David Beckworth Adopts Scott Sumner Criterion for “Market Expectations”
In this post, David Beckworth uses federal funds futures contracts to glean information about “the market”‘s expectations of future monetary policy shifts. Obviously there are caveats about reasoning from an expected price change, but I think this is a good avenue for the Market Monetarists to win skeptics over.
In particular, if people in (say) June 2008 thought that the Fed would raise the fed funds target over the following year, then that is an obvious sense in which the market expected a tightening of monetary policy.
However, I push back in the comments. Before I spend time digging up the numbers, I would like people (esp. fans of Market Monetarism) to weigh in on the validity of my nuance. Here is the full back and forth (so far) between David and me:
BOB:
Hi David,Very interesting post. I really like what you are trying to do with the one-year ahead federal funds rate, but I think your graph is consistent with the market continuously expecting easier policy as 2008 passed. (I’m not saying the chart proves my interpretation is right, I’m rather saying it could go either way; I don’t think there is enough information.)
Where did you get that data, so that if I try to show what I mean, I am using the same numbers as you?
DAVID:
Bob, I am not sure what you mean. If it is June 2008 and the current fed funds rate is 2% and the fed fund futures contract says it will be 3.5% in June 2009 there is really isn’t much room for interpretation here. The market expects it to go up from 2% to 3.5% next year.The data is not easily accessible. You need access to a Bloomberg terminal to get it.
BOB:
Hi David,Yes I agree there are various possible meanings to the statement. But here’s what I mean: Suppose in June 2007 the 24-month fed futures contract predicts 3.5%. Then a year passes, and by June 2008 the 12-month futures contract is still at 3.5%.
Yes, you can say “In mid-2008 the market predicted a tightening of Fed policy over the coming year,” but that tightening would have been predicted a year beforehand. It doesn’t explain why everything was fine and then the markets screamed bloody murder in late summer / fall of 2008.
And it also would be inconsistent with Ted Cruz’s grilling of Yellen. He definitely was saying that the Fed changed people’s expectations about what it was going to do, with its announcements through the summer of 2008.
So do you agree that for the Ted Cruz / Market Monetarist story to make sense, the futures markets would have to show a tightening (measured as rising fed funds rate) relative to the previous path?
I think this is really important. It lies at the heart of the Market Monetarist “revisionism” of what happened in 2008.
This might be important, but it lies nowhere near the heart of MM revisionism of 2008. In MM thought, monetary policy is not about interest rates, real or nominal.
E. Harding I am using it in the same way that Scott Sumner flips out about a rate hike, and David Beckworth (in the piece to which I’m reacting, of course) is using fed futures as an indicator of expected tightening.
I even put in this post a line about “caveat” for never reason from a price change.
So anyway, if you’re right, then Scott Sumner and David Beckworth are not Market Monetarists.
“In MM thought, monetary policy is not about interest rates, real or nominal.”
In truth, Sumner does express the MM thesis in terms of interest rates. He claims the Fed keeps the market rate above the wicksellian rate. If I am not mistaken, this is an equivalent way to express his position, not in terms of NGDP but in terms of interest rates.
When you say “not about interest rates,” do mean to suggest that no historical analysis of interest rates compared to NGDP detracts from the veracity of MM theories?
If so, then why would we (or Sumner, or Beckworth) use that kind of analysis to buttress the case for Market Monetarism? Is the analysis only valid when it supports MM claims, and never valid when it detracts from them?
If not, what do you mean?
For the record, E. Harding, I understand that without context, if you asked Sumner if MM is about interest rates he’d say “Of course not. They are a very misleading indicator. Look to NGDP, young man.”
But when Beckworth runs a piece in the NYT (linked to enthusiastically by Sumner) in which one of the key pieces of evidence to revise the understanding of what happened in 2008 is to point to fed funds futures, then I’m not out of line by quibbling over how he is using that interest rate evidence.
My guess: they think that a predicted tightening in June 2007 didn’t seem that bad. But a predicted tightening in June 2008 seemed terrible.
Sumner uses interest rates as if they were “indicators” of monetary policy when the traditional definitions for “loosening” and “tightening” just so happen to coincide with rising or falling NGDP.
It would be like someone using pirate attacks as an “indicator” for global warming when the changes in pirate attacks just so happen to coincide with global temperatures.
But when they do not coincide, then we are told interest rates and pirate attacks are not credible indicators of monetary policy and global warming.