Category Archives: Inflation

WSJ op-ed: “Trump Forces a Fed Guessing Game”

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Today, The Wall Street Journal published an op-ed by Mickey Levy of the Shadow Open Market Committee (SOMC) member.

Mickey questions whether future rate cuts constitute the right monetary policy, highlighting how lower rates would present a dilemma for the Fed, as:

– Employment will be prioritized over price stability,
– Inflation is now further above its 2% target than it was below target in 2016-19, and
– Tariffs and immigration policy are under-cutting economic growth.

We look forward to any comments you might have.

To view the full article:
https://www.wsj.com/opinion/trump-forces-a-fed-guessing-game-8b5e7c18

CFS Reissues Leland B. Yeager’s International Monetary Relations

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The Center for Financial Stability is pleased to reissue Leland B. Yeager’s masterly International Monetary Relations: Theory, History, and Policy. First published in 1966, it appeared in a second edition in 1976, which has long been out of print. We are making the second edition available in an inexpensive electronic version on Amazon Kindle, as well as posting a facsimile scan of the print version. Here is the CFS home page for the book.

Leland B. Yeager (1924-2018) was a prominent economist of the 20th century. He spent most of his career at the University of Virginia and Auburn University. His main contributions in economics were in money, trade, and capital theory. He had wide-ranging interests that also included ethics and artificial languages, which he wrote about. Armaan Bahl, a student of CFS Special Counselor Steve Hanke, compiled an annotated bibliography of Yeager’s writings earlier this year.

International Monetary Relations was the book Yeager was best known for during his life. It was immediately recognized as being authoritative, innovative, and clearly written, qualities that occur together less often than they should in economics. The book remains worth reading today for its deft weaving of the strands of theory, history, and policy.

At his death, Yeager was working on a second magnum opus. He entrusted it to Steve Hanke for completion, and it was recently published as Capital, Interest, and Waiting: Controversies, Puzzles, and New Additions to Capital Theory.

Copernicus and Asian Monetary Monitor now available

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Now available free at the Internet Archive are two publications that will be of interest to some readers of this blog.

Nicolas Copernicus’s brief Essay on Money shows that Copernicus’s sagacity extended beyond astronomy. In a few pages he diagnoses inflation and a number of its ill effects.

The Asian Monetary Monitor was published every two months in Hong Kong from 1977 to 1996. It cast an eye on monetary and financial developments in East and Southeast Asia. The editor was John Greenwood. The publication is particularly noteworthy for Greenwood’s articles in advance of Hong Kong’s monetary crisis of 1983 explaining why Hong Kong was at risk of a crisis and how to prevent it or escape from it. When the crisis came, Hong Kong’s government adopted Greenwood’s suggestion of returning to the currency board system. The system endures today.

WSJ letter: The Fed Needs to Change but Stay Independent

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Former Fed Governor Robert Heller wrote an important WSJ letter “The Fed Needs to Change but Stay Independent” (see below).

In addition to Fed independence, Bob notes that “Where the Federal Open Market Committee has fallen short in recent years is by not focusing on the monetary and credit aggregates.” Our research and provision of monetary aggregates for over a decade supports his view (see “A Story of Money, Inflation, and the CFS” below).

His piece continues “one will look in vain to find the word ‘money’ in any of the decisions of the FOMC during the past three years.” Indeed, the Fed’s explanation of the failure of the SVB crisis neglected to utter the word “monetary” once in the combined 171 pages in the Barr report and the Fed’s IG study.

In the early stages of Covid, Charles Goodhart wrote a CFS paper (see “After Coronavirus: Deflation or Inflation?” below). Here, he contrasted two strongly held, but competing views regarding the future path of inflation following recovery.

  • “A mainstream position suggested that inflationary pressures would remain muted for the foreseeable future.”
  • “In contrast, a contrary view believed that expansionary monetary and fiscal policies would generate inflation.”

Charles concluded that “apart from the important practical implications of finding out which of these positions is more nearly correct, it will affect macroeconomic theory and teaching, perhaps forever.”

We now have sufficient evidence to show why money and credit needs to be incorporated into the Fed’s policy calculus.

The Fed Needs to Change but Stay Independent
https://www.wsj.com/articles/federal-reserve-fed-monetary-independence-trump-cc314765?mod=letterstoeditor_article_pos8

A Story of Money, Inflation, and the CFS
https://www.centerforfinancialstability.org/research/Money_Story_060623.pdf

After Coronavirus: Deflation or Inflation?
https://www.centerforfinancialstability.org/research/Goodhart_Deflation_Inflation_081420.pdf

FT: “Learning British Financial Stability Lessons. Seriously!”

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Today, the Financial Times‘ Robin Wigglesworth released a well-researched article “Learning British Financial Stability Lessons.  Seriously!” – which covered CFS reports – https://on.ft.com/3ZZ8Rpc . 

CFS will put a finer point on on aspects of the reports in two upcoming events.

Please take a look at this article and our papers, which can be found on CFS’ website- www.CenterforFinancialStability.org.

The Federal Reserve needs to stay put on rates

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Today, the Financial Times published Sheila Bair’s Opinion piece noting that:

– The Fed should feel vindicated in its decision to pause rate rises at its policy-setting meeting last month.  Although it seems poised to raise them again, the Fed should stay put.

– If the Fed does raise rates again, it could temper the impact by only raising rates on bank reserves, while leaving the rate it pays to money market funds and other non-bank financial intermediaries where it is.

We look forward to any comments you might have.

To view the full article:
https://on.ft.com/3QatT1l

Sheila Bair is a former chair of the US Federal Deposit Insurance Corporation and a senior fellow and Advisory Board member at the Center for Financial Stability.

Markets and Volatile Monetary Policy: Empirical Lessons from Banking Instability

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Ahead of the upcoming FOMC meeting, the Fed is dealing with another problem of its own creation. The stock market is elevated and the economy and inflation are on the descent.

Monetary policy meaningfully contributed to the distress at the Silicon Valley Bank and recent swings in financial markets.

“Markets and Volatile Monetary Policy: Empirical Lessons from Banking Instability” offers a solution for officials and an opportunity for investors to profit.

We look forward to any comments you might have.

To view the full article:
https://centerforfinancialstability.org/research/Markets_Volatile_Monetary_061123.pdf

Last week, we released “A Story of Money, Inflation, and the CFS.”

A Story of Money, Inflation, and the CFS

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At the Center for Financial Stability (CFS), we see the world differently. We see the world through monetary goggles – not at the exclusion of other variables, but from a different perspective.

Since 1) inflation proved to not be transitory after the post-pandemic fiscal and monetary response and 2) inflation remained negligible after the big money supply increases in 2009 to 2010, our perspective is essential for:

  • Officials to strengthen the financial system while more effectively promoting growth and
  • Investors to safeguard assets, manage financial institutions, or seek profits.

We look forward to any comments you might have.

Next week, CFS will release a paper on “Empirical Lessons for the Fed from Banking Instability.”

To view the full article:
https://www.centerforfinancialstability.org/research/Money_Story_060623.pdf

Falling Money and the Fed

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CFS Divisia M4 (DM4) declined by the 14th largest amount on record since 1968.

The implication is that inflation and growth are slowing more dramatically than many believe.

Over years and cycles, our data and analytics offer paths for investors to profit and officials to conduct policy in a way to limit inflation and promote growth in a less volatile financial environment.

A message on markets, analytics and policy implications will follow next week.

View “Falling Money and the Fed” at
https://centerforfinancialstability.org/research/Falling_Money_013123.pdf

OFR Annual Report Warns of Elevated Risk to Financial Stability

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In its 2022 Annual Report to Congress, the Office of Financial Research (“OFR”) warned that threats to U.S. financial stability are elevated compared to previous years because of rising inflation, tight credit conditions and geopolitical uncertainty.

OFR found that U.S. economic growth slowed due to elevated interest rates, a significant increase in commodity prices and lingering supply chain issues from the COVID-19 pandemic. OFR reported that non-financial corporate credit risk is rising, but household credit risk remains low. OFR said that financial stability risk is elevated across the financial system, including (i) macroeconomic risk, (ii) credit risk, (iii) liquidity and funding risk and (iv) contagion risk. OFR also that said (i) high volatility in the digital asset market, (ii) increased frequency and complexity of cybersecurity attacks, and (iii) financial losses due to climate-related financial risk contributed to the increased risk to financial stability.

Additionally, OFR highlighted the launch of two pilot programs:

  • the Non-centrally Cleared Bilateral Repo Pilot Project, which OFR said will give regulators more insight into the non-centrally cleared bilateral repo market. OFR is currently considering a rule to establish an ongoing data collection program as to bilateral repo (see previous coverage); and
  • the Climate Data and Analytics Hub pilot, which provides regulators with reliable climate data and tools to properly assess climate risks to financial stability.

LOFCHIE COMMENTARY

In the report, OFR tells us, “[a]s a frontier risk, climate-related financial risk—though difficult to model and forecast within the financial system—presents an increasing threat to financial stability. Being able to assess it accurately is vital to mitigating its effects.” Put differently, OFR acknowledges that it cannot measure the risk that climate change poses to financial stability, and it cannot demonstrate that climate change is a financial stability risk, or how risky it is, but OFR pledges to find something there. This makes no sense whatsoever. If the U.S. government is able to demonstrate the risks that arise from climate change in a convincing manner, businesses will adjust to these risks. For now, OFR does not have the data.

Further, much of what OFR paints as “climate change risk” is really very ordinary “weather risk,” such as building houses in areas likely to be flooded, or areas at risk of wildfires. (See footnote 167 of the OFR report and the papers cited therein.) These risks do not arise because the temperature rose a degree; they arise because people are building where perhaps they should not, which undoubtedly creates financial risk. But it is not climate change risk; it’s weather risk. If the OFR would approach the issue of weather more temperately, it would be more likely to produce work of value.

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