A glimmer of hope?

I’ve had very low expectations for the Fed’s upcoming review of its operating regime. I had thought that the previous review (back in 2020) had hit the nail on the head, until I learned that “average inflation targeting” had nothing to do with stabilizing the average inflation rate. A new paper by Federal Reserve economist Michael T. Kiley suggests they may be about to fix the “asymmetry” problem with FAIT. Here’s the abstract:

I assess monetary policy strategies to foster price stability and labor market strength. The assessment incorporates a range of challenges, including uncertainty regarding the equilibrium real interest rate, mismeasurement of economic potential, and balancing the costs and benefits associated with employment shortfalls and labor market strength. I find that the ELB remains a significant constraint, hindering achievement of the inflation objective and worsening employment shortfalls. Symmetric policy reaction functions mitigate the most adverse effects of employment shortfalls by contributing to economic stability. Make-up strategies address ELB risks. These strategies call for policy to accommodate some period of inflation above its long-run objective following an ELB episode. I also consider an asymmetric shortfalls approach to policy. This approach provides accommodation in response to weak activity while foregoing tightening in response to strong activity. While the approach can, in principle, address ELB risks by raising inflation, it performs poorly. The shortfalls approach exacerbates economic volatility, worsens employment shortfalls, and creates excess inflationary pressures. Mismeasurement is not sufficient to limit the importance of strong responses to measured slack. Overall, monetary policy can promote price stability and labor market strength by focusing on economic stability, with a strategy targeted to address ELB risks.

The Fed’s big mistake in 2020 was adopting an asymmetric policy approach, which involved make-up policies for undershoots but not overheating. Policy must be symmetric.



12 Responses to “A glimmer of hope?”

  1. Gravatar of Jeff G. Jeff G.
    4. June 2024 at 15:21

    Hi Scott, will you be at the Berkeley ACX meet-up?


  2. Gravatar of ssumner ssumner
    4. June 2024 at 15:39

    Jeff, No, I’m home now.

  3. Gravatar of Matthias Matthias
    4. June 2024 at 16:58

    Scott, in principle one could view an asymmetric target of nominally 2% as a symmetric target of, say, effectively 2.5% or so? What goes wrong with that analytical approach?

  4. Gravatar of Michael Sandifer Michael Sandifer
    4. June 2024 at 17:04

    Yes, obviously this is the direction I thought the Fed would go in, given that it’s the next logical step in their evolution. They like to fight the last war, so the last war in this case is still being fought. It’s the war against overheating.

  5. Gravatar of Todd Ramsey Todd Ramsey
    5. June 2024 at 06:04

    More evidence that you are making progress!

    Please don’t give up the fight until we have a US Government issued nominal GDP security.

    A foundation with single issue focus on getting the government to create this security is a possible next step. Who among us can follow Scott’s lead and provide the intellectual and financial leadership to make this happen?

  6. Gravatar of David S David S
    5. June 2024 at 07:16

    I saw a chart (I think it was a link from Yglesias) of recent NGDP growth, and the past six months have been mostly flat at 5.8%—which is a bit hotter than some people might like but a big improvement. Most growth and price trends seem to be sloping downward.

    Housing, of course, is the enraged wooly mammoth stomping in the corner, though.

  7. Gravatar of Robert Simmons Robert Simmons
    5. June 2024 at 09:08

    I was looking back at peak-to-peak growth rates (and other things), and stumbled on to that averaged NGDP/NGDI grew at a 4.0% CAGR from 2007-2023. I realize that that’s a long time, and the path was bad in many ways, but maybe the Fed should declare the economy to be back on trend, and use 2023 as the base from here (to start the level targeting, of course).

  8. Gravatar of ssumner ssumner
    5. June 2024 at 09:27

    Matthias, No, the difference goes way beyond the average inflation rate. An asymmetric target leads to much greater macroeconomic volatility, as I’ve discussed in previous posts.

    Robert, I agree with your conclusion (4% from here), but not because it’s averaged 4% since 2007. I’d put more weight on the fact that we are near equilibrium in the labor market.

  9. Gravatar of Robert Simmons Robert Simmons
    5. June 2024 at 10:49

    I’ve seen some pointing out inflation and NGDP above trend if you look back to 2019, so it was striking to me how close to the pin the growth has been looking out longer. I agree the state of the labor market is more important, but this would give additional cover to make the move (or however you want to phrase it) and perhaps help to explain it. Not that they actually will, unfortunately.

  10. Gravatar of Sara Sara
    5. June 2024 at 21:55

    It amazes me how economists can still take the Fed seriously.

    All one has to do is look at the erosion of purchasing power between 1912 and today.

    If you permit the free market to take over, nobody would use dollars anymore. The only reason they use the dollar is because it’s forced upon them.

    Thailand, for example, prohibited bitcoin for transactions. As did Vietnam. They will let you invest in it, just like gold, but you can’t transact.


    Because they say: “we’re trying to protect you from fraud.”

    No. The real purpose is to keep you from increasing your purchasing power. They want to print easy money, most of which lands in their own pocket. And they cannot do that when there is a fixed supply.

    Zelensky, the bimbo in Ukraine, is now under investigation for buying a Casino. I wonder where he got the money. Could it be your tax dollars? Actually, no. It isn’t your tax dollars. It’s your children’s wealth, borrowed by “The big guy” without your permission.

  11. Gravatar of Tacticus Tacticus
    6. June 2024 at 04:25

    Zelensky is not being investigated for being a casino, you clown.

    Very concerning about purchasing power, however. What will I do with all those bank notes I put in a safe-deposit box in 1912??

  12. Gravatar of spencer spencer
    8. June 2024 at 08:59

    Economists have lost it. None of them can explain how banks create new money. Not even Werner. The relationships between the deposit classes are breathtaking. A bank cannot simultaneously transmit deposits when it is actually creating deposits dollar for dollar.

    The money stock can never be properly managed by any attempt to control the cost of credit. The FED may have lost control of the money stock in April (up 264b since Feb).

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