The Big Picture

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• Has the Fed Stabilized the Price Level?
• Japan Reacts to Fukushima Crisis By Banning Journalism
• Comet Ison, Sungrazing Comet
• Happy Thanksgivingukkah !
• 10 Turkey Day Reads

Has the Fed Stabilized the Price Level? Posted: 29 Nov 2013 02:00 AM PST Has the Fed Stabilized the Price Level? Marc P. Giannoni and Hannah Herman Liberty Street Economics, November 27, 2013     The Federal Reserve Reform Act of 1977 established the monetary policy objectives of maximum employment, stable prices, and moderate long-term interest rates. The goal of "stable prices" has long been understood to mean a low positive inflation rate. On January 25, 2012, the Federal Open Market Committee (FOMC) explicitly defined its price stability mandate in terms of a longer-run goal of 2 percent inflation measured by the total personal consumption expenditure (PCE) deflator. Here, we examine how the behavior of inflation over different time periods compares to this goal. We then discuss how the goal of stabilizing inflation over the long run, rather than on a year-after-year basis, tends to imply a stabilization of the U.S. price level around a trend line—an outcome similar to that from price-level targeting, which offers various theoretical benefits. U.S. Prices since the Mid-1980s The chart below plots the monthly index of the total PCE deflator and the core PCE deflator (which excludes the volatile energy and food components), as well as a trend line that grows at a constant 2 percent annual rate. All three lines are normalized to 100 in January 2006, the start of Fed Chairman Ben Bernanke's tenure. Three features are noticeable from this chart. First, the total PCE deflator grew significantly faster than 2 percent per year before 1990. Indeed, while the inflation rate slowed from the double-digit numbers of the early 1980s following the Volcker disinflation, it still averaged 3.5 percent for the years 1985-90. Second, the total PCE deflator has tracked the trend line fairly well since 1991, with an average year-over-year inflation rate of 2.06 percent. Third, this series has at times displayed relatively large deviations from the trend line. Actually, the PCE deflator has been more than 2.0 percent below the trend line in early 2002 and June 2003, and as much as 2.7 percent above the trend line in July 2008. The low inflation registered in 2002-03, together with relatively weak economic conditions, prompted the FOMC to lower its key policy instrument—the target federal funds rate—to 1 percent. Conversely, the relatively rapid increase in PCE prices and robust economic activity in 2005-06 resulted in the FOMC repeatedly raising the federal funds rate. These deviations in the PCE deflator from the trend line were also due to rising energy prices, as indicated by the growing gaps between the total and core PCE deflators. However, between summer 2007 and summer 2008, the increase in energy prices was seen as largely temporary by the FOMC, and the gap closed quickly as energy prices collapsed in fall 2008. Energy and food prices rose again more rapidly than core prices in early 2011, the wake of the Arab Spring; after a temporary increase in inflation, the total PCE index stabilized again around the 2 percent trend line. The next chart reproduces the same lines, focusing on the recent period that covers the tenure of Chairman Bernanke. The period since January 2006 can be described as one of extreme economic volatility. However, in spite of a major financial crisis and the Great Recession, the average year-over-year growth rate of the total PCE deflator has been 1.95 percent—a number not far off from the FOMC's longer-run inflation goal of 2 percent—despite concerns that the monetary stimulus put in place would create excessive inflation. Thus, it seems that over the past seven-and-a-half years, the Fed has been relatively successful in returning the price level to a 2 percent trend line, much as it did over the prior fifteen years. One might ask how the Fed has achieved this. In part, the Fed benefitted from offsetting inflationary and deflationary shocks over this time period; but there is little doubt that monetary policy has played an instrumental role in returning the price level to this trend line. As previously mentioned, the relatively restrictive monetary policy in late 2005 and 2006 was bound to eventually bring the level of the total (and core) PCE deflators back to their long-run trend. Similarly, the extraordinary monetary policy stimulus (in the form of exceptionally low interest rates, forward guidance, and large-scale asset purchases) provided since the beginning of the recent financial crisis, has largely prevented the Great Recession from causing price deflation. For example, this paper by Del Negro, Giannoni, and Schorfheide argues that the remarkable stability in U.S. inflation in the face of a sharp economic contraction can be attributed to the fact that monetary policy focused on stabilizing inflation around its target. Inflation or Price-Level Stabilization? While the price level has remained remarkably close to its 2 percent trend line since the early 1990s, the total PCE deflator has been below this trend line since 2009 with a 1.4 percent gap in July 2013; the core index displays an even larger gap. Should we expect this gap to be closed in the near future? The answer to the question depends on whether the Fed stabilizes inflation or the price level around its trend line. If the Fed aims to stabilize inflation each year at its target, one should expect the price level to continue to grow at 2 percent over the next few years but not return to the 2 percent trend line. By contrast, if the Fed aims to stabilize the price level, a return to the trend line would be more likely; however, this would require the Fed to tolerate inflation temporarily higher than 2 percent to make up for the present shortfall. One way to determine whether the Fed has been stabilizing inflation or the price level around a long-run trend line is to estimate the actual historical behavior of the FOMC. It is common to describe the FOMC's setting of the federal funds rate with an interest-rate rule (often called a Taylor-type rule) in which the federal funds rate depends on deviations of the inflation rate from 2 percent, on GDP growth, and on the past level of the federal funds rate. When the dependence on the past interest rate is sufficiently high (that is, when the degree of interest rate inertia is close to one), then the central bank's interest-rate policy approximately stabilizes the price level around a trend line. (See the technical appendix for further details.) Typical estimates of interest-rate inertia in the United States are lower than one, but not much so, implying that the Fed's historical policy has been quite similar to price-level targeting. Moreover, while the FOMC has stated its policy strategy in terms of an inflation rate and not the price level, it is interesting to note that there is a technical equivalence between the Fed's "longer-run inflation goal" of 2 percent and price-level targeting. (The technical appendix also discusses this point.) As such, if the FOMC's past behavior continues, it is reasonable to expect inflation temporarily higher than 2 percent so that the price level will return to its long-run trend line. Finally, the threshold-based policy first announced in December 2012—according to which the FOMC would maintain the target federal funds rate near zero as long as the unemployment rate remains above 6.5 percent, even if inflation projections between one and two years ahead would be slightly above 2 percent—is in fact consistent with the FOMC's commitment to a longer-run inflation goal of 2 percent and a policy of price-level stabilization. Is It Desirable to Stabilize the Price Level? Several academic papers (including this one by one of this post's authors) have argued that a commitment by the central bank to stabilizing the price level around a 2 percent trend line has a number of advantages. As unexpected surprises in inflation must be offset by future monetary policy to stabilize the price level under such a regime, households and firms should find it easier to forecast prices several years down the road, and long-run inflation expectations should remain more firmly anchored around the long-run inflation goal. Moreover, firms should be reluctant to fully adjust their prices to surprise changes in their costs, as they would likely anticipate these cost changes to be reversed in the future. The benefits of price-level targeting are likely to be particularly important when the short-term policy rate is constrained by the so-called zero bound, as explained in this paper by Eggertsson and Woodford. Conclusion Since the early 1990s, the PCE deflator has remained remarkably close to a 2 percent trend line. It has continued to track this trend since the beginning of Chairman Bernanke's tenure in January 2006, despite a dramatic financial crisis and the Great Recession. By committing to stabilizing inflation over the long run, the FOMC is de facto at least partially stabilizing the price level around a trend line. Such a policy should thus reap some of the benefits of price-level targeting. Disclaimer The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors. Marc P. Giannoni is an officer in the Federal Reserve Bank of New York’s Research and Statistics Group. Hannah Herman is a senior research analyst in the Group.

Japan Reacts to Fukushima Crisis By Banning Journalism Posted: 28 Nov 2013 10:30 PM PST Japan – Like the U.S. – Turns to Censorship 2 weeks after the Fukushima accident, we reported that the government responded to the nuclear accident by trying to raise acceptable radiation levels and pretending that radiation is good for us. We noted earlier this month: Japan will likely pass a new anti-whistleblowing law in an attempt to silence criticism of Tepco and the government: Japanese Prime Minister Shinzo Abe's government is planning a state secrets act that critics say could curtail public access to information on a wide range of issues, including tensions with China and the Fukushima nuclear crisis. The new law would dramatically expand the definition of official secrets and journalists convicted under it could be jailed for up to five years. In reality, reporters covering Fukushima have long been harassed and censored. Unfortunately, this is coming to pass. As EneNews reports: Associated Press, Nov. 26, 2013: Japan's more powerful lower house of Parliament approved a state secrecy bill late Tuesday [...] Critics say it might sway authorities to withhold more information about nuclear power plants [...] The move is welcomed by the United States [...] lawyer Hiroyasu Maki said the bill's definition of secrets is so vague and broad that it could easily be expanded to include radiation data [...] Journalists who obtain information "inappropriately" or "wrongfully" can get up to five years in prison, prompting criticism that it would make officials more secretive and intimidate the media. Attempted leaks or inappropriate reporting, complicity or solicitation are also considered illegal. [...] Japan's proposed law also designates the prime minister as a third-party overseer. BBC, Nov. 26, 2013: Japan approves new state secrecy bill to combat leaks [...] The bill now goes to the upper house, where it is also likely to be passed. The Australian, Nov. 25, 2013: Japanese press baulks at push for 'fascist' secrecy laws [...] Taro Yamamoto [an upper house lawmaker] said the law threatened to recreate a fascist state in Japan. "This secrecy law represents a coup d'etat by a particular group of politicians and bureaucrats," he told a press conference in Tokyo. "I believe the secrecy bill will eventually lead to the repression of the average person. It will allow those in power to crack down on anyone who is criticising them – the path we are on is the recreation of a fascist state." He said the withholding of radiation data after the Fukushima disaster showed the Japanese government was predisposed to hiding information from its citizens and this law would only make things worse. [...] The Asahi Shimbun newspaper likened the law to "conspiracy" regulations in pre-war Japan and said it could be used to stymie access to facts on nuclear accidents [...] Foreign Correspondents' Club of Japan president Lucy Birmingham: "We are alarmed by the text of the bill, as well as associated statements made by some ruling party lawmakers, relating to the potential targeting of journalists for prosecution and imprisonment." Activist Kazuyuki Tokune: "I may be arrested some day for my anti-nuclear activity [...] But that doesn't stop me." Lawrence Repeta, a law professor at Meiji University in Tokyo: "This is a severe threat on freedom to report in Japan [...] It appears the Abe administration has decided that they can get a lot of what they want, which is to escape oversight, to decrease transparency in the government by passing a law that grants the government and officials broad authority to designate information as secret." U.S. Charge d'Affairs Kurt Tong: It's a positive step that would make Japan a "more effective alliance partner." Prime Minister Shinzo Abe: "This law is designed to protect the safety of the people." See also: Japan Deputy Prime Minister talks about "learning from the Nazis" — Previously said to let elderly people "hurry up and die" (VIDEO) Rather than addressing the problems head-on, the Japanese government is circling the wagons. Unfortunately, the United States is no better. Specifically, the American government: Censors journalists who raise inconvenient truths Pressured the Japanese government to re-start its nuclear program, and is allowing Fukushima seafood to be sold in the U.S. Weakened safety standards for U.S. nuclear reactors after the Fukushima disaster As we noted 6 months after Fukushima melted down: American and Canadian authorities have virtually stopped monitoring airborne radiation, and are not testing fish for radiation. (Indeed, the EPA reacted to Fukushima by raising "acceptable" radiation levels.) *** The failure of the American, Canadian and other governments to test for and share results is making it difficult to hold an open scientific debate about what is happening. Earlier this year, the acting EPA director signed a revised version of the EPA's Protective Action Guide for radiological incidents, which radically relaxing the safety guidelines agencies follow in the wake of a nuclear-reactor meltdown or other unexpected release of radiation.  EPA whistleblowers called it "a public health policy only Dr. Strangelove could embrace." As we noted right after Fukushima happened, this is standard operating procedure for government these days: When the economy imploded in 2008, how did the government respond? Did it crack down on fraud? Force bankrupt companies to admit that their speculative gambling with our money had failed? Rein in the funny business? Of course not! The government just helped cover up how bad things were, used claims of national security to keep everything in the dark, and changed basic rules and definitions to allow the game to continue. See this, this, this and this. When BP – through criminal negligence – blew out the Deepwater Horizon oil well, the government helped cover it up (the cover up is ongoing). The government also changed the testing standards for seafood to pretend that higher levels of toxic PAHs in our food was business-as-usual. So now that Japan is suffering the worst nuclear accident since Chernobyl – if not of all time – is the government riding to the rescue to help fix the problem, or at least to provide accurate information to its citizens so they can make informed decisions? Of course not! The EPA is closing ranks with the nuclear power industry …. Indeed, some government scientists and media shills are now "reexamining" old studies that show that radioactive substances like plutonium cause cancer to argue that they help prevent cancer. It is not just bubbleheads like Ann Coulter saying this. Government scientists from the Pacific Northwest National Laboratories and pro-nuclear hacks like Lawrence Solomon are saying this. [Update.] In other words, this is a concerted propaganda campaign to cover up the severity of a major nuclear accident by raising acceptable levels of radiation and saying that a little radiation is good for us. Any time the results of bad government policy is revealed, the government just covers it up rather than changing the policy.

Comet Ison, Sungrazing Comet Posted: 28 Nov 2013 02:00 PM PST As the comet approaches perihelion on Nov. 28th, 2013, it has significantly brightened and its tail has started to bend . The NASA/ESA SOHO spacecraft has captured imagery. Credit: NASA / ESA / SOHO / Mash Mix: SPACE.com ~~~ Sungrazing comets are a special class of comets that come very close to the sun at their nearest approach, a point called perihelion. To be considered a sungrazer, a comet needs to get within about 850,000 miles from the sun at perihelion. Many come even closer, even to within a few thousand miles. Being so close to the sun is very hard on comets for many reasons. They are subjected to a lot of solar radiation which boils off their water or other volatiles. The physical push of the radiation and the solar wind also helps form the tails. And as they get closer to the sun, the comets experience extremely strong tidal forces, or gravitational stress. In this hostile environment, many sungrazers do not survive their trip around the sun. Although they don’t actually crash into the solar surface, the sun is able to destroy them anyway. Many sungrazing comets follow a similar orbit, called the Kreutz Path, and collectively belong to a population called the Kreutz Group. In fact, close to 85% of the sungrazers seen by the SOHO satellite are on this orbital highway. Scientists think one extremely large sungrazing comet broke up hundreds, or even thousands, of years ago, and the current comets on the Kreutz Path are the leftover fragments of it. As clumps of remnants make their way back around the sun, we experience a sharp increase in sungrazing comets, which appears to be going on now. Comet Lovejoy, which reached perihelion on December 15, 2011 is the best known recent Kreutz-group sungrazer. And so far, it is the only one that NASA’s solar-observing fleet has seen survive its trip around the sun. Comet ISON, an upcoming sungrazer with a perihelion of 730,000 miles on November 28, 2013, is not on the Kreutz Path. In fact, ISON’s orbit suggests that it may gain enough momentum to escape the solar system entirely, and never return. Before it does so, it will pass within about 40 million miles from Earth on December 26th. Assuming it survives its trip around the sun. This video is public domain and can be downloaded at: https://svs.gsfc.nasa.gov/vis/a010000… Like our videos? Subscribe to NASA’s Goddard Shorts HD podcast: http://svs.gsfc.nasa.gov/vis/iTunes/f… Or find NASA Goddard Space Flight Center on Facebook: http://www.facebook.com/NASA.GSFC

Happy Thanksgivingukkah ! Posted: 28 Nov 2013 11:00 AM PST ~~~ 25 Little-Known Facts About Thanksgiving ~~~

10 Turkey Day Reads Posted: 28 Nov 2013 05:00 AM PST Turkey Day is here! Enjoy the time you have with loved ones, but before that, some reads: • Thanksgiving Facts Roundup (Today I Found Out) • Five economic trends to be thankful for (WaPo) but see Fed Reveals New Concerns About Long-Term U.S. Slowdown (Bloomberg) • Stock Bulls Have Plenty to Be Thankful (WSJ) see also What Tech Bubble? The charts beg to differ  (Barron’s) • CNBC Core Viewership Drops To Fresh Two Decade Low In November, Lowest Since 1993 (Zerohedge) • Fox News not outraged by retailers' War on Thanksgiving  (CJR) • What Americans really think of Obamacare (LA Times) • Poor choices: “Circumstances matter" is the new "incentives matter" (FT Alphaville) see also Why I Make Terrible Decisions, or, poverty thoughts (Killer Martinis) • Penny Lane: Gitmo’s other secret CIA facility (AP) • When We Lose Antibiotics, Here’s Everything Else We’ll Lose Too (Wired) • Harvard Yoga Scientists Find Proof of Meditation Benefit (Bloomberg) Let me guess what you are eating today:   Surging Nasdaq Pierces 4,000 Source: WSJ

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