This Yahoo article made me smile:
And so simply put, the Fed does not believe any pricing pressures in the economy will warrant a change in its interest rate policy for the next three years.
To help explain this thinking, Fed Chair Jay Powell cited dinner norms in his press conference on Wednesday afternoon.
“There very likely will be a step-up in inflation as March and April of last year drop out of the 12-month window, because they were very low inflation numbers,” Powell said. “Those will be a fairly significant pop in inflation, but those will wear off quickly because [of the way] the numbers are calculated.”
“Past that,” Powell added, “as the economy re-opens, people will start spending more. You can only go out to dinner once per night, but a lot of people can go out to dinner. And they’re not doing that now, they’re not going to restaurants, they’re not going to theaters…and travel, and hotels, that part of the economy is really not functioning at full capacity.” (Emphasis ours.)
And while the Twitter commentariat had fun with Powell’s exact phrasing — apparently the kind of person who watches the entirety of a Fed press conference is also a multiple-dinner enthusiast — the point the Fed chair makes is economically sound.
I’m actually not sure what point Powell is making. Is it a point about aggregate demand (which can rise at trillions of percent per year, as we saw in Zimbabwe), or aggregate supply, which is limited by labor, capital, and technology?
Yahoo continues:
The anticipated increase in growth, inflation, and a recovery in the labor market is all part of a one-time recovery story in the U.S. economy. A demand surge against stressed supply chains or understaffed restaurants and bars that results in higher prices this year will not last.
The dinner is a metaphor.
No one thinks the economy will grow at 6% for years to come. No one thinks the 7 million or 8 million jobs added back to the economy this year will be repeated next year. And Powell does not think any inflation pressures that result from this unlocking of activity will re-set the current inflation regime.
This is the Keynesian fallacy on steroids—the idea that inflation is caused by fast RGDP growth. In fact, it is precisely because economies can’t grow at 6% forever that inflation is a threat if NGDP grows too fast. I don’t currently fear high inflation, but not because of the reluctance of people to eat two dinners. In 2008, Zimbabweans often lacked even one dinner. Rather, I don’t currently fear high inflation because I expect the Fed to limit growth in aggregate demand to a path consistent with 2% long run PCE inflation.
Inflation is caused by too much money chasing too few goods—NGDP growth minus RGDP growth.
READER COMMENTS
Stephen
Mar 18 2021 at 1:29pm
My friend from Tennessee would always say “let’s have supper”, which wasn’t the same as dinner. Alas, he passed away in 2018 so I can’t press him further on the subject. One cannot have more than one dinner, but one can have both dinner and supper, and we’re not even talking about the title of a Hemingway book.
But seriously, it sure is beginning to feel like the ‘70’s —when we thought we could have guns, butter, and low interest rates, when people started fleeing king dollar for other assets, when there were very high taxes on capital gains, when an impeached Republican president was replaced by a Democrat who seems out of his depth. But I’m sure this time it’s different.
Airman Spry Shark
Mar 18 2021 at 2:59pm
I see a plausible Devil’s Advocate reading of this: when you’re preparing, serving, & cleaning up after your own dinner at home, there’s no money changing hands (so it’s not in NGDP); as soon as you’re going out, money does change hands (and enters NGDP).
There’s room for NGDP to climb sharply as economic activity shifts back from household to market production.
raja_r
Mar 18 2021 at 3:20pm
Wouldn’t the money spent on groceries, utensils, cleaning, etc. count towards NGDP? Granted, the labour will not count.
From Swaminomics
john hare
Mar 18 2021 at 4:57pm
Just to make a contrary statement about eating out. When the lockdown restrictions eased up in Florida last May, I took the crew with families out to dinner. That was also the first date with my wife. Since then, the two of us have eaten in 54 different restaurants. Plus several that we go back to on occasion.
stoneybatter
Mar 19 2021 at 12:39pm
Scott, what do you make of the Fed’s dotplot showing no hikes through end-2023 (per the median dot), while eurodollar futures imply a rate hike as soon as Q4 2022? Is this a case of the market knowing what the Fed will do better than the Fed itself does?
Scott Sumner
Mar 19 2021 at 6:11pm
Yes, probably. It’s happened before.
Comments are closed.