Most educated people know about the three women on the Supreme Court, and are certainly aware of Hillary Clinton. Some may have even heard of Vice Chair of the Board of Governors, Janet Yellen. I’d like to argue that Cleveland Fed president Sandra Pianalto might well be more powerful than any of those five women, mostly because she appears to hold a swing vote at the FOMC. Thus it’s interesting to probe the thought process of a Fed moderate:
Sniderman: Let’s talk more directly about current circumstances. If inflation is near our goal right now, why not try to go faster and get that unemployment rate down sooner?
Pianalto: We always have to stay focused on a balanced approach. I would be concerned that if we were to provide even more policy stimulus, given my current outlook, we could risk an unwelcome rise in inflation. On the other hand, if we were to remove our policy accommodation too quickly, I would be concerned that we would risk slowing the economy and causing an unwelcome disinflation. I think we have to strike a balance, and I think we have a good balance with our current policy.
I’m almost certain Pianalto would say I’m mischaracterizing her views, but that answer has “zero fiscal multiplier” written all over it. Aggregate demand is right about where she wants it. But what happens if the economy goes off course, growing faster or slower than expected?
Sniderman: If we get into the summer and begin to see another one of these patterns of the economy slowing down, do you think that would be the time to support further easing in policy and maybe be willing to take a little more risk on the inflation side of things in order to get the economy moving again?
Pianalto: Right now my forecast is for the economy to grow a little more than 2.5 percent this year and 3 percent next year, with inflation staying close to 2 percent. My forecast for either economic growth or inflation would have to change for me to want to make a change in the stance of monetary policy. Given my current outlook for the economy, the current stance of monetary policy is appropriate. If my forecast were to change significantly, then I would want to look at the appropriate policy response, and perhaps make an adjustment to my monetary policy stance in response to a change in my forecast.
Again, zero fiscal multiplier. But that’s not really what interests me about this answer. Nor is it the implied 4.5% to 5% NGDP growth target, which sounds vaguely market monetarist. That’s certainly the NGDP growth she expects, but she does not indicate that she puts equal weight on short term deviations in inflation and growth. And she does not seem to favor level targeting; so although the NGDP forecast looks decent, it’s actually a bit below what most market monetarists would prefer, given the huge undershoot since 2008.
What interests me most is that she talks as if the Fed is still steering the nominal economy, despite near zero interest rates. Other people may not see it that way, but swing voters at the FOMC certainly talk like they are still “doing monetary policy.” In one sense that’s reassuring—we’d hate to see those at the controls claiming that the steering mechanism for the economy was stuck. On the other hand it’s also a bit dismaying, as the marginal crew member of USS Nominal GDP seems happy with the ship’s course; even as Obama, Romney, Bernanke, 14 million unemployed, and the US stock market think it’s obvious that aggregate demand is too low.
PS. A note to commenters: Please don’t tell me what Mr. Etch-a-Sketch is saying right now, I’m only interested in his views on monetary policy before he felt he had to kowtow to the Tea Party.