The Good: Do aggressive monetary stimulus to keep 2021 NGDP expectations on track. This involves level targeting combined with a “whatever it takes” approach to asset purchases. Buy only safe assets unless there are not enough safe assets to hit your target.
The Bad: Buy risky assets with newly created money in order to help the credit markets. Do enough to keep the credit markets flowing, but not enough to maintain adequate NGDP in 2021.
The Ugly: Bail out failing firms with fiscal policy. Let NGDP expectations collapse.
It looks like we’ve avoided the ugliest outcome, so give thanks for that:
Less than two months ago Boeing Co. went to Washington, hat in hand, asking for a $60 billion bailout for itself and its suppliers. The company, which had spent heavily on stock buybacks and was still reeling from the 737 Max disaster, was an unlikely candidate for government support.
Yet by urging the Federal Reserve to take unprecedented steps to bolster credit markets, the Trump administration ended up helping the plane maker more than any government handout could.
The Fed’s decision to use its near limitless balance sheet to purchase corporate bonds improved liquidity so much that it was a game changer for the company, according to people with knowledge of the matter who asked not to be identified because they weren’t authorized to speak publicly.
Notice how you do not need to directly bail out the corporate sector in order to save most big companies. For that same reason, a massive Fed purchase of T-bonds (and Treasury-backed MBSs) would have (indirectly) helped to provide liquidity in the corporate bond market. The key is maintaining expectations of adequate growth in NGDP. As long as NGDP expectations are on track and lenders know that nominal national income in 2021 will be sufficient to repay nominal debts, then the credit will flow.
Conventional monetary stimulus is the best option. Fed purchases of risky assets is second best. Fiscal stimulus is the worst.
READER COMMENTS
Alan Goldhammer
May 2 2020 at 2:42pm
I didn’t know the 737 MAX could fly. Maybe you have an old picture. 🙂
Scott Sumner
May 3 2020 at 4:48pm
Not only can it fly, it’s probably safer than the jets I flew on in the 1970s and 1980s. 🙂
P Burgos
May 3 2020 at 8:41am
Isn’t 2021 too early to target given the uncertainties surrounding the pandemic?
Philo
May 3 2020 at 10:18am
There is always uncertainty. What the Fed should be trying to control is not 2021 NGDP, but *present expectations of 2021 NGDP*.
P Burgos
May 3 2020 at 12:40pm
I agree about expectations being what the Fed targets. I just think that it is unwise for the Fed to target 2021 expectations when the majority view of experts is that the pandemic will be ongoing throughout 2021. The Fed shouldn’t pick battles with the market that it has a decent chance of losing. Ongoing outbreaks will sink money velocity. And having the Fed do enough to increase inflation during a lockdown (thereby keeping NGDP expectations on track) may well put the Fed in a political pickle, given how much congressmen and their wealthy donors seem to hate inflation. In my view, it is much less risky for the Fed to announce some kind of NGDP level targeting regime only once an end to the pandemic is in sight, as that should align well with the public mood that it is time to get everyone back to work. But rising inflation and rising unemployment are a toxic combination, and it seems very defensible for the Fed to not charge ahead into. The last thing we need is for the president to decide to put more inflation hawks onto the board of governors, and there is, in my opinion, great value in the Fed working to avoid that.
Of course if we can effectively treat the disease come this fall or winter, than that changes everything. But right now it seems that there will ongoing and disruptive outbreaks until we have a vaccine or two thirds or more of the population have caught the virus.
Scott Sumner
May 3 2020 at 4:47pm
The Fed can always hit any nominal variable, even in a pandemic. But realistically, the Fed isn’t going to level target NGDP in 2021. Nonetheless, even level targeting the PCE price index would be a vast improvement over current policy. And I mean “vast”.
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