensing on all the microscope’s glass components. Soon, it was caked in fungus. “Everything out here gets consumed by the jungle,” says Pomerantz.
An entomologist without a microscope is like an astronomer without a telescope, so Pomerantz needed a replacement. Ideally, he wanted something portable enough to carry while hiking, robust enough to withstand the Amazon, and cheap enough to avoid breaking his budget. After a quick search, he learned that 5,000 miles away, a Stanford University engineer named Manu Prakash had been building exactly what he wanted.