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Ryan Avent had a fantastic post Tuesday dismantling the rationale of the Fed, and specifically Jeremy Stein, for basically casting macroeconomic improvement to the wind for the sake of ill-defined financial stability. If you read Ryan’s post you’ll see precisely why this is backwards and, indeed, as likely as not to backfire.

The relatively meager contribution I’d like to make to the discussion is simply this – if the Fed truly believes that financial instability, despite being wholly absent from their legal mandate, is sufficiently important to trade off other desirable outcomes to pursue, then they should pick a target. One of the better decisions the Fed has made in recent years is more openly and rigorously defining targets – specifically, clearly defining the thresholds in widely-available and transparent measures of unemployment and inflation that may lead the Fed, once crossed, to raise interest rates, and disclaiming any potential rate raises before then. If the Fed wants us to take their approach to financial stability seriously, they should pick a variable or index and a threshold value and announce it. Absent doing so, we’ll all have to wonder whether less rigorous impulses undergird the Fed’s eagerness to find new reasons to raise interest rates even as unemployment is high and inflation low.


Tyler Cowen on the shrinking labor force participation rate:

(And broken down by age here, I never find that disaggregation reassuring however, since the elderly are working more and the young less.)

Well, of course it is. More and more old people are working in white collar jobs. More and more old people are healthier and fitter in mind and body. More and more old people are still waiting for their 201(k)s to become 401(k)s again. And there’s just not enough demand to get you to full employment. So the least experienced, least skilled, least institutional-knowledge-endowed laborers are shut out of the workforce.

Conclusion: moar money, moar inflation, moar aggregate demand plz.

Sorry for the snark.


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