NGDP is up 12.4% over the past 9 quarters, an annual rate of 5.3%. That’s too high.

Nominal gross domestic income (NGDI) is up 16.1% over the past 9 quarters, an annual rate of 6.9%. That’s way too high.

Nominal total wages and salaries are up 17.1% over the past 9 quarters, an annual rate of 7.3%. That’s way, way too high.

Interestingly, NGDP and NGDI are exactly the same concept, measured in two different ways. The two figures would be identical if there were no measurement errors. Studies suggest that an average of the two is more accurate than either figure viewed in isolation, and future revisions of NGDP tend to move toward that average.

In this case, the average of NGDP and NGDI growth has been 6.1% over the past 9 quarters (i.e. from 2019:Q4 to 2022:Q1).

But labor compensation is probably a better indicator of macroeconomic stability than NGDP. So it’s worrisome that this figure is even higher (7.3% annual rate).

I usually focus on NGDP out of sheer laziness, and also because it is normally quite similar to NGDI. The past few years have been quite unusual, however, with a surprisingly large divergence between the two. In this environment it probably makes sense to take the average of the two, which suggests that demand overheating is even greater than I had assumed. This is especially the case given that a leading alternative (total nominal wages and salaries) shows even more overheating than NGDI.

The Eurozone is also suffering from high inflation, but their NGDP situation is quite different. Eurozone NGDP growth has averaged only 2.7% over the past 9 quarters, which is close to their trend. Of course NGDP is not a perfect indicator, and it’s possible that the Eurozone economy has also overheated slightly (unemployment recently fell to record lows), but it’s clear that the major problem in Europe is on the supply side. The Ukraine war has hit Europe much harder than the US. (Japan has not had any NGDP growth, and has relatively low inflation.)

I would add that while the ECB does not have a dual mandate, they do allow temporary deviations from 2% inflation when there are supply shocks. Here’s Philip Lane of the ECB:

[I]t should be recognised that the prevalence of downward nominal rigidities in wages and prices means that surprise relative price movements should mainly be accommodated by tolerating a temporary increase in the inflation rate, rather than by seeking to maintain a constant inflation rate that could only be achieved by a substantial reduction in overall demand and activity levels.^[4] Since bottlenecks will eventually be resolved, price pressures should abate and inflation return to its trend without a need for a significant adjustment in monetary policy.

The logic underpinning a hold-steady approach to monetary policy is reinforced if the bottlenecks are primarily external in nature, caused by global disruptions in supply or a surge in global demand. Since monetary policy steers domestic demand, a tightening of monetary policy in reaction to an external supply shock would mean that the economy would be simultaneously confronted with two adverse shocks – a deterioration in the international terms of trade (generated by the increase in import prices) and a reduction in domestic demand.

The Fed announced a new policy of Flexible Average Inflation Targeting back in August 2020. Over the next few months, the Fed failed to provide a clear and consistent interpretation of what the policy actually entails. More recently, it has become clear that FAIT is intended to be asymmetric. But some features of the policy remain unclear, such as when it began.

Jerome Powell gave a speech explaining the new policy in August 2020, and this is naturally the place to look for an official explanation. But Powell’s explanation is vague and unclear:

We have also made important changes with regard to the price-stability side of our mandate. Our longer-run goal continues to be an inflation rate of 2 percent. Our statement emphasizes that our actions to achieve both sides of our dual mandate will be most effective if longer-term inflation expectations remain well anchored at 2 percent. However, if inflation runs below 2 percent following economic downturns but never moves above 2 percent even when the economy is strong, then, over time, inflation will average less than 2 percent. Households and businesses will come to expect this result, meaning that inflation expectations would tend to move below our inflation goal and pull realized inflation down. To prevent this outcome and the adverse dynamics that could ensue, our new statement indicates that we will seek to achieve inflation that averages 2 percent over time. Therefore, following periods when inflation has been running below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.

Let’s break that down into 4 smaller chunks:

We have also made important changes with regard to the price-stability side of our mandate. Our longer-run goal continues to be an inflation rate of 2 percent. Our statement emphasizes that our actions to achieve both sides of our dual mandate will be most effective if longer-term inflation expectations remain well anchored at 2 percent.

This suggests that the policy was intended to be symmetric. (That was also my view.) Under an asymmetric policy where the Fed only offsets inflation undershoots, inflation (and inflation expectations) would average more than 2%.

However, if inflation runs below 2 percent following economic downturns but never moves above 2 percent even when the economy is strong, then, over time, inflation will average less than 2 percent. Households and businesses will come to expect this result, meaning that inflation expectations would tend to move below our inflation goal and pull realized inflation down.

In these two sentences Powell seems to accuse the previous Fed of an asymmetric policy that allowed below 2% inflation but not above 2% inflation. He correctly points out that if policy is asymmetric, then inflation will not average 2% over time. And that’s bad! So why would anyone think Powell was now advocating an asymmetric policy?

To prevent this outcome and the adverse dynamics that could ensue, our new statement indicates that we will seek to achieve inflation that averages 2 percent over time.

This sentence pretty clearly implies that the policy is intended to be symmetric. He’s already explained why an asymmetric policy is bad, and then follows that up by stating that the new policy seeks an average inflation rate of 2%, with no mention of asymmetry. And the term “average” has a pretty clear meaning, more consistent with the symmetric interpretation. Case closed?

Not quite. The final sentence gives an example of how FAIT might work in practice:

Therefore, following periods when inflation has been running below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.

This could be interpreted in two ways. He might be merely using this case as an example, as during August 2020 inflation was running below target and the Fed intended to offset that low inflation with higher than 2% inflation in the future. That would be consistent with the symmetric interpretation. Or he might be signaling that the policy is asymmetric, but that would directly contradict his earlier statements that inflation will continue to average 2% over time.

It is now clear that the Fed intends for inflation to average above 2% over time, but I defy anyone to get that interpretation from Powell’s August 2020 statement.

A few months later, Richard Clarida gave his own interpretation to FAIT:

The new framework is asymmetric. That is, as in Bernanke, Kiley, and Roberts (2019), the goal of monetary policy after lifting off from the ELB is to return inflation to its 2 percent longer-run goal, but not to push inflation below 2 percent. . . .

I believe that a useful way to summarize the framework defined by these five features is temporary price-level targeting (TPLT, at the ELB) that reverts to flexible inflation targeting (once the conditions for liftoff have been reached).

This interpretation is clearly different from Powell’s earlier explanation. Recall that Powell said:

Therefore, following periods when inflation has been running below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.

In contrast to Powell, Clarida is saying that the Fed will only offset below 2% inflation that occurs at the zero lower bound. When not at the zero bound, the Fed will revert to ordinary inflation targeting, the exact same policy regime that was in place prior to 2020. Clarida’s interpretation is actually more consistent with maintaining an average inflation rate of 2%, because inflation usually runs below target when the economy is at the zero lower bound. (But not always, as we saw in 2021.)

Even TPLT would have been a slight improvement over previous Fed policy, as long as the new policy is pre-emptive. That is, as long as the Fed tightens as appropriate during the catch-up period to keep the expected future price level on target. But Powell didn’t just adopt FAIT in 2020; he also abandoned the policy of pre-emptive moves to prevent inflation overshoots. Now the Fed would wait until excessive inflation was actually occurring before tightening. When combined with FAIT, that’s a recipe for disaster (as Frederic Mishkin recently noted.)

John Williams also described an asymmetric FAIT, but emphasized that he was not describing the actual Fed policy, just his preference:

I should be clear from the start that the goal of my presentation is to engage in the broad academic and central bank discussion on monetary policy strategies, and that this is not, and should not be interpreted as, a description of the Federal Reserve’s new policy framework or the practical application of AIT to real-world situations.

Clarida offered a similar disclaimer. So what is the actual policy?

You might be saying to yourself that the problem is with me. “Sumner is a dummy; the public understood that the policy would be asymmetric.”

Well, apparently “the public” does not include prominent economists such as Ricardo Reis.

Nor does it include Fed economists writing articles in Fed publications explaining the policy to the general public. This is from a 2021 Dallas Fed paper by Enrique Martínez-García, Jarod Coulter and Valerie Grossman:

By comparison, average inflation targeting means that policymakers would consider those deviations and can allow inflation to modestly and temporarily run above the target to make up for past shortfalls, or vice versa.  [Emphasis in original]

So now it’s symmetric again. But by early 2022, it was asymmetric again. What a mess!

Even today, it’s not clear if the new Fed policy applies at all times, or only at the zero lower bound.

PS. You might recall that Communication Breakdown appeared on the first Led Zeppelin album. But that album contains another song that better describes my feelings about Fed communication.

And why stop there? After all, Powell used to play guitar in a rock band. Maybe he was inspired by “How Many More Times”, or “Good Times, Bad Times.” What would Powell think of these lyrics?

Your love is not credible.

It’s a time inconsistent thing.

I need a commitment mechanism.

Baby, I need a ring.

PPS. Larry Summer’s view of FAIT:

I’ve never voted for a Democratic or Republican presidential candidate. But that may end in 2024, as the Libertarian Party has recently been taken over by a bunch of far right wackos. Hopefully they regain their senses and nominate someone respectable in 2024. If not, I will likely hold my nose and vote for the Democrat presidential candidate, or the Republican in the unlikely event the GOP nominates Mitt Romney.

Reason magazine has a very revealing video, including interviews with some members of the “Mises Caucus”, which despite its name has little to do with the views of Ludwig von Mises. They seem to have two main points:

1. The previous Gary Johnson version of the party was too unwilling to stand up for edgy libertarian views that the public might see as being extremist. They want to get rid of the pragmatists and return to a smaller party of true believers.

2. They want to abandon traditional Libertarian Party views on issues like abortion and immigration for pragmatic reasons, to attract more Trump voters.

In other words, they are completely incoherent. The Reason interviews with various Mises Caucus members are simply embarrassing. (Only Justin Amash comes off well.) They also want to adopt the far right approach to politics, with lots of trolling:

It is Kauffman who Bishop-Henchman referred to, not by name, in his June 14 letter to the LNC when he writes of “an individual who does things like tweet about how black people have lower IQs and murdering trans people would be a good trade-off for lower taxes.” Those ideas were tweeted on Kauffman’s personal account, not the party’s. (Kauffman and his fans stress that he specifically was talking about the superior morality of no taxes to 1,000 murdered transpeople, not just the “lower taxes” Bishop-Henchman wrote.***)

As of today, I’m still a libertarian. But until the party dumps the Mises Caucus, I’m no longer a Libertarian.

PS. Over at Econlog I have one of my annual “everything is going to hell” posts. I could have included this.

Expect to see lots of excuses coming out of the Fed along the lines of, “Almost no one expected inflation to get this bad”. That’s true, but it’s no excuse. A few people did forecast very high inflation, but it is true that most people (including me) did not expect inflation to get this high. But bad forecasting is not the primary problem.

The current inflation problem, or at least the demand-side inflation portion of the problem, comes from the Fed’s decision to make FAIT asymmetric, making up for inflation shortfalls but not overshoots. That’s the problem, not the fact that the Fed misjudged the situation. Under an effective policy regime (such as NGDP level targeting or symmetrical FAIT) Fed misjudgments are far less costly than under the current regime. When demand is becoming too strong, markets would quickly correct policy mistakes by moving longer-term interest rates up to a level that would restrain spending, in anticipation of future Fed rate changes. That did not happen in 2021.

Here’s another misconception. People say that 5-year TIPS spreads have not changed much over the past 6 months, therefore the inflation situation is not getting worse. That overlooks the fact that actual inflation over the past 6 months has been extremely high. Thus the market forecast of where the price level will be at the end of 2026 is significantly higher than it was just 6 months ago. The inflation situation is clearly getting worse. And five years from now, many of the current supply bottlenecks will likely be resolved.

Another argument is that inflation doesn’t matter, it’s NGDP growth that matters for monetary policy. I agree, but NGDP growth has also been far too high.

Montrezl Harrell used to play for the Los Angeles Clippers. Now he plays for the Charlotte Hornets. He may not realize that he no longer lives in one of those horrible blue states where people are not “free”:

Montrezl Harrell is facing felony drug charges after authorities found three pounds of vacuum-sealed marijuana in his car.

Harrell was pulled over in Richmond, KY on May 12. His vehicle was searched after a trooper said he smelled marijuana. 

The 28-year-old is charged with trafficking less than five pounds of marijuana and could face up to five years in prison if convicted.

What’s 5 years in prison, when you are “free” of those annoying mask mandates?

Update: Commenters pointed out that marijuana arrests still occur in California. I searched and found some data on that:

Felony arrests for marijuana fell a whopping 74% to 2,086 in 2017 from 7,949 in 2016. Under Prop 64, the majority of felony offenses were reduced to misdemeanors. Felony arrests have plummeted from 13,300 since 2014. . . .

The number of marijuana arrests in California continued to decline toward new lows in 2018 according to data released by the Criminal Justice Statistics Center. The total number of felony arrests was 1,617, down 22% from 2017 and the lowest since the 1950s.

And this:

Arrest data from the CA DOJ shows that felony arrests for marijuana continued to decline in California, from 1,181 in 2019 to 1,027 in 2020

So considerable progress since 2014, but much more work to be done. It should be zero.