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.
Slow Motion Train Wreck
Long-time readers know that I have been warning for years that the U.S. stock market was being driven by Fed policy. Last summer (in 2015) my co-author Carlos Lara and I began a three-part financial/economics seminar on “The Coming Storms” to Paige McKechnie of CCC Corporation in Nashville. We had already done the first one or two presentations and then the stock market dropped sharply in August.
So in the following session (when I think some of the participants were thinking “Wow I wish I had taken these guys more seriously when they sounded so alarmist a couple of months ago”) I wanted to show people that the previous two stock crashes were not one-shot events. Instead, they were slow-motion train wrecks.
(In the above, the camera guy was only on me, and so after the fact he interspersed shots of my PowerPoint with its animations. But you can’t see what I was hitting with the laser pointer, because he didn’t have a camera on the actual screen that the audience was seeing.)
Contra Krugman Ep. 20: Krugman Blames Government Water Crisis on Free Market
Make sure you don’t misinterpret my argument: I’m not saying that any one disaster invalidates a whole system. What I’m saying is that you can’t point to government officials screwing up water supply as *further evidence* that we need government officials to provide water, as Krugman tries to do.
Forgiveness
Peter asked Jesus if people should forgive a brother who transgresses up to seven times? Jesus famously answered, “Seventy times seven.”
The traditional point with this story is NOT, of course, to say that you should forgive someone up to 490 times, but then be merciless on the 491st offense.
However, I am pretty sure that I heard an authoritative commentator on the Bible say (in an unrelated context) that the Old Testament describes God as being “angry” with humanity / children of Israel 490 times.
Can anybody confirm that? I can’t find it with a Google search, because everything keeps pointing to Peter and Jesus’ discussion.
Incidentally, note how the wisdom of the Bible anticipates advice from modern psychologists.
Potpourri
==> Rob Bradley wants Resources for the Future to pay attention to Judith Curry and me. (Here’s an old RFF paper which shows how powerful the “tax interaction effect” can be.)
==> David Stockman is not bullish at the moment.
==> Jeffrey Rogers Hummel explains some technicalities of the budget deal, that affect Fed accounting.
==> Tyler Cowen again shows us how awesome Austrian business cycle theory is, without himself endorsing it.
==> Phil Magness on the inequality literature before Piketty.
Murphy Twin Spin
==> At IER I explain how the NYT gets it wrong on the carbon tax.
==> Costco magazine featured an exchange between Kshama Sawant (yes the Seattle socialist) and yours truly, on rent control. (The previous sentence was one you never expected to read, I’m sure.) You can adjust the magnification if you want to do more than look at our headshots.
==> Regarding my Costco piece, someone emailed me the following critique (which he gave permission to reprint), and to be clear the sentence “(All caps mine).” is from my correspondent in the original email:
I like Ms. Sawant’s answer much better than Mr. Murphy’s answer. Why? Her answer shows that a “one size fits all” approach is not the way to go. She looks multi-cultural like me.
I have lived in multiple countries, multiple states, multiple cities, and multiple zip codes so I know that each neighborhood has its own special characteristics.
In the January 2016 issue she states that “more than 200 municipalities across the country have SOME FORM of rent control regulation”. (All caps mine).
It is clear to me that she understands a tiny percentage of neighborhoods couldn’t thrive under ANY form of rent control while another tiny percentage of neighborhoods COULD thrive under any form of rent control. Most neighborhoods fall somewhere between these two extreme examples.
I either make my own hats or buy hats that say size LARGE or EXTRA LARGE. Why? Hats that say, “One size fits all” or “One size fits most” don’t ever fit my 23 inch circumference head, that’s why!
Mr. Murphy may be some kind of professor but his answer clearly shows his MENSA IQ score is much higher than his FEMSA IQ score.
Isaac Was a Willing Sacrifice
In the course of my Bible study with my cousin I recently learned something that blew my mind: When Abraham obeyed the Lord’s command to (do everything up to) sacrifice his own son, Isaac wasn’t a young boy. In fact, he was probably in his 20s or 30s. (Some think he was 33, presumably because that is probably how old Jesus was when He was sacrificed.) And Abraham was more than 100 years old.
Therefore, Isaac obeyed his father’s plan that involved sacrificing his own beloved son.
Other parallels are that Isaac had to carry the wood (Jesus carried His own cross), and some argue (though others say it can’t be) that the location of Abraham’s altar on this episode was the same place where Jesus would be crucified almost two thousand years later.
Other observations to help make this story more understandable to modern readers:
==> God stopped Abraham before he actually killed Isaac. The point wasn’t that God demanded a sacrifice, the point was that God wanted Abraham to acknowledge that he would surrender everything to the Lord.
==> It was customary for pagans of that day to sacrifice their kids to appease their gods. So rather than concluding, “Ugh! The Old Testament is gross! God asks for a human sacrifice!” the point is rather, “Unlike the other deities of that age, the God of Abraham did not actually want him to kill his son.”
==> God gave up His only Son to be killed for us. God was only testing Abraham (without actually requiring it) to do something that God Himself would actually follow through with, centuries later.
Time for Bryan Caplan to Give Rothbard Another Look
Alex Tabarrok has a post explaining that (government) water systems have been bad on lead contamination for a century; it’s not just an isolated problem in Flint.
There’s no way I can talk about this without sounding like a punk, so I simply remind everyone of Bryan Caplan’s EconLog post from 2014 entitled “Why Do Government Enterprises Work So Well?” in which drinking water was one of the counterexamples Bryan offered to Rothbardian cynicism.
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