In the late 2010s, I frequently had to deal with commenters who complained about Fed policy. They echoed President Trump’s complaints that the Fed was holding back the economy. Inflation was slightly too low. They felt there was unused potential. They had all sorts of grand ideas for reforming Fed policy.
Let’s review the data:
Unemployment in December 2017 was 4.1%, and then fell gradually to 3.6% in December 2019.
PCE inflation averaged 1.8% in the final three years of the decade, about 0.2% below target.
To an economist like me that lived through the Great Inflation and spent his life studying the Great Depression, that’s almost paradise. While I agreed with critics that things were not exactly perfect, I also understood that things could be far, far worse.
And now they are.
To succeed, one must recognize what success looks like. Don’t let the perfect be the enemy of the good.
READER COMMENTS
Thomas Lee Hutcheson
Jun 24 2022 at 10:20am
But if the Fed had seen clearly why 2017-19 was not perfect, they would presumably have been better able to see that September 2021 was not perfect either.Better. But fine tuning one response to a negative demand shock like 2008 and following does not ipso facto prepare one to respond to supply shocks. That’s why I give the Powel Fed much higher marks than the Bernanke-Yellen Fed. If we have a decade of over-target inflation I’ll revise my judgement.
Spencer Bradley Hall
Jun 24 2022 at 10:50am
Yeah, you should study George Bailey’s “It’s a Wonderful Life”. The Mr. Potter’s of the world took over.
“In December 1965 the Board of Governors raised the permissible interest ceiling on time certificates of deposit from 4 ½ to 5 ½ per cent for member banks. The Federal Deposit Insurance Corporation (FDIC), as it always does, made the Board’s ceilings applicable to all nonmember insured banks. Most commercial bankers on the basis of their evaluation of the competitive situation opted to pay rates at or near the ceilings. Although this was the fifth in a series of rate increases promulgated by the Board and the FDIC beginning in January 1957, it was unique in that it was the first increase that permitted the commercial banks to pay higher rates on savings than savings and loan s and the mutual savings banks could competitively meet.”
Matthias
Jun 26 2022 at 6:51am
Interest rate ceiling seems like a bad idea anyway?
Kevin
Jun 24 2022 at 11:21am
This is extremely interesting. I was probably too hawkish during the Great Recession, fearing an outcome like we have now, but it’s incredible to me that anyone would be dissatisfied with 1.8% inflation.
I assumed that Trump was just posturing, wanting insurance against recession, and an even stronger stock market.
Thomas Lee Hutcheson
Jun 24 2022 at 8:19pm
If your target is 2.0%, why would you be satisfied with 1.8%. Especially if you had just been trough a period in which 2% looked like it might be too low?
robc
Jun 24 2022 at 2:27pm
I hate that saying, mostly because it is too cliche, but also because it is often backwards.
In many situations, there is the opportunity for the perfect and people settle for the good instead.
MIchael Sandifer
Jun 24 2022 at 7:46pm
I don’t think the economy was as close to equilibrium as you do, as you know. Inflation expectations fell dramatically in Q4 of 2018 and in 2019, and were much more than 0.20% below target during that 5 quarters. And, inflation 0.20% below target, when an economy is still recovering(unemployment still coming down, but inflation below target and falling), can mean RGDP growth is slowed by 0.80% or more. Even if you’re convinced that monetary policy was too lose earlier in 2018, the Fed overreacted on the tightening side. I think they implicitly admitted that when they started lowering rates again late in 2019.
Sure, you can say the equilibrium interest rate fell for other reasons, but what other reasons, where’s the evidence, and why excuse the Fed for coming up even shorter against their inflation target than they did for most of the slow recovery after the Great Recession? You often argue the Fed should be judged against their policy regime, so by that standard at least, they failed prior to the pandemic.
I did become concerned about inflation in March of this year, and my own model, if one believes we should level-target NGDP at just over 4%, tells me the Fed should have started tightening in March of 2021. But, while I acknowledge there’s a good argument for that perspective, I’m not completely convinced.
That is, there is a non-trivial probability, improbable though it seems, that most of the rise in inflation expectations was not due to the Fed, despite NGDP growth having risen above the post-Great Recession trend. That is because, I’m not convinced the economy ever fully recovered from the Great Recession.
That said, I’m arguing against the most probable interpretation of my own model now, which tells me the Fed is responsible for a bit over half of the current high inflation, and suggests that the NGDP growth path should be around 4%, at highest. But, I’m looking at my model and the data carefully, and the more compelling, if less probable interpretation, still holds my attention.
To most informed observers, I have a dovish bias, and I acknowledge that my perspective may just be a bias, but I’m not yet convinced.
Scott Sumner
Jun 24 2022 at 8:32pm
Everyone—I’m not saying that we should not always strive to improve, but we need to recognize when monetary policy is very close to perfection.
Spencer Bradley Hall
Jun 25 2022 at 2:34pm
Long-term money flows fell by 35% during that period. R-gDp would have been higher except for the fact that the FED drove existing money (savings) out of circulation into frozen deposits by raising the remuneration rate from 1.25% on 12/14/2017 to 2.4% on 12/20/18.
The subsequent drops in the remuneration rate did not represent an easing, from 2.4% to 1.55%.
And Powell tightened further after that, raising the remuneration rate to 1.6% from 1.55% on 1/30/20.
Comments are closed.