AIT so far

Last August, I did a blog post suggesting that in order for the Fed’s new average inflation targeting policy to be successful the PCE price level needed to be roughly 135.207 in January 2030, which represents a 2% annual growth rate over the January 2020 price level (110.917.) The most recent PCE data is for April 2021, and shows the price level at 114.075. Thus inflation is averaging 2.27% during the first 15 months of the 2020s. The Fed needs PCE inflation to average 1.96% for the remainder of the decade in order to hit their AIT target.

Let’s hope they are serious.



39 Responses to “AIT so far”

  1. Gravatar of marcus nunes marcus nunes
    19. June 2021 at 15:25

    That´s almost exactly the average inflation observed in the 90s to 2005 (1.98%). That was the outcome of a stable monetary policy, something that we hope is reproduced going forward.

  2. Gravatar of George Selgin George Selgin
    19. June 2021 at 15:54

    Scott, if I understand you correctly, I agree entirely; I made what I believe was a very similar point on twitter a little while ago:

  3. Gravatar of Lizard Man Lizard Man
    19. June 2021 at 16:07

    Let’s assume that inflation will be above 2% for the next few quarters. If that is the case, then the AIT regime adopted by the Fed requires that for the rest of the decade, they deliver inflation below 2%. The Fed has delivered inflation below 2% for a decade or more. Why would anyone doubt that they will do that? The question that remains is if they will allow inflation above 2% in inflation outside the context of a global pandemic.

  4. Gravatar of ssumner ssumner
    19. June 2021 at 16:21

    Marcus, Good point.

    George, Great minds . . .

    Lizard, Yes, but the key is the long run average. During the 2010s, inflation averaged well below 2%. If it averages 2% during the 2020s, then that would boost the Fed’s credibility.

  5. Gravatar of Effem Effem
    19. June 2021 at 16:48

    My prediction: inflation will run hot for the next 2-3 years producing an overshoot. The Fed will then come up with some unconvincing excuse why an undershoot for the rest of the decade isn’t feasible.

    We’ve painted ourselves into a corner by allowing asset prices to be the tail which wags the dog. The Fed won’t have the courage to stick to its brand new AIT. Just my 2c.

  6. Gravatar of bill bill
    20. June 2021 at 05:51

    In popular culture, Greeenspan was initially lionized as the Maestro, then trashed for a housing bubble and big recession that occurred 3 years after he left. The reality is that Greenspan did a very good job.

  7. Gravatar of David S David S
    20. June 2021 at 07:49

    Since Bill referred to Greenspan, we might as well look to Bernanke’s performance as a tragic and cautionary tale (as Marcus points out in his excellent and comprehensive mini-history).

    Despite my idiotic prediction of a 2021 rate hike I think that the Powell Fed will stay calm and continue to ignore current price volatility before making any moves. My hope is that we can have a period similar to 1992 thru 2005–but with slightly lower interest rates, stable NGDP growth, and no repeat of 2001. And if something funny happens, no repeat of 2005 through 2010.

    If we wake up on January 1st, 2031 and realize that inflation averaged 2.1% from 2019 through 2030 should be regard AIT as a failure?*

  8. Gravatar of ssumner ssumner
    20. June 2021 at 09:53

    David, In my earlier post, I said that 1.8% to 2.2% would count as success.

  9. Gravatar of Michael Rulle Michael Rulle
    21. June 2021 at 05:08

    Me too——but the question is —-“who will be “they””?

  10. Gravatar of Spencer Hall Spencer Hall
    21. June 2021 at 08:24

    What’s ludicrous is that increase in inflation decreases the real rate of interest and r *. It has a negative economic multiplier. We are headed for a decades long second great depression.

  11. Gravatar of Michael Rulle Michael Rulle
    21. June 2021 at 11:52

    It is probably my imagination—but Bullard’s tone was far different today—he didn’t walk back per se—but when he both describes how AIT works (for the public’s sake)——combined with a 2.4% 2022 inflation forecast it suddenly seems a lot closer to Powell both in theory and fact than on Friday—add basically the same comment from Kaplan–and of course the explicitly pro-Powell Williams—and presto—market erases Friday’s losses. I like when they all sound the same–especially when I like what they say.

  12. Gravatar of Bob Bob
    21. June 2021 at 16:38

    So are we in danger of over shooting or are we good?

  13. Gravatar of ssumner ssumner
    21. June 2021 at 19:08

    Bob, I’d say there’s a 50% chance of policy being correct, a 30% chance of overheating, and a 20% chance of undershooting. So we are in a pretty good place, but there are always risks.

  14. Gravatar of Daniel Kling Daniel Kling
    21. June 2021 at 19:14

    And what do you think overheating looks like (in the context of this guess)? Are you talking about overshooting and getting 2.5-3% average inflation for the 2020’s or something more… exciting?

  15. Gravatar of ssumner ssumner
    21. June 2021 at 20:32

    Daniel, More than 2.2% for the 2020s.

  16. Gravatar of TallDave TallDave
    22. June 2021 at 06:46

    depends what fiscal authorities do… right now monetary policy is pushing (e.g. mortgage rates low enough to drive lumber up an insane 500%), but byzantine fiscal policy (increasingly paying people more to not produce, and/or making production more expensive in various and sundry ways) is pulling down production and employment

    danger now is that Fed will bow to increasing left-wing political pressure to inflate and we’ll relive the 1970s

  17. Gravatar of TallDave TallDave
    22. June 2021 at 07:48

    would point out though that a >2% inflation target is intrinsically no better or worse than a <1% inflation target

    obviously if growth is 4% we want inflation closer to 1%, and vice versa… if someone asks what the inflation target for the 2020s should be, the answer should be "depends on RGDP"

  18. Gravatar of Michael Rulle Michael Rulle
    23. June 2021 at 04:22

    Scott says more than 2.2% is overheating for the 20s. I did not know his view was so precise and narrow in range. Seriously. Maybe we will have NGDP by then—-although I doubt it. But that range is usually quoted at 4-5% by Scott—-at least with a 2% inflation target. I guess in NGDP terms 2.2% might translate into 4.4-5.5% relative to target. I will buy that today.

  19. Gravatar of postkey postkey
    23. June 2021 at 08:38

    “Scott says more than 2.2% is overheating for the 20s.”

    Don’t take it too seriously? This is religious site. It’s what S.B.S. ‘believes’!

  20. Gravatar of Daniel Kling Daniel Kling
    23. June 2021 at 15:01

    I didn’t take Scott’s as saying that 2.2% inflation would be disastrous or even particularly bad, but rather that it would be a meaningful miss of their target. Even if 2.2% inflation isn’t bad per se, missing the target might be damaging via reduced Fed credibility and/or the Fed inducing an unnecessary recession to try to hit the target. But even without that, it’s not crazy to say that 2.2% is not 2.0%. As a professor, I’m sure Scott has experienced his share of goofy arguments that “it’s close enough that it should count” from his students.

    I was going to push further earlier and ask if he had a distribution in mind for the probable inflation outcomes conditional on landing on that 30% chance of overheating. But it seemed like asking for conditional distributions is pushing the bounds of politeness, even here.

  21. Gravatar of ssumner ssumner
    23. June 2021 at 15:26

    Daniel, Good comment. Here’s how I think of it. If inflation is more than 2.2% during the 2020s, then you’ve missed by more than 2 percentage points (or 200 basis points as they say on Wall Street.) That’s a lot! The Fed would have to be pretty clumsy to miss that badly.

    More likely, if they miss that badly it will be because they’ve abandoned AIT, and haven’t really even tried to get the price level back on track by 2030.

    On the overshooting question, I suspect that a modest overshooting is much more likely than a 1970s-style overshooting.

  22. Gravatar of rinat rinat
    24. June 2021 at 06:49

    The scam that we know as Macroeconomics more broadly, and the Fed more specifically, is once again asking for congress to raise the debt ceiling so that corrupt apparatchiks can spend more American tax dollars.

    Instead of raising the debt ceiling every other year, we ought to raise Tariffs to protect workers from cheap labor and from country’s who devalue their currency; secondly, we ought to abolish the Fed, and jail the paper pushers – including Sumner, Yellen, and others – who sell America’s future for the present; and lastly, we ought to abolish Marxist critical race theory (the New KKK) and quota’s from ever being implemented, and reinstall a merit based system that promotes the best and brightest. If America can do those three things, it can thwart the totalitarian substructure that is emerging from social science departments and globalist/totalitarian corporations.

    I must say that it’s quite astounding that these social science Marxists predomintely emerge from loser state schools, and watered down private universities like Bentley? What is Bentley’s ranking btw? 500? 1000? Gosh, what a loser University.

    Are these academics upset with their status and choices in life? Are they the product of some low IQ PhD program at schools like Bentley? Do they have a desire for power and prestige? I presume there are a number of issues here that ought to be looked at.

  23. Gravatar of Spencer Hall Spencer Hall
    24. June 2021 at 06:52

    Any fool can create higher N-gDp. All he has to do is stoke inflation. That is absurd. That will leave real wage growth behind and induce increased income inequality. It will reduce growth.

    It’s stock vs. flow. All you have to do to create higher R-gDp is to drive the banks out of the savings business (which doesn’t reduce the system’s size and as a byproduct increases the systems profits). I.e., to increase AD you increase velocity (a noninflationary response), you don’t add more money (an inflationary response).

    I.e., lending by the banks is inflationary whereas lending by the nonbanks is noninflationary. The DIDMCA of March 31st 1980 destroyed the thrifts. That destroyed velocity (the true driver of economic growth).

  24. Gravatar of ssumner ssumner
    24. June 2021 at 11:12

    rinat, You said:

    “Instead of raising the debt ceiling every other year, we ought to raise Tariffs”

    Big government socialists like you are not welcome here.

  25. Gravatar of David S David S
    25. June 2021 at 09:13

    Just noticed that YoY PCE was 3.4%—not exactly Weimar level. And I presume, just some things playing catch up and/or reflecting supply chain squeezes.

    To paraphrase a blog Scott wrote about Greenspan’s actions during 1987, A lot of what the Fed does over the next decade could consist of saying the right thing at the right time, but doing nothing unless absolutely necessary.

    I’ll bet a dollar that the cost of an annual Criterion Channel subscription will be $109.99 in 2025.

  26. Gravatar of Michael Sandifer Michael Sandifer
    26. June 2021 at 04:55

    What if inflation averages, say 2.6% in the 2020s, but average real GDP growth exceeds expectations, at say 2.5%, with NGDP growth being stable over the decade? I doubt many would say the Fed failed, though many would acknowledge that what the Fed was doing was closer to NGDP targeting than AIT.

  27. Gravatar of Michael Rulle Michael Rulle
    26. June 2021 at 05:38

    Scott thinks that only incompetence, or rejection of AIT, could cause a .2% overshoot over 10 years. He obviously thinks it is easy (for the Fed) to,do. I am not saying he is wrong. I am saying I was not aware he thought it was they easy to be that precise.

  28. Gravatar of Michael Rulle Michael Rulle
    26. June 2021 at 05:40

    His book will be even more interesting than I thought

  29. Gravatar of Spencer Hall Spencer Hall
    26. June 2021 at 06:35

    The objective of higher N-gDp growth is to accelerate capital spending:

    “The latest report on durable goods orders shows a surge of capital expenditures by businesses. Orders are not just rebounding from the pandemic, they are far exceeding pre-pandemic levels. Non-defense capital goods excluding aircraft are running more than ten percent above 2019 levels.”

  30. Gravatar of Spencer Hall Spencer Hall
    27. June 2021 at 04:37

    Negative real rates of interest is the boogeyman.

  31. Gravatar of Spencer Hall Spencer Hall
    27. June 2021 at 06:41

    With the current high inflation, and a large number of retirees, COLAs will increase the fiscal deficits. MMT with high inflation has now been denigrated.

  32. Gravatar of Spencer Hall Spencer Hall
    28. June 2021 at 15:19

    Economists are incapable of high level thinking, abstract or theoretical thinking. Banks aren’t intermediaries.

    In the U.S. Golden Era in Capitalism, 2/3 was financed by velocity instead of new money (by putting savings back to work, by the thrifts/nonbanks, and backstopped by the FSLIC, NCUA etc.). M1’s average growth was 1.5% each year (from 142.2 to 176.9). CPI inflation averaged 2.5% during the same period (from 23.7 to 33.1) elevated by the prosecution of the Korean War and Viet Nam Wars.

    The nonbanks grew faster than the commercial banks (which made Citicorp’s Walter Wriston jealous). Then the DIDMCA of March 31st 1980 destroyed the nonbanks thereby destroying velocity (bottling up monetary savings). Disintermediation is made in Washington.

    A dollar of savings (income held beyond the income period in which received), is more potent than a dollar of the money stock. R-gDp, not optimized, averaged 5.9% (from 2289.546 to 4445.853) during 1950-1966 (in spite of the 3 recessions).

    It is much more desirable to promote prosperity by inducing a smooth and continuous flow of monetary savings into real investment, than to rely, as we have done c. 1965, on a vast expansion of bank credit with accompanying inflation to stimulate production. The 2013 “Taper Tantrum” is prima facie evidence.

  33. Gravatar of Spencer Hall Spencer Hall
    29. June 2021 at 07:40

    The FED is driving the economy in reverse. Persistent negative real rates of interest will destroy the private bond market. The bond market will be nationalized.

    Investors will not for long accept negative returns on their savings. They will divert their bond holdings to buy hard assets (or even stocks in the short-run). It will create an asset bubble, “a commodities supercycle”.

    It is self-destructive capitalism. It will decimate the social fabric. It will create monstrous hoovervilles.

  34. Gravatar of Michael Sandifer Michael Sandifer
    29. June 2021 at 09:12

    I don’t think economists have a problem with high level thinking, but not many of them have studied the relationship between the stock market and economic growth. Some PhD economists, one of whom was famous, have told me that there’s zero relationship between stock prices and economic growth, while many others, some of whom are also famous, say that the P/E ratio is a real variable, when it’s actually a nominal variable.

    So, they’re even less prepared for the reality that the E/P ratio is equal to the NGDP growth rate, on average, much less being aware of the implications. One of those implications is that it’s easy to impute the mean NGDP market forecast in the S&P 500, for example, and that when NGDP growth, the earnings yield, earnings growth, and price growth are out of equilibrium, it automatically suggests monetary disequilibrium. If stock prices are up 25% in a year, for example, but are at or below a previous trend line, it likely means monetary policy is tight, even if loosening. Moreover, the degree of tightness is implicit with pretty high precision.

    Hence, for a very long time in the US, the stock market indicates the US has been in recovery modes. I’d say it goes back just after the tech crash.

  35. Gravatar of Spencer Hall Spencer Hall
    1. July 2021 at 09:24

    re: “I don’t think economists have a problem with high level thinking”

    Banks pay for the deposits that they already own. Case closed.

  36. Gravatar of Spencer Hall Spencer Hall
    1. July 2021 at 09:28

    As Nunes says: (“It is the real interest rate that affects spending”, pg. 19 Marcus Nunes and Benjamin Cole’s “With Market Monetarism – a Roadmap to Economic Prosperity”).”

    Negative real rates of interest stoke asset bubbles, creating income inequality.

  37. Gravatar of Michael Sandifer Michael Sandifer
    1. July 2021 at 18:54

    I buy Scott’s arguments that there are basically no asset bubbles. And I don’t think negative real rates have any particularly important effects on markets in and of themselves. I do think they probably indicate monetary disequilibrium in economies with greater than negative growth potential.

  38. Gravatar of Spencer Hall Spencer Hall
    2. July 2021 at 09:40

    S&P/Case-Shiller U.S. National Home Price Index (CSUSHPINSA)

    Ben Bernanke gave a speech in which he tossed out this little chestnut:

    “First, the Fed cannot reliably identify bubbles in asset prices. Second, even if it could identify bubbles, monetary policy is far too blunt a tool for effective use against them.”

    “How do you know it’s a bubble?” Alan S. Blinder gives a convincing explanation:
    (1) The historical data should be long enough to give us an historical perspective.
    (2) The data should be deflated (using real prices)
    (3) The data should be compared to the relative prices of other things.

    “Using 120 years of historical home prices, the relative prices of houses in America barely changed over more than a century! The average annual relative price increase from 1890 to 1997 was just 0.09 of 1 percent. Then things changed dramatically.

    According to the Case-Shiller index, real house prices soared by an astounding 85 percent between 1997 and 2000—and then came crashing down to earth from 2006 to 2012. This represented a large, long-lasting, and a sharp deviation from fundamental value.” Pg. 32 “After the Music Stopped”

    The chart is even more distorted today.

  39. Gravatar of Spencer Hall Spencer Hall
    3. July 2021 at 12:19

    FAIT is about to get less effective:

    R-gDp percent of N-gDp:

    1/1/2019 ,,,,, 0.896921
    4/1/2019 ,,,,, 0.889304
    7/1/2019 ,,,,, 0.888827
    10/1/2019 ,,,,, 0.888205
    1/1/2020 ,,,,, 0.882364
    4/1/2020 ,,,,, 0.884105
    7/1/2020 ,,,,, 0.880519
    10/1/2020 ,,,,, 0.878556
    1/1/2021 ,,,,, 0.864709

    It will start to drop off more sharply in the last half of 2021.

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