TRUMP | Triumphal Triumvirate Trampled

Why did Benedictine-trained ideologues
advance extreme agendas? Was St
Benedict somehow responsible?

Among many of my fellow alumni of Benedictine schools (I attended Ampleforth College and Portsmouth Abbey School for a total of six years), it has been a source of embarrassment that three key advisers to Donald Trump are graduates of these schools. 

The three people constituted a strategic triumvirate. All three are now out. In reverse order:

1. Sebastian (Seb) Gorka 

Sebastian Lukács Gorka attended St Benedict's School for Boys, Ealing Abbey. He was the last of the three to leave his job at the White House, which he did on August 25. He issued a resignation letter, but the White House insists that he did not resign — implying that he was fired. The White House announcement said: "Sebastian Gorka did not resign, but I can confirm he no longer works at the White House."

Gorka was a deputy assistant to President Trump, focusing on national security and terrorism. He was closely aligned with departed senior strategist Steve Bannon, and he seemed to link his departure with Bannon’s in his exit letter.

2. Stephen K. Bannon

Steve Bannon attended St Benedict's College preparatory school in Richmond, Virginia. He was Donald Trump's chief strategist before and after Trump's election. On August 19, Bannon was forced out. The decision was "mutually agreed" by White House Chief of Staff John Kelly and Bannon. 

3. Sean Spicer

Spicer attended Portsmouth Abbey School. He was Press Secretary at the Trump White House. He resigned on July 21 after opposing President Donald Trump's appointment of Anthony Scaramucci as communications director. (PS Sept. 6, 2017: He damaged his rep working for Trump, says Politico.) 

FOMC | St. Louis Fed Chief Asks Hawks to Think Harder

James Bullard, President of the St.
Louis Fed, predisposed to raise rates
but wondering if this will actually
increase, not lower, inflation.

The President of the St. Louis Fed, James Bullard, is in line to join Jeffrey Lacker of the Richmond Fed in calling for an increase in the fed funds rate.

The St. Louis Fed has historically been the champion of the monetarist school, which keeps reminding Keynesians and New Keynesians who want to keep stimulating the economy that increasing the money supply will cause inflation.

At one time, zero-lower-bound interest rates were viewed as dangerously inflationary. The fact that inflation has remained low hasn't changed the tune of a hawk like Jeffrey Lacker of the Federal Reserve Bank of Richmond. Six years ago he predicted that the zero-lower-bound approach taken in 2008 would make inflation soar. Now he's been voting for a rate increase at the most recent meetings of the FOMC, warning that inflation will get out of control if the FOMC doesn't raise rates.

However, yesterday Bullard gave some support to the idea that the long period of low interest rates – the "Permazero" – might require a rethinking of monetary policy.  At a Cato conference he said that after seven years, expectations for permanently low interest rates might be baked into the cake.

Bullard says we should pay attention to the ideas of John Cochrane of Chicago's Booth School of Business, who suggests that raising the interest rate target off the zero-lower-bound floor may raise, not lower, inflation. The 94-page paper in which Cochrane lays out his theory and data poses the theory as a question – Do Higher Interest Rates Raise or Lower Inflation? 

Cochrane provides charts showing what happens to inflation under different assumptions. If you disagree with his story, I can hear him say, show me your model.

I note that Cochrane relies on the simple version of the Irving Fisher's equation, using an expected inflation rate added to "real" rate.

Most theories contain the Fisher relation that the nominal interest rate equals the real rate plus expected inflation, it = rt +Etπt+1, so they contain a steady state in which higher interest rates correspond to higher inflation. 

This is a simplification of the actual equation, which is multiplicative (rt * Etπt+1). The distinction doesn't doesn't matter for low levels of expected inflation (the "Fisher premium"), but it certainly does for higher ones – far as that may be from our recent inflation numbers.

Bullard does not take the step of opposing a rate increase based on Cochrane's theories. That would put him in the same boat as Paul Krugman, who opposes a rate increase on Keynesian grounds that we still need more demand and higher rates could choke off demand.

After seven years of Zero Interest Rate Policy, the FOMC is getting cabin fever. They are generals who look like they are avoiding a battle. Bullard made clear that his predisposition in December is to vote to raise rates. The FOMC may in December want to give the benefit of any doubt to a rise in rates.

Cochrane has therefore done everyone a favor by providing a reason for inflation hawks to think a little harder... because raising rates just might be inflationary.

FOMC | Committee Stands Pat

Jeffery Lacker, FRB Richmond
inflation hawk, voted again for
a rate increase, losing 9 to 1.

Today the Federal Open Market Committee voted to continue interest-rate policy at the zero-bound level, where it has been since 2008.

The sole vote against the decision was that of Jeffrey M. Lacker, President of the Federal Reserve Bank of Richmond, who would have preferred that the FOMC raise the target range for the federal funds rate by 25 basis points at this meeting. He had voted for a rate increase at the previous FOMC meeting.

The case for raising rates is that zero-bound interest policy makes it difficult for the Fed to encourage the economy should it take a turn for the worse, and unemployment rates are low by historical standards.

The majority view is that the FOMC has been charged since 1946 with steering between the twin dangers of inflation and unemployment. The inflation rate is below the Fed target of 2 percent and economic growth has been moderate by historical standards.

Meanwhile, the news from the Bureau of Labor Statistics this morning was that the September improvement in jobs was broadly based among metro areas.

The next meeting of the FOMC is in mid-December. The meeting will be informed by two more months' worth of new data on labor markets and other economic indicators.