Firstly I would like to thank the FOMC for allowing the creation of the Shadow FOMC. In these times of controversial monetary policy, it seems only prudent to have a loyal opposition. And with the increased importance of the Shadow Banking System, whose ranks have been swelled by refugees fleeing the forces of Genghis Frank and Khan Dodd, it is vital that said loyal opposition should be a Shadow FOMC.
We intend to issue quarterly statements, coinciding with the releases of the Light FOMC .
Release Date: September 19, 2014.
For immediate release.
Information received since the Shadow Federal Open Market Committee last met, which was never, suggest that the early universe rapidly expanded due to cosmic inflation. However, the expansion was disjointed due to quantum fluctuations. The effects of these imbalances continue to have a major effect on the universe, as they are the cause of all variation, including galaxies, planets, and the fractional reserve banking system. More recently, fear of another kind of inflation lead to mistakenly tight monetary policy during 2008, a key cause of the recession, from which the economy has now partially recovered. Private Sector GDP is running at a trend rate almost as high as during the Clinton and Bush II bull years, though many analysts miss this due to a mistaken focus on total NGDP, which includes government spending at cost. Industrial production rose. The S&P500, which appeared on the verge of mass bankruptcy, is now at record levels, seeing a 30% rise in 2013. Unemployment, painfully high for a very long time, has started to accelerate downwards. Employment figures, however, have been very disappointing; partly because of demographics, many of the unemployed have simply given up looking for a job. Only recently have we seen the employment/population ratio begin to rise.
More recently, since the Light FOMC met in July incremental data suggests that economic activity is expanding at a moderate pace. On balance, labor market conditions improved somewhat further; however, the employment rate has only improved slightly and wage inflation is muted, suggesting there remains significant underutilization of labor resources. The minimum wage continues to distort labor markets, suggesting a need for higher inflation to reduce its effects. Household spending appears to be rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Restrained fiscal policy is encouraging true economic growth, although it is confusing accountants who mistakenly assume government spending is by definition useful activity. 10-year breakevens have recently fallen back to 2%, and 5-year breakevens are below 1.7%, slightly below the Light Committee’s longer-run objective. The US government has not issued NGDP-linked bonds, so we lack market implied growth figures, but trailing Nominal Private Sector GDP (NPGDP) growth has been trending around 5%, almost at our 6% target – and substantially closer than the irrelevant NGDP, which is closer to 4%.
If it was acting consistently with its somewhat misguided statutory mandate, the Light FOMC would not have initiated tapering, as low employment and low inflation both suggest a need for lose monetary policy. The Shadow Committee agrees that, with current mediocre policy, economic activity will expand at a moderate pace. The Light Committee thinks that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year, which is very strange, given that breakevens have fallen since then. Maybe the Light Committee could not afford a Bloomberg terminal.
The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions, but that this does not excuse irresponsible monetary policy. In light of the hugely reduction in the employment/population ratio since 2006, but improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to maintain the pace of its asset purchases. In October, the Shadow Committee will continue to add to its holdings of agency mortgage-backed securities at a pace of $10 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $15 billion per month. Both Light and Shadow Committees are 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 NPGDP, over time, is at the rate most consistent with the Shadow Committee’s mandate.
The Committee will monitor incoming information on economic and financial developments in coming months as closely as it can be bothered, and will continue its purchases of Treasury and agency mortgage-backed securities, until the outlook for the labor market has improved substantially in a context of NPGDP growth. If incoming information broadly supports the Committee’s expectation of ongoing improvement in labor market conditions and the Committee’s optimistic hope of NPGDP moving back toward its longer-run objective, the Shadow Committee will end its current program of asset purchases at sometime in early 2015. However, asset purchases are not on a preset course, and the Shadow Committee’s decisions about their pace will remain contingent on the Shadow Committee’s outlook for the labor market and broader economy, 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 Shadow Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate, and suggests that the Light Committee might like undertake one, rather than merely talking about it. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 6% NPGDP growth. This assessment will take into account a wide range of information, including market indicators, what witty people say in our twitter feed, and patterns we see in clouds. The Committee 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 for a considerable time after the asset purchase program ends, especially if projected NPGDP growth continues to run below the Committee’s 6 percent longer-run goal, and provided that longer-term NPGDP expectations remain well anchored.
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 NPGDP of 6 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Shadow Committee views as more consitant with the fundamental level of human time preference, which implies long-run real rates of around 3-4%. Over the longer term, the Shadow remains concerned not only about technological stagnation but also about the risks from Superintelligent Artificial Intelligence.
Voting for the FOMC monetary policy action were: everyone, because of the Aumann Agreement Theorem.