Johnleemk and Nic Johnson sent me this great quotation from Minneapolis Fed president Narayana Kocherlakota.
[The Fed] has also been targeting a fed funds rate of under a quarter percent for nearly four years—and anticipates continuing to do so through mid-2015. In the language of central banking, the Fed’s policy stance is considerably more accommodative than it was five years ago. . . .
Some observers argue that the Fed has done too much, has been too accommodative. I strongly disagree. … In light of the unusually large macroeconomic shock, I believe that it is misleading to assess the FOMC’s actions by comparing its current choices to policy steps taken over the past 30 years. Instead, we have to assess monetary policy by comparing the economy’s performance relative to the FOMC’s goals of price stability and maximum employment. In particular, if the FOMC’s policy is too accommodative, that should manifest itself in inflation above the Fed’s target of 2 percent. This has not been true over the past year: Personal consumption expenditure inflation—including food and energy—is running closer to 1.5 percent than the Fed’s target of 2 percent.
But this comparison using inflation over the past year is at best incomplete. Current monetary policy is typically thought to affect inflation with a one- to two-year lag. This means that we should always judge the appropriateness of current monetary policy using our best possible forecast of inflation, not current inflation. Along those lines, most FOMC participants expect that inflation will remain at or below 2 percent over the next one to two years. Given how high unemployment is expected to remain over the next few years, these inflation forecasts suggest that monetary policy is, if anything, too tight, not too easy. (Bold print added by Johnleemk.)
It’s really gratifying to see Fed people like Dudley and Kocherlakota getting closer and closer to the truth, that Fed policy has been ultra-tight since mid-2008, just as Fed policy in the 1930s was ultra-tight, despite near-zero interest rates. Over time, people will stop talking about policy as being “too tight” and just start calling it “tight,” as Friedman did in 1997 when Japanese policy was too tight to hit their inflation target, and interest rates were near-zero. After all, you rarely see people say; “Those 1000% interest rates show that monetary policy was tight during the German hyperinflation, albeit too expansionary relative to the needs of the economy.” They simply cut to the chase. Policy was
When I started out in late 2008 and early 2009 my claims that tight money was the problem were met with incredulous stares. Now we’ll see who gets the last laugh. Indeed (here’s a teaser) we may find that a month from now I’ll be able to get the last laugh on some of my early critics. I have a long memory.
I’ll get back to the MOE/MOA debate tonight.
PS. Do you see a bit of sarcasm when an academic says “in the language of central banking.”