John H. Cochrane

Torsten Slok of Deutsche Bank sends along the following fascinating graphsThe titles seem a little off. Yes, the market is expecting rate cuts (forward rate) but the market has been exactly wrong about everything for 10 years (and longer) first forecasting the recovery that never came, then forecasting much slower interest rate rises than actually happened

Dear Professor Cochrane and Folks, My thanks to Professor Cochrane for publishing this post. It has all the standard arguments against increasing the minimum wage in one spot and so is useful on those grounds alone

I understand how one can be nervous about casting off any pretense of monetary control, and counting entirely on an interest rate target to control inflation, no matter how much talk and modeling has gone that way since about 1982 when the Fed abandoned money targets in favor of explicit interest rate targets. Let's review the pre-2008 system, which the corridor envisages going back to in whole (Taylor, zero interest on reserves and an inactive discount window) or in part (Selgin, I think, interest on reserves above zero but substantially below interest on other assets, a wide band between interest on reserves and an upper bound) or just touching (Fed, minimal floor).This is the same graph, with zero interest on reserves. If the Fed implemented its interest rate target with a flat daily money supply curve, but raised the level of that target with the price level or inflation, we get the same implied upward sloping supply curve in response to inflation. One borrowing rate, the interest on reserves rate, one lending rate, a repo rate, the Fed only takes short term treasuries as it only purchases short term treasuries (better yet, treasury electronic money, but that hasn't been invented yet), and the Fed will either purchase or repo.

But I’ll argue instead that much of the threat to central bank independence stems ultimately from how central banks are behaving, and has little to do with interest rates. The big threat to independence comes from the expansion of activities and responsibilities that central banks have taken on, on an apparently permanent basis, in the years since the financial crisis: Asset purchases, regulatory expansion, a much larger set of goals, and a marriage of regulatory and macroeconomic policy. Central banks took on a new, and apparently permanent power, formerly foresworn: to buy assets directly, to control asset prices, not just short term interest rates. The trend to central banks as the large, integrated, monetary-financial-and macroeconomic planners, integrating broad control of financial markets and their participants, is desired by central banks, politicians, and not contested by voters.