Ethan S. Harris

Bio: Ethan S. Harris is an academic researcher from Bank of America. The author has contributed to research in topics: Monetary policy & Interest rate. The author has an hindex of 12, co-authored 18 publications receiving 794 citations. Previous affiliations of Ethan S. Harris include Bank of America Merrill Lynch.

The Equilibrium Real Funds Rate: Past, Present and Future

Abstract: We examine the behavior, determinants, and implications of the equilibrium level of the real federal funds rate, defined as the rate consistent with full employment and stable inflation in the medium term We draw three main conclusions First, the uncertainty around the equilibrium rate is large, and its relationship with trend GDP growth much more tenuous than widely believed Our narrative and econometric analysis using cross-country data and going back to the 19th Century supports a wide range of plausible central estimates for the current level of the equilibrium rate, from a little over 0% to the pre-crisis consensus of 2% Second, despite this uncertainty, we are skeptical of the “secular stagnation” view that the equilibrium rate will remain near zero for many years to come The evidence for secular stagnation before the 2008 crisis is weak, and the disappointing post-2008 recovery is better explained by protracted but ultimately temporary headwinds from the housing supply overhang, household and bank deleveraging, and fiscal retrenchment Once these headwinds had abated by early 2014, US growth did in fact accelerate to a pace well above potential Third, the uncertainty around the equilibrium rate implies that a monetary policy rule with more inertia than implied by standard versions of the Taylor rule could be associated with smaller deviations of output and inflation from the Fed’s objectives Our simulations using the Fed staff’s FRB/US model show that explicit recognition of this uncertainty results in a later but steeper normalization path for the funds rate compared with the median “dot” in the FOMC’s Summary of Economic Projections

The Commodity-Consumer Price Connection: Fact or Fable?

Abstract: The recent surge in commodity prices has rekindled interest in their power to predict consumer price inflation. But is this interest warranted? In examining the empirical relationship between commodity prices and consumer price inflation, this article finds that commodities' reputation as useful leading indicators of inflation is actually based more on fable than fact. Testing eight commonly used indexes, the authors conclude that although commodities had some predictive power in the past, the commodity-consumer price connection has broken down in the more recent period. They argue that this shift primarily reflects the diminished role of traditional commodities in U.S. production and the "sterilization" of some inflation signals by offsetting monetary policy actions.

The Equilibrium Real Funds Rate: Past, Present, and Future

Abstract: We examine the behavior, determinants, and implications of the equilibrium level of the real federal funds rate, interpreted as the long run or steady state value of the real funds rate. We draw three main conclusions. First, the uncertainty around the equilibrium rate is large, and its relationship with trend GDP growth much more tenuous than widely believed. Our narrative and econometric analysis using cross-country data and going back to the 19th century supports a wide range of plausible estimates for the current level of the equilibrium rate, from a little over 0 per cent to the pre-crisis consensus of 2 per cent. Second, a bivariate vector error correction model that looks only to U.S. and world real rates well captures the behavior of U.S. real rates. The model treats real rates as cointegrated unit root processes. As of the end of our sample (2014), the model forecasts the real rate in the U.S. will asymptote to an equilibrium value of a little less than half a percent by 2021. Consistent with our first point, however, confidence intervals around this point estimate are huge. Third, the uncertainty around the equilibrium rate argues for more “inertial” monetary policy than implied by standard versions of the Taylor rule. Our simulations using the Fed staff’s FRB/US model show that explicit recognition of this uncertainty results in a later but steeper normalization path for the funds rate compared with the median “dot” in the FOMC’s Summary of Economic Projections.

The Commodity-Consumer Price Connection: Fact or Fable?

Abstract: nterest in commodity prices as indicators of consumer price inflation has ebbed and flowed with the rise and fall in commodity prices themselves. True to form, as commodity prices have surged in the last two years (Chart 1), interest in their predictive power has returned. Inflation hawks point to an outpouring of studies in the late 1980s showing a strong empirical connection between commodity prices and subsequent consumer inflation. Indeed, the concern over commodities has grown to the point where even two previously obscure commodity indexes—the National Association of Purchasing Managers price index (NAPM) and the Federal Reserve Bank of Philadelphia’s prices paid index (PHIL)—have begun to capture considerable attention among economists and market analysts. Is this renewed attention warranted? In this article, we argue that none of the channels through which commodity prices signal more generalized inflation are operating as well as they did in the past: commodities have become less important as an input to production, some of the inflation signals from commodity prices may be sterilized by offsetting monetary policy, and commodities have become less popular as an inflation hedge. We also present evidence that the recent commodity movements are a reaction to swings in dollar exchange rates rather than a signal of generalized inflation pressures. Our empirical results underscore the diminished signaling power of commodities in the last eight years. Drawing on data for the 1970-94 period, we examine five major U.S. commodity indexes and three subgroups of commodities—gold, oil, and food. We use vector autoregression models (VARs) to test whether commodity prices are useful in predicting subsequent movements in both the finished goods producer price index (PPI) and the core— that is, nonfood and nonenergy—consumer price index (CPI). These VAR methods allow us to isolate the predictive power of commodity prices while controlling for other determinants of inflation. We find that: • Contrary to conventional theory, there is no long-run link between the level of commodity prices and the I The views expressed in this article are those of the authors and do not necessarily r the position of the Federal Reserve Bank of New York or the Federal Reserve System. The Federal Reserve Bank of New Y ork provides no warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability, or fitness for any particular purpose of any information contained in documents pr oduced and provided by the Federal Reserve Bank of New York in any form or manner whatsoever.

A Skeptical View of the Impact of the Fed’s Balance Sheet

Abstract: We review the recent U.S. monetary policy experience with large scale asset purchases (LSAPs) and draw lessons for monetary policy going forward. A rough consensus from previous studies is that LSAP purchases reduced yields on 10-year Treasuries by about 100 basis points. We argue that the consensus overstates the effect of LSAPs on 10-year yields. We use a larger than usual population of possible events and exploit interpretations provided by the business press. We find that Fed actions and announcements were not a dominant determinant of 10-year yields and that whatever the initial impact of some Fed actions or announcements, the effects tended not to persist. In addition, the announcements and implementation of the balance-sheet reduction do not seem to have affected rates much. Going forward, we expect the Federal Reserve’s balance sheet to stay large. This calls for careful consideration of the maturity distribution of assets on the Fed’s balance sheet. Our conclusion is that the most important and reliable instrument of monetary policy is the short term interest rate, and we discuss the implications of this finding for Fed policy going forward. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Federal Reserve Bank of New Yorkの制定せる財務諸表様式について

Abstract: Enclosed is a copy of the Board of Governors’ Semiannual Agenda of Regulations for the period August 1, 1980 through February 1, 1981. The Semiannual Agenda provides you with information on those regulatory matters that the Board now has under consideration or anticipates considering over the next six months, and is divided into three parts: (1) regulatory matters that the Board had considered during the previous six months on which final action has been taken; (2) regulatory matters that have been proposed for public comment and that require further Board consideration; and (3) regulatory matters that the Board may consider over the next six months.

Why You Should Never Use the Hodrick-Prescott Filter

Abstract: Here's why. (1) HP introduces spurious dynamic relations that have no basis in the underlying data-generating process. (2) Filtered values at the end of the sample are very different from those in the middle, and are also characterized by spurious dynamics. (3) A statistical formalization of the problem typically produces values for the smoothing parameter vastly at odds with common practice. (4) There's a better alternative. A regression of the variable at date t on the four most recent values as of date t—h achieves all the objectives sought by users of the HP filter with none of its drawbacks. JEL codes: C22, E32, E47

Are Oil Shocks Inflationary?: Asymmetric and Nonlinear Specifications versus Changes in Regime

Abstract: This paper identifies a structural break in core U.S. inflation Phillips curves such that oil prices contributed substantially before 1981, but since that time pass-through has been negligible. This characterization is robust to a variety of re-specifications and fits the data better than asymmetric and nonlinear oil price alternatives. Evidence does not support the hypotheses that declining energy intensity or deregulation of energy-producing and -consuming industries played an important role. Monetary policy did not itself become less accommodative of oil shocks, but may have helped create a regime where inflation is less sensitive to price shocks more generally.

Risk factors in stock returns of Canadian oil and gas companies

Abstract: This paper uses a multifactor market model to estimate the expected returns to Canadian oil and gas industry stock prices. Results are presented to show that exchange rates, crude oil prices and interest rates each have large and significant impacts on stock price returns in the Canadian oil and gas industry. In particular, an increase in the market or oil price factor increases the return to Canadian oil and gas stock prices while an increase in exchange rates or the term premium decreases the return to Canadian oil and gas stock prices. Furthermore, the oil and gas sector is less risky than the market and its moves are pro-cyclical. This suggests that Canadian oil and gas stocks may not be a good hedge against inflation.

Oil prices, exchange rates and emerging stock markets

Abstract: While two different streams of literature exist investigating 1) the relationship between oil prices and emerging market stock prices and 2) the relationship between oil prices and exchange rates, relatively little is known about the dynamic relationship between oil prices, exchange rates and emerging market stock prices. This paper proposes and estimates a structural vector autoregression model to investigate the dynamic relationship between these variables. Impulse responses are calculated in two ways (standard and the recently developed projection based methods). The model supports stylized facts. In particular, positive shocks to oil prices tend to depress emerging market stock prices and US dollar exchange rates in the short run. The model also captures stylized facts regarding movements in oil prices. A positive oil production shock lowers oil prices while a positive shock to real economic activity increases oil prices. There is also evidence that increases in emerging market stock prices increase oil prices.