Dollars and Jens
Wednesday, January 29, 2014

The FOMC statement, as revised:
Information received since the Federal Open Market Committee met in October December indicates that economic activity is expanding at a moderate pace growth in economic activity picked up in recent quarters. Labor market conditions have shown indicators were mixed but on balance showed further improvement ; the . The unemployment rate has declined but remains elevated. Household spending and business fixed investment advanced more quickly in recent months, while the recovery in the housing sector slowed somewhat in recent months. Fiscal policy is restraining economic growth, although the extent of restraint may be is diminishing. Inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent activity will expand at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for the economy and the labor market as having become more nearly balanced. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.
Taking into account the extent of federal fiscal retrenchment since the inception of its current asset purchase program, the Committee sees continues to see the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to modestly reduce make a further measured reduction in the pace of its asset purchases. Beginning in January February, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $ 35 30 billion per month rather than $ 40 35 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $ 40 35 billion per month rather than $ 45 40 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee's sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.
The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other  policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. The Committee also reaffirmed its expectation that the current exceptionally low target range for the federal funds rate of 0 to 1/4 percent will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee now anticipates continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Charles L. Evans; Esther L. George Richard W. Fisher; Narayana Kocherlakota; Sandra Pianalto; Charles I. Plosser; Jerome H. Powell; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Eric S. Rosengren, who believes that, with the unemployment rate still elevated and the inflation rate well below the federal funds rate target, changes in the purchase program are premature until incoming data more clearly indicate that economic growth is likely to be sustained above its potential rate.


Tuesday, January 14, 2014
mininum wage econometrics is hard
This is nominally about the minimum wage, but I encourage reading it in a more broadly epistemological cast of mind — this is work with which I was previously familiar, but it's well-described here. The upshot is that, with noisy data and confounding factors, blunt attempts to control for the confounds may well "control for" most of the signal as well, leaving mostly noise — only noise if you try to average out the noise in the wrong way.

More narrowly, the recent evidence suggests a way out of an interesting paradox in some of Card's work on the response of labor markets to presumably exogenous shocks:
All of this — the elastic (short-term) response to an increase in supply, the inelastic (short-term) response to a minimum price, and the weak (short-term) coupling between series that might be expected to be similar — makes a fair amount of sense in the modern search-theoretic models of labor that capture the fact that (most) people don't get up each morning, immediately congizant of which employer is willing to pay the most money for their labor that day, and go to work for that employer; instead there's a lot of what you might elsewhere call "repeat business".  It appears that the main effect of higher minimum wages is, in fact, to reduce growth in employment, and that it takes a while for differences in levels to show up; moreover, if you "correct for" the difference in job growth between different jurisdictions, you can swamp much of the effect, even if you take some care not to.

If you believe in a strong income effect among minimum wage employees, perhaps the right thing to do, then, is to raise the minimum wage when it is expected that job market conditions will, for other reasons, be improving over the next year or two; you provide a boost in income now, and create slack in the job market in the future.  (This suggestion is meant to be a bit cheeky; even to the extent that I think these partial-equilibrium Keynesian arguments are correct, and that welfare losses from the business cycle are sizable compared to microeconomic deadweight losses, I'm skeptical that policy can be timed well; cf. the famous projections of the unemployment rate with and without the 2009 stimulus.)

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