Some commenters have pushed back on my “no tight money” claims by pointing to a slowdown in NGDP growth over the past year. I am not persuaded.

Under any sort of rational policy regime, you should try to come back to the trend line after a steep decline caused by special factors. NGDP fell extremely sharply in mid-2020 (due to very special factors), and hence it was appropriate that NGDP rose extremely rapidly over the following year. That’s the implication of level targeting, but also average inflation targeting and even the Fed’s vague “dual mandate”.

But once NGDP got back near the old trend line, it was appropriate to slow NGDP growth to a rate consistent with the Fed’s 2% target, which implies an NGDP growth rate of roughly 3.5%. Instead, NGDP growth has averaged 9% over the past year. Even if that’s a bit slower than the rate during the bounce back from Covid, policy is actually becoming more expansionary in the sense that we are now moving further and further above the optimal target path, instead of merely recovering to the previous trend line (which was appropriate). It’s not enough to think in terms of growth rates, you also need to consider levels.

I understand that concepts such as easy and tight money are subjective, so let me make my point using different terminology. I believe that the Fed’s policy error over the past 12 months has been even worse than the mistakes made in 2021. Policy in 2021 was too expansionary (at least late in the year), but the policy in 2022 is even worse, far too expansionary.

It’s possible that policy has recently become a bit less expansionary, but it’s certainly not a tight money policy by any reasonable definition. Forecasts for 4th quarter NGDP growth remain quite high. Every month of overshooting makes the subsequent correction even more painful. Stopping high inflation in 2023 will be more painful (or less effective) than it would have been if we’d bitten the bullet and brought NGDP growth down more sharply this year. Nominal wage growth has developed a lot of upward momentum, making it much harder to control.

Here’s the FT:

US retail sales rose more than expected in October, notching their biggest monthly increase since the start of the year.

Sales, which include spending on food and fuel, rose 1.3 per cent from the previous month to $694.5bn, according to data from the Census Bureau on Wednesday. That was up from no growth in September and marked the biggest month-on-month increase since January. Economists had expected a 1 per cent increase. . . .

The so-called retail control group, which excludes building materials, motor vehicle parts and petrol station sales, jumped 0.7 per cent, following an upwardly revised 0.6 per cent increase in September. Economists expected a 0.3 per cent increase.

FWIW, the Atlanta Fed 4th quarter RGDP estimate (that’s real GDP) has been bumped up to 4.4%. And inflation is still hot. Wake me when the Fed begins to tighten.

“But two quarters of negative GDP mean we’re in a recession.” LOL.

“So what should the Fed have done differently?”

Level targeting

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Level targeting

Ever since the 1990s, the Democratic Party has been on a steady downward path. Given that I wasn’t a Democrat in the 1990s, you might assume this is the last place I’d look today. Unfortunately, all the other parties are on even worse trajectories:

Not sure what these three people have in common. Some of them are very talented, perhaps all if you include “outrageous personality” as a talent. But the only commonality I can find is that all three are famous for making really offensive statements. So that’s how the GOP wants to advertise their party? “Join the GOP; we’re a party of trolls”.

If that’s their aim it won’t work, because no one can out-troll the new and depraved Libertarian Party:

This is highly offensive in at least two distinct ways. The exclusion of Trump and the inclusion of Cheney is an obvious nod toward that fact that the Libertarian Party is more upset at a brave woman who sacrificed her career to expose Trump’s treason, then they are by the fact that Trump tried to overturn a democratic election and make himself dictator.

Equally offensive is their mocking of those of us who understand the threat posed by people like Putin. This is something I’d expect to see on Russia TV, not a Libertarian Party website. I guess they don’t care at all about liberty for Ukrainians and other nations threatened by Putin. Unfortunately, as we learned in the late 1930s, problems that begin in Europe don’t always stay there. I expect that soon the LP will be touting “America First” advocates like Henry Ford and Charles Lindbergh.

The LP has slid so far down into the authoritarian nationalist sewer that it will take decades to wash off the stench. I may have to stop calling myself libertarian, for fear I’d be associated with these clowns.

I don’t know what will happen in 2023, but I do know that the outcome with be interesting.

Here’s the FT:

Economists tend to think in small incremental steps, missing big turns in the story, which helps explain why their consensus view had not forecast a single US recession since records began in 1970 — until now.

For the first time, economists as a group not only expect a recession in America in the next year, but give it a very high probability, more than 60 per cent. Given their record, it’s worth asking whether the consensus is, in fact, unlikely.

Bloomberg says the actual probability is 100%:

Bloomberg economists forecast 100% chance of US recession in the next year

Hmmm . . . That’s a pretty high level of confidence, given that the consensus view of economists has always been wrong since records began. Are we talking metaphysical certitude? Objective reality? A God-like view?

In 2023, we will either have a recession (which is interesting because economists will be correct for the first time ever), or we will not have a recession, despite a “zero probability” of not having a recession. That would also be interesting.

The FT also has a paragraph that left me scratching my head:

This is hardly the most likely scenario and compared with economists, who typically call recessions months after they have begun, markets have a good forecasting record. Though markets can send false signals, showing jitters before downturns that never arrive, they also anticipate real recessions consistently. Going back to the second world war, the US stock market has typically fallen at least 20 per cent and bond traders have always pushed short-term yields above long-term yields in the months before a recession. Both of those market signals are warning of a recession now, so to picture alternate outcomes may be magical thinking.

Doesn’t the 2nd sentence in that paragraph sort of contradict the 4th sentence?

I don’t have strong views on the question. I recognize that recession risks are elevated during periods where the Fed is trying to reduce inflation. (High interest rates mean nothing.) But I don’t have strong views on whether a recession will occur in 2023. A mini-recession might be a nice change of pace, given that the US has never had one. Say no more than 5% unemployment at the peak?

In the past, I argued that recessions should normally be unforecastable, because if they were expected then they would be prevented by the Fed. The one exception was when a recession was optimal policy, the only way to control inflation. Today, I don’t believe we need a full blown recession, but I suspect we need a mini-recession to control inflation. In other words, if we reduce NGDP growth to 5% for one year, and 3.5% thereafter, we’d probably get a mini-recession, and that NGDP path would also bring inflation under control. If we miss that target path by being too dovish, we won’t control inflation. If we miss in the hawkish direction, we’ll have a full blown recession.

BTW, many commenters told me that a recession began last winter. If you are in that group, don’t bother giving me your forecast. I don’t care. And if you are in the group of us that understood that two negative quarters don’t mean recession, I’m still not interested in your forecast. Sorry.

Here’s what I wrote in 2017:

But he also seems like the sort of guy who will try to bring down the Republican Party if they don’t support him. Even during the campaign, it was obvious that the GOP had a tiger by the tail. If they had stiffed him at the convention he would have told his supporters to not vote for the GOP nominee.

I can’t wait to see Trump’s response if the GOP nominates DeSantis in 2024. A third party bid?

If you want to read what the National Review will be saying a few years from now, read TheMoneyIllusion today.