Only 18 speeches by Fed Presidents this Week. Is that Possibly Enough?

Check out the calendar of Fed speeches this week. I have some observations on one by Fed Chair Jerome Powell.

Jerome Powell Speaks

Please consider Opening Remarks by Fed Chair Jerome Powell on At “A Look at the Past, Present, and Future,” a conference celebrating the Centennial of the Division of Research and Statistics, Board of Governors of the Federal Reserve System, Washington, D.C.

I strongly suspect that speech was far better than Sominex taken with a two glasses of wine at putting someone to sleep.

If you were there, please tell us how you stayed awake.

The essence of the speech was how amazing the Fed’s research department is.

Here is a statement that caught my eye: “Intellectual rigor has to be combined with flexibility and agility. Economic models can do a reasonably good job of capturing the working of the economy over past decades.“

Flexibility and Agility

The only time the Fed is flexible is after it has creates a big financial mess and then constructs clever financial bank bailouts to paper over the messes it made.

Amusingly, the Fed’s staff has produced some excellent reports, totally ignored by the Fed presidents who have zero propensity to ever change their minds.

Need to Make Up For Lack of Inflation

St. Louis Fed James Bullard “It would take a decade of above 2.5 percent inflation to make up for 5 years of shortfall“

He is not alone. They all made similar speeches.

Fed Admits Mistakes, Seeks More Power

Regarding Silicon Valley Bank, please note The Fed Admits a Mistake in Collapse of SVB, Seeks More Power Anyway

Inflation Expectations

The Fed research department put out a brilliant report (common sense actually) that inflation expectations do not matter at all and the Phillips Curve is nonsense.

Check it out:  Why Do We Think That Inflation Expectations Matter for Inflation? (And Should We?) by the Divisions of Research & Statistics and Monetary Affairs Federal Reserve Board.

The paper also blasted belief in the Phillips Curve. Here are a few direct quotes. The last bullet point is the most important one.

• The direct evidence for an expected inflation channel was never very strong.
• It is an irony of history that, when Phelps and Friedman sought to justify their proposed theoretical specifications, they were faced with the uncomfortable fact that empirical Phillips curves appeared to be remarkably stable.
• These techniques are similar in spirit to those employed in the 1990s to estimate new-Keynesian models; hence, they suffer from the same sorts of problems—discussed below—that attend empirical estimates of those models.
• Friedman’s derivation of the expectations-augmented Phillips curve implies that the real product wage should be strongly countercyclical (recall that in this model firms are always assumed to be on their labor demand curves). In particular, Friedman states as a matter of fact that “. . . selling prices of products typically respond to an unanticipated rise in demand faster than prices of factors of production,” which would in turn imply the empirical prediction that the price Phillips curve is steeper than the wage Phillips curve. However, in U.S. data this prediction is completely at odds with the evidence.
• Most standard tests of the new-Keynesian Phillips curve suffer from such severe potential misspecification issues or such profound weak identification problems as to provide no evidence one way or the other regarding the importance of expectations (much the same statement applies to empirical tests that use survey measures of expected inflation).
• What little we know about firms’ price-setting behavior suggests that many tend to respond to cost increases only when they actually show up and are visible to their customers, rather than in a preemptive fashion. 

Despite multiple Fed research papers on inflation expectations and the Phillips Curve Fed presidents still place massive faith in both of them.

Powell brings up inflation expectations multiple times in every FOMC press conference Q&A.

Fed Studies Debunk the Phillips Curve

• Fed Study Shows Phillips Curve Is Useless
• Yet Another Fed Study Concludes Phillips Curve is Nonsense.

Both studies were done by Fed research staffers.

Yet, Fed Chairs Janet Yellen and Jerome Powell did not believe the Fed’s own studies.

in March of 2017, then Fed Chair Janet Yellen commented the “Phillips Curve is Alive“.

A Fed Economist Concludes the Widely Believed Inflations Expectations Theory is Nonsense

On October 21, 2021 I commented  A Fed Economist Concludes the Widely Believed Inflations Expectations Theory is Nonsense.

The research department had these two amusing quotes in its report.

• It is far, far better and much safer to have a firm anchor in nonsense than to put out on the troubled seas of thought. John Kenneth Galbraith (1958).
• Few things are harder to put up with than the annoyance of a good example. Mark Twain, The Tragedy of Pudd’nhead Wilson (1894)

Stupidity Well Anchored

I discussed the silliness of inflations expectations theory in Stupidity Well Anchored: Absurdity of Inflation Expectations in Graphic Form

Inflation Expectations Q&A

Q: If consumers think the price of food will drop, will they stop eating out?
Q: If consumers think the price of food will drop, will they stop eating at home?
Q: If consumers think the price of natural gas will drop, will they stop heating their homes and stop cooking to wait for the event.
Q: If consumers think the price of gas will drop, will they stop driving or not fill up their car if it is running on empty?
Q: If consumers think the price of gas will rise, can they do anything about it other than fill up their tank more frequently?
Q: If consumers think the price of rent will drop, will they hold off renting until that happens?
Q: If consumers think the price of rent will rise, will they rent two apartments to take advantage?

Asset Irony

People will rush to buy stocks in a bubble if they think prices will rise. They will hold off buying stocks if they expect prices will go down.

People will buy houses to rent or fix up if they think home prices will rise. They will hold off housing speculation if they expect prices will drop.

The very things where expectations do matter are the very things the Fed ignores.

How the Fed Destroyed the Housing Market and Created Inflation in Pictures

On October 5, 2023 I explained How the Fed Destroyed the Housing Market and Created Inflation in Pictures

For 12 years, home prices, OER, Rent, and the overall CPI all rose together. That changed in 2000 with another trendline touch in 2012. Then it was off to the races as the Fed did round after round of QE, suppressing mortgage rates.

The Fed erroneously does not consider rising home prices as inflation. The bubbles shown in the above chart are the result.

Yet, on Wednesday Powell bragged “Economic models can do a reasonably good job of capturing the working of the economy over past decades.“

Yeah right. And even though the research staff puts out some excellent material debunking those models, the Fed presidents shows zero agility in taking anything other than their existing beliefs into consideration.