E Fed Abandons R-Star While Trump Caves In

The Federal Reserve and Donald Trump live in strange worlds. We need to examine those worlds. We know that the Fed has abandoned the r* (R-star) and Trump fortunately caved in to Canada.

We know that for Donald Trump and his cronies, as the Doors song goes, women seem wicked when they are unwanted. His son, Donald Jr., feels threatened that the metoo movement will put his sons in danger. Well, maybe danger lurks if they become like dad and grandpa! Yes, there are a few women who frame men. It has always been that way and it is unfortunate, but it is not the norm.

As for economics, we know POTUS has, for the good of North America, been a paper tiger when it came to renegotiating NAFTA.

Fed Supernova

But, really, we have to start with the Fed because, while we know that Donald Trump is bizarre, we did not know that the Fed was becoming strange. Now we learn that the Fed is almost abandoning an essential formula.

It all has to do with the r*. The neutral, natural rate, the sweet spot, which allows neither bubbles nor depressions. Tim Duy is astonished, saying the Fed has unleashed a supernova of hawkishness:

New York Federal Reserve President John Williams, its key proponent, made clear in a speech late Friday that the neutral interest rate is no longer a guiding star for monetary policy. This means a federal funds rate in the range of what is considered neutral has no special significance as far as policy is concerned. That is hawkish relative to any expectations that the Fed would pause as policy rates approach a level that neither stimulates nor restricts the economy. 

And:

Williams now argues that r-star only served as a useful metric when policy rates were far below neutral. Now that policy is closing in on r-star, it actually becomes a less clear concept because of the uncertainty of neutral-rate estimates. 

Clearly, the r* is being abandoned because it may tell us, as Scott Sumner has said, to be more dovish, to take a pause, to stop raising rates which has the tendency to lower the r*.  Then in a downturn, with the r* too high, it becomes more difficult to use lower interest rates to boost the economy as we approach the zero lower bound. Williams said this in 2016: