Seriously, lets all go and read Scott Sumner. He discusses how monetary policy can still be effective even when the cash rate hits zero, and I find it difficult to fault his reasoning.
I would suggest reading all the posts, but there are a few that touched me:
Read more
The RBNZ stated today that long-term interest rates have risen too quickly. There forecast recovery was premised on a low dollar and a relatively flat yield curve – however, it seemed a bit disingenious to suggest that we would have a foreseeable strong recovery and a flat yield curve 🙂 . However, this logic was based on a special assumption – a slumping terms of trade.
As a result, the bank is likely to slash rates by at least 50bp at the next meeting. This was already more likely than during the meeting given the exchange rate – as we’ve discussed. This is a big announcement on their part – effectively we may well be pushing towards the lower bound of the OCR. In this case, we need to think more carefully about our monetary policy …
There will be a post at 11am that points out some good suggestions on this issue.
Note that the general market also feels this way – hence:
Source NBNZ
Yesterday Federal Reserve Chairman Ben Bernanke gave a speech to the Council of Foreign Relations. I heard a few soundbytes on Radio NZ National on my way home last night and was particularly interested in his comments on the concept of ‘too big to fail’.
Bernanke identifies that in a crisis, authorities have strong incentives to prevent the failure of large, interconnected firms, due to the negative externalities that arise from their failure. Such firms might be considered ‘too big to fail’.
However, Bernanke also identifies the undesirable effects that stem from the belief of market participants that a particular firm is considered too big to fail: Read more
Over in the good old US the Congressional Budget Office has released their forecasts (ht Paul Krugman). It is an ugly sight, as would be expected, with growth falling miles below its “potential” level and a large negative output gap opening up.
As Paul Krugman points out, this type of large output gap would provide massive deflationary pressure – he suggests that we could have a deflation rate of between 3-5%!
Now, I’m sure his logic is spot on given this estimate of potential output – however this raises a question for me, has potential been forecast correctly? Generally, growth in potential output is forecast to be relatively stable – and trends along with historic growth. But this doesn’t feel quite right. There are two reasons why this may fail:
In what appears to be becoming a “stand up for the Bank” day, I was surprised to see Steve Pierson at the Standard state that he believes the Reserve Bank cut interest rates too late!
Now, if the Reserve Bank had known exactly what was going to happen in the world and decided to hike rates for the hell of it I would agree – but ex-ante they (like the majority of other people) had no idea what was going to happen.