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.
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.
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?
“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.
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.
DATE: MAY 1, 1994
FROM: DR. HUNTER S. THOMPSON
SUBJECT: THE DEATH OF RICHARD NIXON: NOTES ON THE PASSING
OF AN AMERICAN MONSTER.... HE WAS A LIAR AND A QUITTER,
AND HE SHOULD HAVE BEEN BURIED AT SEA.... BUT HE WAS,
AFTER ALL, THE PRESIDENT.
"And he cried mightily with a strong voice, saying, Babylon the great is fallen, is fallen, and is become the habitation of devils, and the hold of every foul spirit and a cage of every unclean and hateful bird."
Richard Nixon is gone now, and I am poorer for it. He was the real thing -- a political monster straight out of Grendel and a very dangerous enemy. He could shake your hand and stab you in the back at the same time. He lied to his friends and betrayed the trust of his family. Not even Gerald Ford, the unhappy ex-president who pardoned Nixon and kept him out of prison, was immune to the evil fallout. Ford, who believes strongly in Heaven and Hell, has told more than one of his celebrity golf partners that "I know I will go to hell, because I pardoned Richard Nixon."
Garry Marshall's patronizing 'holiday anthology' film boasts a star-studded ensemble, but its characters seem barely human.
It’s hard to know where to begin with Mother’s Day, a misshapen Frankenstein of a movie that feels like it escaped the Hallmark headquarters halfway through its creation and rampaged into theaters, trying to teach audiences how to love. The third in Garry Marshall’s increasingly strange “holiday anthology” series, Mother’s Day isn’t the rom-com hodge-podge that Valentine’s Day was, or the bizarre morass of his follow-up New Year’s Eve. But it does inspire the kind of holy terror that you feel all the way down to your bones, or the revolted tingling that strikes one at a karaoke performance gone tragically wrong.
While it’s aiming for frothiness and fun, Mother’s Day is a patronizing and sickly sweet endeavor that widely misses the mark for its entire 118-minute running time (it feels much longer). The audience gets the sense that there are many Big Truths to be learned: that family harmony is important, that it’s good to accept different lifestyles without judgment, that loss is a natural part of the circle of life. But its overall construction—as a work of cinema—always feels a little off. One character gets a life lesson from a clown at a children’s party, and departs with a hearty “Thanks, clown!” Extras wander in the background and deliver halting bits of expositional dialogue like malfunctioning robots. Half of the lines seem to have been recorded post-production and are practically shouted from off-screen to patch over a narrative that makes little sense. Mother’s Day is bad in the regular ways (e.g. the acting and writing), but also in that peculiar way, where it feels as though the film’s creator has never met actual humans before.
There’s a common perception that women siphon off the wealth of their exes and go on to live in comfort. It’s wrong.
A 38-year-old woman living in Everett, Washington recently told me that nine years ago, she had a well-paying job, immaculate credit, substantial savings, and a happy marriage. When her first daughter was born, she and her husband decided that she would quit her job in publishing to stay home with the baby. She loved being a mother and homemaker, and when another daughter came, she gave up the idea of going back to work.
Seven years later, her husband told her to leave their house, and filed for a divorce she couldn’t afford. “He said he was tired of my medical issues, and unwilling to work on things,” she said, citing her severe rheumatoid arthritis and OCD, both of which she manages with medication. “He kicked me out of my own house, with no job and no home, and then my only recourse was to lawyer up. I’m paying them on credit.” (Some of the men and women quoted in this article have been kept anonymous because they were discussing sensitive financial matters, some of them involving ongoing legal disputes.)
When schools ask applicants about their criminal histories, a veneer of campus safety may come at the expense of educational opportunity.
The long-running “Ban the Box” campaign is now gaining ground at colleges and universities. The movement aims to protect job, and now student, applicants from being asked about their criminal histories and was recently bolstered by President Obama, who is taking executive action to ban the practice at federal agencies. Campus officials say the background question helps them learn as much as possible about prospective students and allows them to take steps to keep everyone on campus safe. But opponents say the question—which requires prospective students to check a box if they have criminal histories—is an undue barrier that harms certain groups of students.
Some colleges routinely ask an optional criminal-background question; some schools are compelled to ask it by the state in which they’re located; and, whether intentional or not, more than 600 colleges and universities ask simply because they use Common App to streamline the admissions process. This year, 920,000 unique applicants used Common App to submit 4 million applications, or 4.4 applications per student, according to the organization. The criminal-background question that Common App asks is:
The justices signed off Thursday on a new procedural rule for warrants targeting computers.
The U.S. Supreme Court approved a new rule Thursday allowing federal judges to issue warrants that target computers outside their jurisdiction, setting the stage for a major expansion of surveillance and hacking powers by federal law-enforcement agencies.
Chief Justice John Roberts submitted the rule to Congress on behalf of the Court as part of the justices’ annual package of changes to the Federal Rules of Criminal Procedure. The rules form the basis of every federal prosecution in the United States.
Under Rule 41’s current incarnation, federal magistrate judges can typically only authorize searches and seizures within their own jurisdiction. Only in a handful of circumstances can judges approve a warrant that reaches beyond their territory—if, for example, they allow federal agents to use a tracking device that could move through multiple judicial districts.
In Trump’s aftermath, his enemies on the right will have to take stock and propose a meaningful alternative vision for the GOP’s future.
Donald Trump’s big victories in the Mid-Atlantic primaries don’t represent quite the end of the ballgame—but they come damn close.
And now Donald Trump’s many and fierce opponents in the Republican Party and the conservative movement face the hour of decision. Trump looks ever more certain to be the party nominee. Yet not perhaps since George McGovern in 1972 has a presumptive nominee so signally failed to carry the most committed members of his party with him.
So what happens now to those who regard themselves as party thought-leaders? Do they submit? Or do they continue to resist?
Resistance now means something more—and more dangerous—than tapping out #NeverTrump on Twitter. It means working to defeat Trump even knowing that the almost certain beneficiary will be Hillary Clinton.