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9th October 2018 Off By binary
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I have three new pieces that just came out. At The Hill, I have an article that discusses wages:

On Friday, the government announced average hourly wage growth for October, which came in at an annual rate of 2.8 percent.

The case was similar in September, and the media reported that Fed officials may react by tightening monetary policy. Not surprisingly, this puzzles lots of people: Shouldn’t we welcome higher wages, especially after decades of sub-par wage growth?

The short answer is that we should welcome higher “real” wages, but the Fed does have reason to be concerned about higher “nominal” wages. . . .

It’s true that printing lots of money can lead to higher nominal wages. However, as workers in places like Mexico and Argentina have discovered, if productivity is stagnant, then large nominal pay raises do not translate into higher real wages.

The recent 2.8 percent average hourly wage growth doesn’t pose a large threat, but the Fed has good reasons to be wary of a steep upsurge in nominal wage growth.

At Mercatus, I have a new policy report discussing the Hypermind NGDP prediction market:

It is difficult to understand why it took so long for an NGDP prediction market to be created, as NGDP is probably the best single indicator of whether monetary policy is too expansionary or too contractionary. Given that the Fed has already expressed an interest in TIPS spreads, it likely would be equally interested in market forecasts of NGDP growth.

Had this market been in existence during 2008–2009, it might well have provided valuable signals to the Fed. After all, even Ben Bernanke admits that the Fed erred in September 2008, when it refused to cut its target interest rate from 2 percent right after Lehman failed. At the time, TIPS market expectations of inflation were much lower than Fed forecasts. But NGDP growth expectations are even more informative about the state of the economy than inflation expectations.

In the end, the Hypermind NGDP prediction market is a sort of demonstration project. One would hope that the Fed will set up its own (better-funded) NGDP futures market, which could help it to make more informed policy decisions. The cost would be trivial relative to the potential gains from more effective monetary policy.

At The Bridge, I have a piece pointing out that monetary policy is becoming increasingly accommodative:

Thus whether you judge policy solely by considering inflation, or both inflation and employment, you reach the same conclusion. Policy was too restrictive to hit both the Fed’s inflation target and its employment target during 2009-16, and policy is now relatively accommodative, with inflation above the two percent target and the unemployment rate below the 4.0 percent to 4.6 percent range that the Fed views as “full employment”.

The fact that monetary policy is increasingly accommodative does not necessarily imply it is too accommodative. The Fed needs to look beyond the current data and forecast the impact of its policy on the future condition of the economy. Inflation has recently been pushed up by a sharp rise in oil prices, and it’s possible that it may fall back below two percent during 2019. Even so, the balance of risks has recently shifted, and the long period of excessively restrictive monetary policy is over.

 

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