Ben Bernanke listened to his critics, but the recovery is still stuck. What went wrong?
To print or not to print? That is the question dividing the Federal Reserve.
Back in September the Fed launched its latest, and most ambitious, bond-buying program to date, dubbed QE3. Unlike before, the Fed hasn't committed to buying a specific dollar amount of bonds with QE3; instead, it's committed to buying $85 billion of bonds a month until the labor market improves "substantially". But what's "substantial" and what's not? And what if the Fed loses its nerve before the economy arrives at this mysterious moment of "substantial" improvement?
This latter question has gripped markets after the Fed's January meeting when "a number" of members said it should "taper" its bond purchases even before, you guessed it, there's any substantial improvement in unemployment. In other words, an increasing, and increasingly vocal, minority at the Fed are nervous about keeping open-ended bond-buying quite so open-ended. Now, a vocal minority is still a minority -- and besides, Bernanke tends to get his way -- but this hawkish talk has been enough to spook markets that thought QE3 wouldn't end much before 2014.
But there's a better question than how long QE3 will last. That's how much QE3 will work. Let's back up for a minute. Whether you want to call it "quantitative easing" (QE) or "bond-buying" or "large-scale asset purchases" (LSAP), the idea here is fairly simple: the Fed is printing money and buying pieces of paper. It's doing this because it can't boost the economy like it normally does by cutting short-term interest rates; those rates are stuck at zero, and can't go lower. Okay, that's not entirely true. The Fed can't cut nominal rates now, but it can cut real ones -- in other words, it can push up inflation, thereby reducing inflation-adjusted borrowing costs. That's what the Fed has done by printing money and buying long-term bonds from banks. Even if this freshly-printed money ends up as bank reserves (which it mostly has), the Fed is signaling that it wants more inflation.
Take a look at the chart below of what markets (roughly) think will happen with inflation over the next 5 years, annotated with the Fed's unconventional policies. Markets expect more inflation every time the Fed eases, and less every time it stops ... until QE3. Then, almost nothing. That's crazy. QE3 is open-ended, whereas previous rounds were not. This difference should have convinced markets that this time the Fed was really serious about jump-starting the recovery. Has QE hit a wall of diminishing returns? (Note: The black line shows the Fed's 2 percent inflation target).
Look again, but this time, focus on the black line. QE has hit a wall, but it's a wall of incredibly well-anchored inflation expectations, not diminishing returns. In other words, the Fed has quite easily been able to push inflation expectations back up to its 2 percent target, but no more. QE1 and QE2 had big effects, because they came when expected inflation was well below 2 percent and falling; QE3 has not, because expected inflation was already around 2 percent.
But wait. The Fed unveiled the Evans rule back in December, telling us it wouldn't raise rates before unemployment falls to 6.5 percent or inflation rises to 2.5 percent. In other words, isn't the Fed's 2 percent inflation target really a 2.5 percent inflation target now? Not exactly. The Fed is telling us it will tolerate 2.5 percent inflation, not that it will create it -- indeed, the Fed doesn't think inflation will stray at all above 2 percent over the next few years.
The best way to figure out what the Fed wants is to listen. After all, it tells us what it thinks will happen with GDP, unemployment, and inflation over 1, 2, and 3-year periods. Now, it's GDP and unemployment predictions have been, in the spirit of generosity, a tad optimistic, but not so for inflation (which, not-so-coincidentally, is the only above variable the Fed controls directly). The chart below looks at the Fed's core PCE inflation projections since late 2008; upper-range estimates for 1, 2, and 3-year periods are in red, and lower ranges ones are in blue. This is what a 2 percent inflation ceiling looks like.
There's a lot going on here, but there's a depressingly simple message in this chart: QE3 isn't working, because the Fed doesn't want it to work. The Fed revised its inflation projections up after QE1 and QE2, and markets followed; the Fed has kept its inflation projections steady after QE3, and, again, markets have followed. Now, this doesn't mean QE3 is entirely useless -- it's at least stopping inflation expectations from falling -- just that it could be doing much more if the Fed let it. That would be simple enough. The Fed could make its forecasts symmetrical around 2 percent, rather than peaking at 2 percent. Or it could say it expected (or is that wanted?) inflation well above 2 percent over the next two years, but not after that; in other words, make its target more explicitly flexible.
That leaves us with one last question. The Fed has shown time and again it can push inflation expectations (which largely determine inflation) up to 2 percent, even when short-term rates are parked at zero. But is that as much inflation as the Fed can create? It's hard to see why that would be the case, other than the Fed's self-imposed 2 percent ceiling. But the great thing about self-imposed problems is you can stop imposing them. The Fed doesn't need a new mandate (like NGDP targeting) to speed up the recovery; it just needs to tell us it wants -- gasp! -- 3 percent inflation for a year or two.
Until then, the recovery will suffer the outrageous slings and arrows of our 2 percent ceiling.
The comedian's n-bomb at the White House Correspondents’ Dinner highlights a generational shift in black culture.
Georgia McDowell was born the daughter of farmers and teachers in North Carolina in 1902. She was my great-grandmother, and she taught me to read, despite the dementia that clouded her mind and the dyslexia that interrupted mine. I loved Miss Georgia, though she kept as many hard lines in her home as she had in her classrooms. One of the hardest lines was common to many black households: The word “nigger” and all of its derivatives were strict taboos in person, on television, and on radio from any source, black or otherwise, so long as she lived and breathed. She’d kept the taboo through decades of teaching black students and raising black children. For most of my childhood, the taboo was absolute.
When Apple announced in 2013 that its next iPhone would include a fingerprint reader, it touted the feature as a leap forward in security. Many people don’t set up a passcode on their phones, Apple SVP Phil Schiller said at the keynote event where the Touch ID sensor was unveiled, but making security easier and faster might convince more users to protect their phones. (Of course, Apple wasn’t the first to stuff a fingerprint reader into a flagship smartphone, but the iPhone’s Touch ID took the feature mainstream.)
The system itself proved quite secure—scanned fingerprints are stored, encrypted, and processed locally rather than being sent to Apple for verification—but the widespread use of fingerprint data to unlock iPhones worried some experts. One of the biggest questions that hung over the transition was legal rather than technical: How might a fingerprint-secured iPhone be treated in a court of law?
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?
The billionaire’s bid for the nomination was opposed by many insiders—but his success reveals the ascendance of other elements of the party coalition.
In The Party Decides, an influential book about how presidential nominees are selected, political scientists John Zaller, Hans Noel, David Karol, and Marty Cohen argue that despite reforms designed to wrest control of the process from insiders at smoke-filled nominating conventions, political parties still exert tremendous influence on who makes it to general elections. They do so partly through “invisible primaries,” the authors posited—think of how the Republican establishment coalesced around George W. Bush in 2000, long before any ballots were cast, presenting him as a fait accompli to voters who’d scarcely started to think about the election; or how insider Democrats elevated Hillary Clinton this election cycle.
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!
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.
The Massachusetts Supreme Court will decide whether a local shrine should be tax-exempt—a decision that could have broad implications for faith organizations in America.
Property-tax battles are rarely sexy. But a case now in front of the Massachusetts Supreme Judicial Court, about whether the 21 religious brothers and sisters who run the Shrine of Our Lady of LaSalette in Attleboro should have to pay taxes, could have huge repercussions. The Court’s decision will be an important part of the ongoing debate in America about who defines religious practice—believers or bureaucrats—and whether religion itself should be afforded a special place under the law.
The case centers on a colonial-era law in Massachusetts that exempts religious houses of worship and parsonages from property taxes if they are used for religious worship or instruction. The shrine has enjoyed this perk since its founding in 1953. But in recent years, the City of Attleboro, nestled between Providence and Boston, has faced a tightening budget. It began looking to see where it could collect more revenue. The shrine, the only major tourist attraction in town, was an obvious target for tax collectors.
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.