It is what it is

Twelve basis points on the 5 year TIPS spread

Two hundred points on the Dow.

Fed lowers its 2014 unemployment estimates by 0.3% or 0.4%

People are getting very excited by the Fed’s new initiatives, and rightly so.  But it’s important to keep things in perspective.  There’s a big difference between moving slightly toward level targeting/targeting the forecast, and actually doing those things. The markets are telling us that expected NGDP growth accelerated.  So the policy “worked.”  But it’s not enough to promote rapid recovery.  On the other hand we have to be realistic, the policy will be judged on the basis of subsequent events, not yesterday’s changes in market expectations (as it would be judged if macroeconomics were a science, not a branch of astrology.)

In my view the most important gain might be in future business cycles. The Fed has implicitly acknowledged that they should have paid more attention to market monetarists and Woodfordians back in 2008-09. Like most big institutions, the Fed evolves gradually over time. Perhaps the best analogy I could provide would be the Keynesian revolution. It had a small impact on 1930s policy-making, but not enough to promote a fast recovery. On the other hand it became conventional wisdom among policymakers after WWII (for better or worse–and I’d say “both.”) I expect the Fed to do some hard thinking about signaling/level targeting/etc between now and the next recession, and to be better prepared next time.  And the smartest teenage economists in the blogosphere (Soltas, Wang, etc) have also been pushing the Fed to move in this direction.  That bodes well for the future.

On a lighter note, yesterday was “Scott Sumner day” and yet I had to go to work.  That doesn’t seem fair!  I’d also note that Cardiff Garcia at FT Alphaville mentioned David Beckworth and I (along with Woodford), in their discussion of economists who had played a role in the debate. Don’t get me wrong, I realize that Woodford’s 100 times more influential than I am.  But I also think we’ve had some impact, mostly by putting out ideas that other more famous people have discussed and/or advocated (Christy Romer, Krugman, DeLong, Jeffrey Frankel, Jan Hatzius, etc.)  So it’s a good day for market monetarism.

In a recent post I mentioned Evan Soltas’s tweet on how the decision seemed to affect the Obama contract over at Intrade.  A few months back a blogger named “redonkulus” sent me a link showing that the Obama contract is positively correlated with the TIPS spread, which jumped last night.

PS.  A patron of the arts is a wealthy individual who is skilled at finding and nurturing talented artists.  Tyler Cowen is sort of a patron of the economics blogosphere. He was the first to promote my blog, and he saw the quality of Evan Soltas’s blogging even before I did.

PPS.  I just noticed some very kind comments from my favorite progressive blogger, Matt Yglesias.  He credits me with influencing his thought on monetary economics.  I can honestly say that he’s influenced my thought on public policy issues more than any other blogger.  I’d also like to thank Ryan Avent, who’s helped promote our ideas, and who can  express then much more eloquently than I can.

PPPS.  Also thanks to all the other market monetarists.  The list is getting so long that I won’t try to name them (and offend someone by leaving out the name) but you all know who they are.




50 Responses to “It is what it is”

  1. Gravatar of Michael Michael
    14. September 2012 at 05:07

    Given the conditional nature of the Fed’s policy, and the lack of explicitly stated goals, doesn’t the real impact of this program depend on how the Fed plays it out from here on? Markets can’t have future Fed actions fully priced in yet, can they?

  2. Gravatar of Ram Ram
    14. September 2012 at 05:25

    Congratulations, Scott! You fully deserve the praise you’ve been getting. I would note that the Fed is still not forecasting inflation above 2 percent at any point in time, but the change in language about conditionality, and dropping the ‘Q’ in ‘QE’ are a big deal and you certainly had a lot to do with both.

  3. Gravatar of Arthur Arthur
    14. September 2012 at 05:33

    Thank you Scott.

  4. Gravatar of maynardGkeynes maynardGkeynes
    14. September 2012 at 05:34

    If Bernanke had said that he will keep up even if inflation goes above target, that would mean something. Despite all the posturing, this looks like a non-event to me without the inflation “out” being disavowed, which it specifically was not. What am I missing?

  5. Gravatar of Brent Brent
    14. September 2012 at 05:38

    Credit where due, congrats, Scott. But really, everyone participating in our economy is a winner here.

  6. Gravatar of Robert Robert
    14. September 2012 at 05:49

    I honestly never believed that I’d see even this degree of effort from the Fed over this business cycle, and I’m sure that’s in no small part due to your tireless blogging, day in, day out.

    Hell, with language like “If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved”, there may even be hope for an explicit level target somewhere in our not-to-distant future.

    My only concern is that if we ever do get an NGDP level target, I might not have my favourite blog to read every day.

  7. Gravatar of johnleemk johnleemk
    14. September 2012 at 06:11

    I’m still somewhat skeptical that this is an undiluted victory for market monetarism. But there is absolutely no doubt that this is a clear step in the right direction, and hardly much more doubt that this step is due to market monetarist influence.

    Without Scott Sumner and market monetarists, there is no Woodford paper harping on NGDP, level targeting, and expectations. Without Woodford, there is no Bernanke QE3 announcement harping on expectations, level targeting, and explicitly considering the implications of targeting NGDP.

    The only plausible counterfactual scenarios where the Woodford paper and/or Bernanke QE3 announcement still happen without Sumner are ones where someone else does pretty much what Sumner has been doing: keeping the importance of level targeting and expectations alive in an intellectual climate that has either been outright supportive or relatively indifferent towards tight monetary policy. Without Sumner or someone like him, yesterday could never have happened.

  8. Gravatar of ChacoKevy ChacoKevy
    14. September 2012 at 06:41

    And to top it off, your Packers beat my Bears… again… Congrats on all of your success. Except last night. That was Satan’s doing.

    On second thought, you guys did make Jay Cutler cry. I do like seeing that, so it wasn’t a total loss.

  9. Gravatar of Philo Philo
    14. September 2012 at 06:47

    “The Fed has implicitly acknowledged that they should have paid more attention to market monetarists and Woodfordians back in 2008-09.” I wish one of the reporters at Bernanke’s press conference had tried to get him to admit this explicitly: that the Fed’s action yesterday implied that it had been doing too little *for the last four years*.

  10. Gravatar of Doc Merlin Doc Merlin
    14. September 2012 at 06:50

    The Fed is buying TIPS so TIPS is no longer a good proxy for CPI.

  11. Gravatar of Doc Merlin Doc Merlin
    14. September 2012 at 06:51

    … er the TIPS spread is no longer a good proxy for CPI, I mean.

  12. Gravatar of David Beckworth David Beckworth
    14. September 2012 at 07:03


    Thanks for your leadership and untiring efforts. The only reason the rest of us Market Monetarist got any traction is because you opened the door for us. Congrats!

  13. Gravatar of Peter K. Peter K.
    14. September 2012 at 07:06

    Congratulations to you and like-minded bloggers and commenters. A good day!

  14. Gravatar of Razer Razer
    14. September 2012 at 07:09

    Yea! We’re saved. More of the same money printing schemes. Can’t wait for QE259.

  15. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    14. September 2012 at 07:35

    Sorry to rain on the parade, but the Interest Rate Illusion is alive and well at the WSJ;

  16. Gravatar of libertaer libertaer
    14. September 2012 at 08:15

    Congrats from Germany! Great work! The potatoes are heating up. I hope Draghi is listening.

  17. Gravatar of J.V. Dubois J.V. Dubois
    14. September 2012 at 08:17

    Congratulations Scott, and thank you. Not only for advocating the important ideas of expectations driven monetary policy, but also for drawing people like Krugman, Cowen or Yglesias into constructive and intellectually inspiring discussion. I daresay that substantial share of this important victory for Market Monetarism can be attributed to the overall tone of the debate as it is set by such an amazing thinkers and MM champions like Nick Rowe, Lars Christensen, David Glasner, David Beckworth you and many others.

    This is an important battle won, but let’s not forget that the war ain’t over yet :D

  18. Gravatar of Morgan Warstler Morgan Warstler
    14. September 2012 at 08:46

    The value to NGDPLT comes in the Yang, the moment when the policy forces rates up no matter what the unemployment #.

    That’s what make the thing a rule, when everybody on the field sees the Eagle Eye doesn’t make mistakes and is brutal in its unwillingness to listen to player arguments.

    We’re simply not there yet.

    I LOVE Scott getting attaboys, BTW, Woodford is not very good at returning phone calls…

    But I FEAR that Scott just got made the posterboy for what is not actually what Scott has been asking for…

    An open commitment where we only know the Bernanke put is now higher than 2% is not NGDPLT.

  19. Gravatar of Costard Costard
    14. September 2012 at 08:47

    “I expect the Fed to do some hard thinking about signaling/level targeting/etc between now and the next recession, and to be better prepared next time.”

    They’ll have to be. Expectations of QE+ZIRP are now a feature of the economy. Capital markets will leverage upon these expectations, and if it wants to “fix” the next recession, the Fed will be forced into an even more aggressive stance — and to venture even further into the realm of diminishing returns that has characterized the last 20 years of monetary easing.


  20. Gravatar of Shane Shane
    14. September 2012 at 08:54

    Congratulations! Great work!

    I think you are wrong, though, to say that all of the effects of this move are already priced in. That’s because this statement is as much a new grammar for Fed communication as it is a statement. They now have a simple code: want more NGDP? Continue QE. Want about the same? Suspend it. Want less? Raise rates. This is a good move in that each month they continue QE becomes like a mini-QE in itself. And while they won’t let the market ask them how much inflation they will allow, they will, in effect, let the market ask them “higher, lower, or about the same”? The question then becomes, when will they say when? 2015 applies to raising rates, not necessarily to the end of QE. They left that very ambiguous, and I think that’s a big reason for the relatively muted reaction.

  21. Gravatar of Expectations: A Silly Game | Economic Thought Expectations: A Silly Game | Economic Thought
    14. September 2012 at 09:11

    [...] Sumner tells the blogosphere to chill out. One sentence, in particular, stands out, The markets are telling us that expected [...]

  22. Gravatar of Mike Sax Mike Sax
    14. September 2012 at 09:20

    “The value to NGDPLT comes in the Yang, the moment when the policy forces rates up no matter what the unemployment #.”

    The beauty of what Bernanke did yesterday is that it wasn’t that. He’s saying the opposiet of “unemployment doesn’t matter all we care about is inflation”

    In fact that was the prior policy. Until yesterday. Some still argue whether or not it will work. But I look at it this way. There are no athesits in foxholes.

    And the one thing Bernnake proved yesterday is that he’s not on with the rest of the GOP’s Tank the Economy program where any pain is worth it as long as it hurts Obama.

    I gotta say he may be an unelected buearaucrat but right about now I’d vote for him if only he’d run for something.

    Look at it this way: whether it works or not he’s the only one of our public servants-as opposed to our politicians in Congress-who actualy says “Unemployment is a problem for all Americans. We will do whatever it takes within our power to do seomething about it.”

  23. Gravatar of Magnum Serpentine Magnum Serpentine
    14. September 2012 at 09:29

    I feel this might be a good thing but its hard to tell. However let me remind people everywhere, of an important truth which in a in-direct way, has everything to do with Politics, Money policy etc.

    No policy, No solution No Plan is good unless it follows the policy that states, “People and human life are far far far more important than any sort of GDP or Profit increase or just plain profits. No matter how much it might hurt profits, people come first. In other words, People before profits!!!”

    Thank you
    The Magnum Principal by
    Magnum Serpentine.

  24. Gravatar of Ricardo Ali Fernandez Ricardo Ali Fernandez
    14. September 2012 at 09:34

    Now, if we can get the ruling body to stop sixty-five plus years of the abusive application of the “state-secrets privilege doctrine” and pass the equivalent of 2012′s H.R. 5956 we will all be happy. After all, “it is what it is.”

  25. Gravatar of Gregor Bush Gregor Bush
    14. September 2012 at 10:29

    Very well done Scott.

    And don’t give up! All that needs to be done to move the Fed to an explict level target is to press them on what exactly they mean by having the labor market “improve substantially” , what they mean by “in the contest of price stability” and how they would trade off one objective for the other.

    I would love to see a journalist ask (at the next Fed presser) this question: if the the FOMC forecast was for 2.8% core PCE inflation and an unemployment rate of 7.2% at the end of 2013, would the Fed continue to prchase at a rate of 40B/ month? Would they purchase faster than that? Slower? Why?

  26. Gravatar of Michael Donnelly Michael Donnelly
    14. September 2012 at 10:31

    According to Reinhart / Rogoff the leveraging process will take about 20 years and keep growth 1% lower on average per year than normal. So expect 2% not 3% growth for a long, long time.

    However in honor of Scott Sumner day, let’s hope he gets to participate in the next Keynes vs. Hayek video which are terrific fun.

  27. Gravatar of Jamboree Jamboree
    14. September 2012 at 10:39

    What is the transmission mechanism by which this money will move from buying financial assets into the economy to create jobs?

  28. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. September 2012 at 10:42


    Have you seen this?

    You’re now so well known people are asking “Who is Scott Sumner?”

  29. Gravatar of Remarks From Economics Bloggers That I Find Hilarious Remarks From Economics Bloggers That I Find Hilarious
    14. September 2012 at 11:07

    [...] “Fed lowers its 2014 unemployment estimates by 0.3% or 0.4%.” — Scott Sumner, explaining why the Efficient Market Hypothesis should now lead us to believe that the Fed’s [...]

  30. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    14. September 2012 at 11:09

    I knew him before he was Our Savior;

    But, they didn’t ‘spell his name right’;

    ‘Sumner is the author of The Money Illusion, an excellent blog that has relentlessly made the case since 2009 for an eccentric policy called “NGDP targeting.” This is a complicated sounding plan with a simple idea at its heart. If the equation that solves the economic crisis is “GDP growth + inflation = 5%” then the solution to low GDP growth is inflation that brings us up to 5%. Therefore, the Federal Reserve should announce that it will do everything in its power to raise inflation expectations until we’re back to where we want to be.’

  31. Gravatar of happyjuggler0 happyjuggler0
    14. September 2012 at 11:09


    Don’t forget to thank “The Academy”, or you just might find that you won’t get nominated next time.

  32. Gravatar of D.Gibson D.Gibson
    14. September 2012 at 11:13

    Congratulations!! I’ll keep my “Sumner for Fed Chair” pin handy, in case it is needed in the future.

  33. Gravatar of Saturos Saturos
    14. September 2012 at 11:21

    From the Derek Thompson article:

    We’ll stop short of saying that Sumner’s blog is worth tens of billions of dollars, although the full value of smart monetary policy is probably in the trillions of dollars.

    If nothing more, the Sumner case is a textbook lesson in the power of blogs.

    Also, apparently I’ve been roaming a wilderness these past 12 months.

  34. Gravatar of Saturos Saturos
    14. September 2012 at 11:22

    Does this mean Scott will finally get rid of the ads?

  35. Gravatar of Aidan Aidan
    14. September 2012 at 11:28

    I hate to be ruin the fun so soon after Scott Sumner Day, but this proposal sounds a lot closer to what Krugman’s been pushing all along than anything Scott has introduced. I see a Krugmanian commitment through the expectations channel to being “irresponsible” by promising not to immediately tighten as the economy shows signs of improvement. I welcome this development (and there are obvious signs of Scott’s general web of influence at Jackson Hole and in Bernanke’s press conference) but I might hold off on declaring Scott Sumner Day until the Fed announces NGDP level targeting and an end to paying interest on excess reserves.

  36. Gravatar of TallDave TallDave
    14. September 2012 at 12:16

    So it’s a good day for market monetarism.

    Probably the best we’ve seen so far.

    I wouldn’t pay much attention to Intrade political predictions, they tend to merely reflect the conventional wisdom, i.e. polls (Kerry jumped to 70% on election day as exit polls came out iirc) and the polls are all still assuming 2008-like turnout, despite several indicators showing that’s extremely wishful thinking: Gallup has recorded a 38-point swing in enthusiasm (from D+26 to R+12) to the GOP since 2008, in swing states the Democrats have lost 800K registered partisans to 80K for the GOP, and the net favorable/unfavorable view of the parties has reached an all-time high of R+3 (down from D+25 in 2008).

  37. Gravatar of johnleemk johnleemk
    14. September 2012 at 12:18

    Garrett Jones provide a good, concise answer to the people of the concrete steppes:

    Today’s price level depends mostly on the future supply of money.

    So if word gets out that the money supply will be higher than expected two years from now, in Cagan’s story that pushes up prices today.

    Congratulations to Scott Sumner on his deserved and underacknowledged victory.

  38. Gravatar of Bonnie Bonnie
    14. September 2012 at 12:25

    Thank you Scott! Even though it wasn’t far enough, the change in the Fed is a dramatic improvement over what it’s been doing in the area of monetary policy over the last few years. There are many people, even those who don’t understand what’s going on and are upset about the development, who will end up much better off because of your willingness to go against the flow, and never tire doing it.

    @Mike Sax. I love this: “And the one thing Bernnake proved yesterday is that he’s not on with the rest of the GOP’s Tank the Economy program where any pain is worth it as long as it hurts Obama.”

    It takes some serious strength of character to do the kind of at least covert admission that a preferred policy framework isn’t cracked up to what it should be and needs some work when it has been instrumental in fostering financial chaos. Bernanke has demonstrated that strength of character in willingness to change it. I almost regret the not so nice things I’ve said about him, but I’m not quite there yet. Perhaps when we get close to the 2% target and we don’t see wavering in the policy, then I will regret everything.

  39. Gravatar of John John
    14. September 2012 at 12:32

    Can anyone say how the Fed is going to be able to exit? If they start trying to raise interest rates by selling Treasuries and MBSs, they’d have to do so in large quantities. Who is gonna want to be buying those assets when the Fed has so many to sell? It’s like stepping in front of a freight train. If the price of the assets the Fed holds drop sharply when they need to sell them then they won’t have valuable assets to control the money supply.

    Raise IORs?
    Raise reserve requirements?

    What’s the exit strategy?

  40. Gravatar of Saturos Saturos
    14. September 2012 at 12:47

    So I finally figured out what’s really been happening.

    I’m dead.

    This, clearly, is what heaven looks like.

    I just read an article on Business Insider with Scott Sumner’s picture next to the headline. It told me that the Fed just switched to expectations-based monetary policy. Then it quoted the FAQs of the MoneyIllusion blog at length. Then it linked to a video of Scott Sumner’s presentation at Pepperdine University. The same video I watched a year ago, except that time it was in like 5 parts, but now it was joined into one single hourlong YouTube clip.

    I had a dream a few months ago, where Scott Sumner was in the worldwide headlines, as the global economy sped away from its trough. Of course, back then I was still a mortal on Earth.

    I feel sorry for the Earthlings who just got another meaningless announcement from Bernanke. Because here in heaven, it’s monetary policy for the win.

    Gotta go now – there seem to be approximately seventy-two very attractive ladies standing around me for some reason…

  41. Gravatar of ssumner ssumner
    14. September 2012 at 13:02

    Thanks everyone.

    Morgan, PLEASE don’t bother Woodford on my behalf. I beg you.

    Saturos, I’ll get rid of the ads when they give me one millionth of the stock market wealth that I’ve “supposedly” created.

    Aiden, I agree it’s a bit closer to Krugman, but recall that the promise to be irresponsible is essentially identical to level targeting, which I have advocated.

    Chacokevy. I taped the game but didn’t have time to watch. Now I guess there’s no need. :)

  42. Gravatar of ChacoKevy ChacoKevy
    14. September 2012 at 18:31

    Oh no! I’m so sorry! I should know better because most normally functioning human beings don’t drop their entire lives for an NFL game. Curse you, football on Thursday nights!
    I do think you should still watch it, though. The dirtbaggery of our quarterback really should be witnessed.

  43. Gravatar of Lorenzo from Oz Lorenzo from Oz
    14. September 2012 at 22:07

    I am specifically grateful for making macroeconomics interesting and clear (particularly monetary economics). When I originally did Economics at University, macro just came across as this ad hoc crap compared to micro.

    Now, thanks to reading your blog and those of your partners-in-crime (particularly David Glasner, who is so strong on economic history) I can even blog about it with some clarity.

  44. Gravatar of Phil Phil
    15. September 2012 at 00:20

    Btw, I think looking at changes in the broad indices massively understates how important the statement was. E.g. In the ftse 100, every single mining company gained at least 10%. Counterbalanced by declines in defensive sectors like utilities and energy. Friday saw an absolutely huge move in favour of risk assets, which had already appreciated. The stock market is predicting a huge increase in economic activity.

    Well done prof sumner.

  45. Gravatar of Aidan Aidan
    15. September 2012 at 09:00

    Scott – You’re right, I don’t think there’s a huge divergence in views. It certainly makes stuff like this look silly in retrospect:

    As important as I think the market monetarist work has been, I don’t think we can discount the pressure from the left by people like Krugman. Democratic officials have been mostly disappointingly silent on monetary policy but it’s pretty clear that that Krugman NYT magazine piece earlier this year got under Bernanke’s skin. Again, I don’t think he made any criticisms that market monetarists didn’t but it’s pretty clear that Bernanke was paying attention.

  46. Gravatar of Negation of Ideology Negation of Ideology
    15. September 2012 at 11:19

    John -

    The exit strategy is simple. First, just let the short term assets run off. You could reduce the balance sheet significanlty without selling anything. If that’s not enough, start selling some of the $400 Billion of useless shiny yellow metal on the Fed’s books. If that’s not enough, raise reserve requirements and/or sell term deposits.

    It seems pretty unlikely to me that the Fed would have any difficulty reducing NGDP growth if that was needed.

  47. Gravatar of John John
    15. September 2012 at 14:24

    Negation of Ideology,

    I guess a better way of phrasing my question would be to ask who is going to buy treasuries or MBSs when the Fed stops buying them? Everyone will know that rates are rising so why buy low yielding bonds virtually guaranteed to lose value?

  48. Gravatar of Negation of Ideology Negation of Ideology
    16. September 2012 at 05:34


    Ah, I understand. I can’t say for sure, but I would assume prices would fall (meaning yields would rise) until enough people bought them – the market clearing price. If NGDP did rise faster than expected then the deficit would be lower than expected so the supply of Treasuries would be lower than expected.

    How these factors combine is anyone’s guess. My guess is that interest rates will go up from these historic lows, but every time I think rates can’t go any lower they fall even more so I won’t try to guess where the bottom is.

  49. Gravatar of ssumner ssumner
    16. September 2012 at 06:45

    John, Very interesting question. I’m on record predicting that rates will stay low for longer than most expect. It will be interesting to watch how this plays out.

  50. Gravatar of John John
    16. September 2012 at 08:13


    Yes it will. I’ve heard it said that this policy is like a roach motel or Hotel California.

Leave a Reply