New Monetarist Stephen Williamson Completely Loses It

New Monetarist Stephen Williamson has declared "The End of Central Banking." He focuses on the central banks recently announcing negative nominal target rates, such as in Sweden and Japan, all supposedly to try to reach now apparently far out of  reach 2% inflation targets. They, along with the Fed, simply are pathetic losers unable to get anywhere near those target rates.  Of course, the reason for this is the truth of neo-Fisherian new monetarist economics that  argues that to raise inflation one central banks should increase their target rates.  He goes on to argue that all schools of macroeconomic thought support such an argument, except for the loser ISLM/Phillips Curve school, supposedly in control at all these loser central banks, now coming to their end.

Well, it may well be true that large amounts of modern macro theory support this view, apparently with little empirical evidence to support this view that depends on agents adapting their expectations appropriately.  Sounds nice, but in fact we are still waiting for this to actually happen, although, of course, we all know that it takes time, lots of  time, for these expectations to adjust.

Well, as far as I am concerned, Williamson has just completely lost it. In his post (see link) he presents data showing sharply falling inflation expectations, in particular a FRED graph showing the "10 year inflation breakeven point" over time, this reflecting the difference between 10 year nominal US bond rates, and the US 10 TIPS rate.  The rate went sharply negative down to nearly -2% during the 2008 crash, but fairly quickly rebounded to a not unreasonable positive rate.  So, what has this measure Williamson focuses on so strongly been doing recently?

Well, he  makes a big deal  about how it is now lower than ever except for that brief super decline during 2008, reachin 1.18% "currently."  This reflects a sharp decline in the last few months from a rate around 1.5% quite recently.

So why does this suggest that he has completely lost it?  Because the Fed raised its target rate in December, and most of this decline has happened since then.  Now maybe we must wait some appropriate long period of time, just as all the hyperinflationistas (not in same camp as Williamson) have been insisting that eventually, sooner or later, the horrible overly stimulative Fed policy of  the last years will certainly certainly eventually lead to hyperinflation, or at least some noticeable increase in the inflation rate.

As it is, we have seen the Fed do what Williamson recommended in order to increase the inflation rate (and certainly the expectations of that).   But, instead we have seen his favorite measure of inflation expectations crashing hard, and the trend looks like it is straight down.  Williamson needs to phone home, or maybe phone Milton Friedman, or maybe even Irving Fisher himself, I do  not know.  In any case, the data he himself touts seems to be completely at odds with what he argues so  presumptuously. More monetary crackpottery, if more responsible  than a lot of it.

Addendum:  I have just gone to his original post where I added a comment making the main points here, if more  briefly and with less of the punch.  Williamson's reply is that market participants now expect that there will be no more  rate increases by the Fed, and that indeed, US rates will converge to  those of  Japan (he has a long convergence argument in his post).  This is in the face of Yellen still maintaining the official line before a congressional committee that more  rate increases, if more slowly than previously stated, are in store from the Fed.  I think Williamson is  right that indeed the rate increases are not likely to happen, and it is just a matter of time before the FOMC climbs off its official high horse on this matter.  But his argument that it is completely reasonable that this increase in target rates (by only 25 bp) should lead to a crashing breakeven inflation rate continues to make no sense whatsoever, even if the Fed is not going to increase target rates further.

Barkley Rosser