Hacker News Reader

Comment by Eliezer | Hacker News Reader

Three cheers for not overreaching one's mandate. I know we rag a lot on Federal Reserve chairpeople for not doing NGDP level targeting, but in a lot of ways it's one of the most sensible branches of government.

View on HN

The Fed isn't a branch of government. They also typically target 2% inflation, a la the ECB. The difference being that the Fed doesn't have a specific requirement to target it, whereas the ECB does.

Edit: They do the targeting through a variety of ways--and none of them touch Bitcoin or in any way are influenced by Bitcoin. Just like the Fed has no authority nor mandate to regulate any other currency than the USD.

In addition to not being a branch of government, it is also not clear that the Fed is at all "sensible". I don't doubt that the Fed is full of smart people, but they seem to use their smarts to find ways to put a band-aid on the mess the last Fed chair made by keeping interest rates too low, too long.

Digital currency is a huge threat to the Fed if successful, so it will need to be dealt with in some capacity. Right now, I suspect they are hoping it is a fad or a toy that will go away. Gox certainly doesn't help change that impression.

They believe this to be the case. If they didn't, they wouldn't believe in the need for central banking. :)

Digital currency is a huge threat to the Fed if successful, so it will need to be dealt with in some capacity. Right now, I suspect they are hoping it is a fad or a toy that will go away.

The primary function of the Fed is to be a stabilizing force in the market. There is absolutely no evidence that bitcoin will ever be a threat against this. Even the logical arguments in favor of that position have a hard time holding water.

Pedantic point, but US inflation has only climbed above 2% once in the past two years. If their target was 2 percent inflation, they should have been above it roughly half the time. It seems they are happy with 1.5 or so.

Because the Fed is not bound to 2% by its mandate, like the ECB is, they're free to alter that number as they see fit. Typically, during recession, you'll target a bit lower of inflation so as to stay the purchasing power of the unemployed's savings. The last thing you want to do is to have inflation take off on somebody who's living off of savings. Even to get to 1.5, they needed to do some QE, so it's not all rainbows and sparkles. Inflation's a difficult beast to tame, but they at least have more influence over that than, say, GDP.

They actually have quite a lot of influence on nominal GDP. (Real GDP is a different beast.)

To be even more pedantic, surely their targets would consider the mean not the median, so it wouldn't necessarily have to be over the target half the time for that target to still be the average.

You're assuming they have sufficient control to hit within evenly-distributed noise of their target.

The Fed does have a specific requirement. As part of the 1977 revision

> "so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates."

Targeting 2% inflation means they're not even trying to promote stable prices. Unfortunately, there is no punishment for not keeping to the mandate.

For what it's worth, here is the Bank of Canada's explanation for why they target a 2% inflation rate as part of a broader goal of promoting price stability:

http://www.bankofcanada.ca/wp-content/uploads/2010/11/why_ca...

Keep in mind the mandate is price stability, not interest rate stability. And anyway, targeting a static, transparent, openly published interest rate is very stable, at least when they are actually able to do it for extended periods. It's very predictable, which businesses need to plan and forecast future hiring and investment.

Volker targeting [whatever it takes to kill inflation, eg 20%+] and Bernanke targeting [whatever it takes to prevent a Depression, eg 0%] maybe not so much, but at those times their mandate was even moreso price and economic stability, not interest rate stabilty.

The fact that 2% interest rates cause currency devaluation over time doesn't make it unstable, it's still quite predictable and hence stable. It's high-variance money and assets, like cryptocurrencies among other things, that are unstable (at least right now in their infancy, I'm sure that will be different 10-20yrs from now).

Yes, price stability is exactly what I wrote. Interest rates are not inflation. 2% price inflation can in no way be interpreted to mean stable prices.

Of course the Fed is a branch of the government, and one of the more powerful ones. Next you'll be telling me that the Supreme Court doesn't legislate civil rights because someone painted a word saying "judiciary" above it. I go by what things are, not by what they're called.

I don't believe anyone would define it as a branch of the government. It is true that it is not under the Legislative, the Judicial, or Executive branches (source http://www.federalreserve.gov/faqs/about_14986.htm), but it does not constitute some fourth branch of government.

From your link:

>The Federal Reserve System fulfills its public mission as an independent entity within government. It is not "owned" by anyone and is not a private, profit-making institution.

>As the nation's central bank, the Federal Reserve derives its authority from the Congress of the United States. It is considered an independent central bank because its monetary policy decisions do not have to be approved by the President or anyone else in the executive or legislative branches of government, it does not receive funding appropriated by the Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms.

I really like how they say it isn't owned or for profit when the next paragraph down they say it has "special" shares, of which pay 6% in dividends by law. Nope no profits there, just magic money. Technically that isn't ownership, they're not real shares, and technically they dont turn a profit, all that goes to shareholders..

Their goal isn't to turn a profit. Almost all of the profits that they do get go to the federal government.

The member banks earn a 6% dividend on the amount of stock that they own in their regional Federal Reserve Bank. That amount of stock is determined by the member bank's balance sheet. They have to invest that money in the Federal Reserve.

So by your reasoning, Federal Express is also a branch of government? From Wikipedia: "The Reserve Banks are not federal instrumentalities for purposes of the FTCA [the Federal Tort Claims Act], but are independent, privately owned and locally controlled corporations."

I can't tell if sarcasm or severely misinformed.

The fed, is anything but federal. They are a group of private corporations owned by groups of banks within each reserve banks district. They can be somewhat controlled by congress by way of statute but rarely are and currently answer to no one but themselves. There is a lot of conspiracies around who or what group really owns the majority shares. I'm not going to go into the theory here as they are just that, theories.

In response to going by what they are not what they are called they very much are not a branch of government. They say this very plainly on their own website:

http://www.federalreserve.gov/faqs/about_14986.htm

> I can't tell if sarcasm or severely misinformed

* Describes itself as "within government"

* Subject to congressional oversight

* Governors and Chair appointed by POTUS with oversight from the Senate

They aren't part of the government elected by the public, that's what many people class as important.

As for subject to congressional oversight, seems like pretty loose oversight if you ask me... https://www.youtube.com/watch?v=CY8xz3Q7aig

The Board of Governor's of the Federal Reserve System is part of government. It's an independent federal agency, with about 2,000 employees

The system also includes 12 regional Federal Reserve Banks, which are quasi-private. There's a mixture of public and private control of them. The member banks in each region get to elect 6 of the 9 directors. Each member bank gets two votes and the vote is divided by bank size, so the big banks in each region choose two directors, the medium banks two, and the small banks two.

The remaining 3 directors are appointed by the Board of Governors (the federal agency).

The Federal Reserve Banks are considered federal entities for some purposes, but private entities for others.

The member banks in each region are required to own a certain amount of stock in their Federal Reserve Bank. They get paid a 6% annual dividend of the amount that they have invested in the Federal Reserve. All remaining profits (the vast majority) go to the federal government.

I know we rag a lot on Federal Reserve chairpeople for not doing NGDP level targeting, but in a lot of ways it's one of the most sensible branches of government.

There's maybe about 5 people who do this...

> we rag a lot on Federal Reserve chairpeople for not doing NGDP level targeting

I wish HN was actually this economically informed.

Who exactly is that 'we' you are speaking of? Are there anyone except a small group of market monetarists that advocate NGDP targeting?

As someone closer to MR in thought, NGDP seems marginally less bad than the current way of doing things, but not all that much different.

Reply on news.ycombinator.com