David Beckworth directed me to a Bloomberg article discussing the Fed’s new policy approach:
Officials chewed over, but ultimately rejected, a slew of more daring proposals, from raising the inflation target to abandoning it for a nominal GDP target. They were also cautious in re-examining what they might do when rates hit zero.
They decided negative interest rates would be a bad option in the U.S. and haven’t warmed to the idea of capping the yields on some Treasury securities — known as yield-curve control — though they haven’t entirely ruled that one out.
In the end they see their current tools — bond purchases and communication on the future path of interest rates — as still the best options. Atop that they will add the important wrinkle that inflation should average close to 2% over time.
So no NGDP level targeting, not even price level targeting. It looks like average inflation targeting, which is pretty weak tea.
Oh wait:
The shift, however, will only go so far. When the Fed articulates its new embrace of inflation averaging, officials likely won’t apply it in rule-like fashion, economists said, and may not even mention the word “average.”
That final sentence brought to mind a classic Monty Python routine.
READER COMMENTS
Ike Coffman
Aug 17 2020 at 4:24pm
I have said it before, and I will say it again: the Fed is looking at the wrong kind of inflation to set it’s policy. It needs to be looking at asset inflation, including the stock market, which is skyrocketing. I do not think the money the Fed has been injecting into the economy has been very productive at all.
Scott Sumner
Aug 17 2020 at 7:06pm
They tried focusing on asset inflation in 1929. How’d that work out?
They should ignore inflation entirely and stabilize NGDP.
Ike Coffman
Aug 17 2020 at 8:30pm
We might actually be on the same page. I am not a constrictionist calling for a reduction in the money supply, I am saying the money is going to the wrong places. Money needs to go more to consumers than the banks, somehow, and I think government did two things right through the extra $600 a week unemployment, and the $1200 stimulus. Now that those programs have ended a large number of consumers have no money for consumption. When demand is falling there is no reason for businesses to invest, so the capital injected by the fed ends up flowing toward the stock market. This does not help the economy, and exacerbates the wealth gap. I see a parallel between what is happening now and what happened in 1927.
Market Fiscalist
Aug 17 2020 at 9:16pm
Michael Palin decided against lion taming as a good career move when he realized that lions (unlike anteaters) were actually genuinely scary animals and would be hard to tame. I suspect that at the fed out-of-control inflation is still seen as as a scary animal that would be hard to tame.
So in some ways the fed has the opposite fear to Palin. He was fearless because he did not know that lions were really scary, while the fed is fearful because it doesn’t know that inflation is a beast that is easily tamed.
Apologies – I like to be pedantic when it comes to Monty Python analogies !
Thomas Hutcheson
Aug 18 2020 at 10:14am
Why not something even more radical: comply with their mandate to trade off stabilizing prices, i.e. a PL trajectory target and maximizing employment. Granted that will approximately equal NGDP targeting.
In fairness, the TIPS spread under the Powell Fed is not as far below 2% PCE as the Bennake Fed at this stage measured by the maximum deviation.
A question. If the Fed had wanted to keep NGDP on a 4%-5% trajectory, what would they have done differently since 8/2008? Since 1/2017? Since 1/2020? Starting now? Should they announce the target?
Scott Sumner
Aug 18 2020 at 2:50pm
In 2008 they should have announced a 4% or 5% NGDP level targeting regime. That by itself likely would have been enough. Also refrain from IOR, and do whatever it takes in terms of money creation for market expectations of NGDP growth to equal the target.
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