Last weekend the Federal Reserve Bank of Kansas City hosted its annual symposium in Jackson Hole. Despite being the Fed’s largest annual event, the symposium has been “fairly boring” for years, in terms of what can be learned about the future of actual policy. This year’s program, Changing Market Structures and Implications for Monetary Policy, was firmly in that tradition—making Jerome Powell’s speech, his first there as Fed Chair, the main event. In it, he covered familiar ground, suggesting that the changes he has begun as Chair are likely to continue.

Powell constructed his remarks around a nautical metaphor of “shifting stars.” In macroeconomic equations a variable has a star superscript (*) on it to indicate it is a fundamental structural feature of the economy. In Powell’s words, these starred values in conventional economic models are the “normal, or “natural,” or “desired” values (e.g. u* for the natural rate of unemployment, r* for the neutral rate of interest, and π* for the optimal inflation rate). In these models the actual data are supposed to fluctuate around these stars. However, the models require estimates for many star values (the exception being desired inflation, which the Fed has chosen to be a 2% annual rate) because they cannot be directly observed, and therefore must be inferred.

These models then use the gaps between actual values and the starred values to guide—or navigate, in Powell’s metaphor—the path of monetary policy. The most famous example being, of course, the Taylor Rule, which calls for interest rate adjustments depending on how far the actual inflation rate is from desired inflation and how far real GDP is from its estimated potential. Powell’s thesis is that as these fundamental values change, particularly as the estimates become more uncertain—as the stars shift so to speak—using them as guides to monetary policy becomes more difficult and less desirable.

His thesis echoes a point he made during his second press conference as Fed Chair when he said policymakers “can’t be too attached to these unobservable variables.” It also underscores Powell’s expressed desire to move the Fed in new directions: less wedded to formal models, open to a broader range of economic views, and potentially towards using monetary policy rules. To be clear, while Powell has outlined these new directions it remains to be seen how and whether such changes will actually be implemented.

A specific example of a new direction—and to my mind the most important comment in the Jackson Hole speech—was Powell’s suggestion that the Fed look beyond inflation in order to detect troubling signs in the economy. A preoccupation with inflation is a serious problem at the Fed, and one that had disastrous consequences in 2008. Indeed, Powell noted that the “destabilizing excesses,” (a term that he should have defined) in advance of the last two recessions showed up in financial market data rather than inflation metrics.

While Powell is more open to monetary policy rules than his predecessors, he’s yet to formally endorse them as anything other than helpful guides in the policymaking process. At Jackson Hole he remarked, “[o]ne general finding is that no single, simple approach to monetary policy is likely to be appropriate across a broad range of plausible scenarios.” This was seen as a rejection of rule-based monetary policy by Mark Spindel, noted Fed watcher and co-author of a political history of the Fed. However, given the shifting stars context of the speech, Powell’s comment should be interpreted as saying that when the uncertainty surrounding the stars is increasing, the usefulness of the policy rules that rely on those stars as inputs is decreasing. In other words, Powell is questioning the use of a mechanical rule, not monetary policy rules more generally.

Such an interpretation is very much in keeping with past statements made by Powell. For example, in 2015, as a Fed Governor, he said he was not in favor of a policy rule that was a simple equation for the Fed to follow in a mechanical fashion. Two years later, Powell said that traditional rules were backward looking, but that monetary policy needs to be forward looking and not overly reliant on past data. Upon becoming Fed Chair early this year, Powell made it a point to tell Congress he found monetary policy rules helpful—a sentiment he reiterated when testifying on the Hill last month.

The good news is that there is a monetary policy rule that is forward looking, not concerned with estimating the “stars,” and robust against an inflation fixation. I am referring to a nominal GDP level target, of course; a monetary policy rule that has been gaining advocates.

Like in years past, there was not a lot of discussion about the future of actual monetary policy at the Jackson Hole symposium. But if Powell really is moving the Federal Reserve towards adopting a rule, he is also beginning to outline a framework that should make a nominal GDP rule the first choice.

[Cross-posted from Alt-M.org]

In the first of this series of posts, I explained that the mere presence of fractional-reserve banks itself has little bearing on an economy’s rate of money growth, which mainly depends on the growth rate of its stock of basic (commodity or fiat) money. The one exception to this rule, I said, consists of episodes in which growth in an economy’s money stock, defined broadly to include the public’s holdings of readily-redeemable bank IOUs as well as its holdings of basic money, is due in whole or in part to a decline in bank reserve ratios

In a second post, I pointed out that, while falling bank reserve ratios might in theory be to blame for business booms, a look at some of the more notorious booms shows that they did not in fact coincide with any substantial decline in bank reserve ratios.

In this third and final post, I complete my critique of the “Fractional Reserves lead to Austrian Business Cycles” (FR=ABC) thesis, by showing that, when fractional-reserve banking system reserve ratios do decline, the decline doesn’t necessarily result in a malinvestment boom.

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Hours ago, Illinois Gov. Bruce Rauner (R) vetoed legislation that would have subjected enrollees in short-term health insurance plans to higher deductibles, higher administrative costs, higher premiums, and lost coverage. The vetoed bill would have blocked the consumer protections made available in that market by a final rule issued earlier this month by the U.S. Department of Health and Human Services, and would have (further) jeopardized ObamaCare’s risk pools by forcing even more sick patients into those pools.

Short-term plans are exempt from federal health insurance regulations, and as a result offer broader access to providers at a cost that is often 70 percent less than ObamaCare plans.

Rather than allow open competition between those two ways of providing health-insurance protection, the Obama administration sabatoged short-term plans. It forced short-term plan deductibles to reset after three months, and forced consumers in those plans to reenroll every three months, changes that increased administrative costs in that market.

The Obama administration further subjected short-term plan enrollees to medical underwriting after they fell ill – which meant higher premiums and cancelled coverage for the sick. Prior to the Obama rule, a consumer who purchased a short-term plan in January and developed cancer in February would have coverage until the end of December, at which point she could enroll in an ObamaCare plan. The National Association of Insurance Commissioners complained that the Obama rule required that her coverage expire at the end of March – effectively cancelling her coverage and leaving her with no coverage for up to nine months. The Obama administration stripped consumer protections from this market by expanding medical underwriting after enrollees get sick – something Congress has consistently tried to reduce.

Earlier this month, HHS restored and expanded the consumer protections the Obama administration gutted. It allowed short-term plans to cover enrollees for up to 12 months, and allowed insurers to extend short-term plans for up to an additional 24 months, for a total of up to 36 months. These changes allow short-term plans to offer deductibles tallied on an annual basis, rather than deductibles that reset every three months. They spare enrollees and insurers the expense of re-enrolling every three months. Most important, they allow short-term plans to protect enrollees who get sick from medical underwriting at least until they again become eligible to enroll in an ObamaCare plan the following January.

Indeed, HHS clarified that because the agency has no authority to regulate standalone “renewal guarantees” that allow short-term plan enrollees who fall ill to continue paying healthy-person premiums, “it may be possible for a consumer to maintain coverage under short-term, limited-duration insurance policies for extended periods of time” by “stringing together coverage under separate policies offered by the same or different issuers, for total coverage periods that would exceed 36 months.” As HHS Secretary Alex Azar explains, this helps ObamaCare:

Our decision to allow renewability and separate premium protections could also allow consumers to hold on to their short-term coverage if they get sick, rather than going to the exchanges, which improves the exchange risk pools.

I made that very argument in my comments on the proposed rule.

Illinois law automatically adopts whatever rules and definitions the federal government creates for short-term plans. If Illinois legislators had just done nothing, millions of Illinois residents automatically would have had a health insurance option that is more affordable and provides better coverage than ObamaCare.

But this is Illinois.

In their infinite wisdom, Illinois legislators passed legislation that once again would have exposed short-term plan enrollees higher deductibles, higher administrative costs, higher premiums, and cancelled coverage. The bill would have:

• Required that initial contract terms for short-term plans last no longer than six months. It further provided that such plans could be extended for no more than six additional months.
• Mandated that consumers who wish to keep purchasing consecutive short-term plans go uninsured for 60 days. Some consumers would inevitably develop expensive conditions during that period, and therefore be left with no coverage until the next ObamaCare open enrollment period. 
• Prohibited renewal guarantees. The legislation specifically cut off this option. As a result, it would have dumped every single short-term plan enrollee with an expensive illness into the Exchanges. Ironically, Illinois legislators who thought they were bolstering ObamaCare actually passed a bill that would have sabotaged it.

Thankfully, Gov. Rauner stopped this ignorant, ridiculous effort to deny consumer protections to short-term plan enrollees. All eyes now turn to California, where Gov. Jerry Brown (D) must sign or veto legislation that would deny medical care to those who miss ObamaCare’s open enrollment period – by banning short-term plans altogether.