Posts Tagged ‘output gaps’

Notes From Underground: Why The Fed’s Forward Guidance Model is Flawed

March 17, 2014

A quick note before we enter the Fed’s two-day meeting. I am reposting a note from a few weeks ago when I conjectured that Chairman Yellen was not the keeper of the Greenspan Put. In the present realm of depressed wages, Yellen would err on the side of allowing corporate profits to soften if it meant an increase of wages for the middle level wage earner. Corporate profits as a percentage of GDP are at elevated levels because capital has been well rewarded from the effects of globalization while the massive increase in the global wage pool has kept downward pressure on wage rates in the developed world economies. Throw in the historical low borrowing rates set by the world’s central banks and the result is enhanced corporate profits. The FED has been enamored with the idea of “forward guidance” and went so far ¬†as to put in a quantitative threshold as a measure of its commitment. The Bank of England has already dispensed with its numeric-based forward guidance and seems to have accepted a more nuanced and qualitative response to its mandate.



September 13, 2012

First, as I read the FOMC statement, it was painfully obvious that the impact of the Michael Woodford piece found willing adherents in the bowels of the Board of Governors of the Federal Reserve. The FED’s language: “IF THE OUTLOOK FOR THE LABOR MARKET DOES NOT IMPROVE SUBSTANTIALLY, the committee will continue its purchases of agency mortgage-backed securities …” Further, in a direct BOW to Woodford: “The committee expects that a HIGHLY ACCOMMODATIVE STANCE OF MONETARY POLICY WILL REMAIN APPROPRIATE FOR A CONSIDERABLE TIME AFTER THE ECONOMIC RECOVERY STRENGTHENS.”