Bernanke and Yellen on monetary policy options

Ben Bernanke and Janet Yellen coauthored a piece in the FT on options for the Fed during this crisis. As you’d expect, there were lots of good ideas, including this one:

Finally, as Eric Rosengren, president of the Federal Reserve Bank of Boston recently suggested, the Fed could ask Congress for the authority to buy limited amounts of investment-grade corporate debt. Most central banks already have this power, and the European Central Bank and the Bank of England regularly use it. The Fed’s intervention could help restart that part of the corporate debt market, which is under significant stress. Such a programme would have to be carefully calibrated to minimise the credit risk taken by the Fed while still providing needed liquidity to an essential market.

Readers know that I’ve long recommended the Fed ask Congress for the ability to buy a wider range of assets during a crisis.  Well, now we are in a crisis.

I look at this issue slightly differently from Bernanke and Yellen, however.  They focus on actions to restore confidence in the credit markets (a valid concern), whereas my motivation is to insure that there are enough assets for the Fed to buy in order to achieve a price level or NGDP level target.  QE won’t have the impact it should unless accompanied by level targeting and a “whatever it takes” commitment to asset purchases.  Allowing for more asset purchases makes that commitment more credible.

In fact, I’d prefer the Fed avoid buying corporate bonds until they ran out of Treasuries and MBSs to buy.  My motivation is money creation, not targeted assistance.

I’m a bit confused by this paragraph:

However, the underlying challenges today are quite different. Back then, the near-collapse of the financial system froze credit and spending; the goal of monetary policy was to restart both. Now, the problem is not originating from financial markets: they are only reflecting underlying concerns about the potential damage caused by the coronavirus pandemic, which of course monetary policy cannot influence.

If they mean that monetary policy cannot undo the medical harm caused by C19, then I clearly agree.  But that’s not how I read the paragraph.  They seem to be saying that monetary policy cannot undo the economic damage of the coronavirus.  That’s not entirely true. Spending and debt are nominal problems, not real problems.

If monetary policy props up NGDP growth with a whatever it takes approach to money creation, then it can make it easier for borrowers to repay loans.  It won’t magically allow cruise lines to service their debt, but faster NGDP growth has a big impact on a wide swath of firms across the American economy.  Debt defaults will be considerably lower if NGDP rises by 5% in 2021, than if it falls by 5%.  Indeed “considerably” is an understatement.

That may be nitpicking on may part, and Bernanke and Yellen are correctly emphasizing the need for the Fed to be very aggressive in addressing this crisis.  My only complaint is that they don’t put quite enough emphasis on the crucial importance of maintaining adequate NGDP growth, even at the cost of inflation.  The health of our financial system depends on it.  Our labor market will also do better with faster NGDP growth, although of course mass unemployment is inevitable in the short run due to social distancing.

There’s little that can be done regarding NGDP in the very short run.  In the very long run we’ll be fine.  It’s the medium term that scares me—2021 and 2022.  Even late 2020.  We need to do more to create positive NGDP growth expectations for 6 months to 3 years out.  Deflation is not the optimal outcome for an adverse supply shock, as any EC101 textbook will tell you.



15 Responses to “Bernanke and Yellen on monetary policy options”

  1. Gravatar of Benjamin Cole Benjamin Cole
    19. March 2020 at 15:57


    Helicopter drops on Wall Street are a good idea, and should be pursued.

    But as Stanley Fischer and David Beckworth have concluded helicopter drops on Main Street are what is needed.

    It may be the day of the Federal Reserve-commercial banking monopoly on creating money has played itself out. It is a wretchedly clunky system, baffling in its complexity, uncertain in its results, and opaque, fertile ground for misdeeds.

    I prefer tax cuts, such as payroll tax holidays or radical reductions in withholding schedules, with lost revenues offset by central bank money printing. Clear, above-board, transparent. We can hold accountability

    What folly is this that says the central bank can print any amount of money, conduct a helicopter on Wall Street, and that does not cause too much inflation, or commercial banks can print money in the form of loans and that does not cause too much inflation, but to give people tax cuts financed by printing money—horrors, that will cause too much inflation!

    By the way, the markets are telling us there won’t be any inflation for the next 10 years.

    Maybe at long last, in certain quarters, practitioners of monetary policy are finally happy!

  2. Gravatar of Michael Sandifer Michael Sandifer
    19. March 2020 at 17:07

    If Trump were intelligent, he would have someone present a bill to Congress to turn over monetary policy to the Treasury Department, at least during this national emergency. The mere act of doing so might move the Fed along in its evolution toward stronger stimulus.

    Of course, Trump isn’t intelligent, so all he does is insult the Fed publicly and threaten to do things he can’t do, like fire the FOMC chairman, which wouldn’t necessarily change much anyway.

    To be clear, I wouldn’t expect good monetary policy out of the Treasury Department right now, and would rather not see this change occur, but it might at least spur more stimulus.

  3. Gravatar of Kevin Kevin
    19. March 2020 at 17:29

    Prof Sumner,

    I’m more and more pessemistic that the Fed will even try to offset the current drop in inflation expectations. The mentality at the Fed seems to be refighting the last war: provide liquidity and don’t let the banks fail. The lesson they learned was to not let the banks fail, rather than to keep inflation expectations on target. They seem to feel like monetary policy is complete now that they set ST interest rates to zero for the foreseeable future, and any misses in inflation can be blamed on Coronavirus.

    I think you are way too optimistic about the Fed learning MM after the last recession. I talked to half a dozen soon to be assistant professors and PhD students from my old dept (finance not macro) who can’t tell the difference between NGDPLT and MMT, because both endorse mass asset purchases and helicopter money. Their fear is that non-govt agencies won’t roll the national debt once the Fed starts printing so much money to cause inflation, since the debt/gdp ratio is already so high. I mention this group because they lack the conservatism of the “old guard” but still oppose NGDPLT because it sounds irresponsible and low prestige for the central bank to print money. Someone like this might run the Fed in 20 years, but I can’t help but feel we MMs are not winning the intellectual fight at all. I almost expect MMT to win over policy makers before we do.

    Expect no help from fiscal policy either: even today, many Senate Republicans are opposed to relatively tiny helicopter drops. Not that injecting $1T in ST loans rather than grants is even that big a deal for the markets. This entire stimulus package disgusts me. It’s nothing more than giant cash grab for favored industries. I thought we’d have to elect Sanders to have “socialism” but we seem to be there already with Trump.

  4. Gravatar of LGS LGS
    19. March 2020 at 18:57

    Scott, an extreme supply side shock like we might be seeing with the coronavirus serves as an interesting test for NGDP targeting. Assume for the sake of argument that the real productive capacity of the world will decrease 10% for the next year. Would you rather have 5% NGDP growth even at the cost of 15% inflation? What would happen if 2% inflation targeting were successfully achieved instead – would you predict that real GDP would decline *more* than 10% in that case, as monetary policy was too tight by your standards? How much more?

  5. Gravatar of Benjamin Cole Benjamin Cole
    19. March 2020 at 19:25

    Btw— the word seems to be that chloroquine works against Covid-19.

    For those of you interested in a bit of harmless but possibly effective self-medication, drink quinine water. Rush to the grocery stores before it becomes sold out!

    President Trump actually addressed this drug chloroquine yesterday and made sense. The FDA is having Hissy-Fits, but this looks like the answer.

  6. Gravatar of Tuharsky Tuharsky
    19. March 2020 at 19:33

    “Deflation is not the optimal outcome for an adverse supply shock, as any EC101 textbook will tell you.”

    Not my EC101 textbook. Ssumner, please make the case that this is in fact the case, as I believe it underlies the reason why you are a fan of NGDP targeting as opposed to price level or any other level targeting regime. (Please note, I am thoroughly convinced of your arguments for level targeting. I believe your case for NGDP targeting, as opposed to any other form of level targeting, has not been made as explicitly.


  7. Gravatar of Benjamin Cole Benjamin Cole
    20. March 2020 at 04:12

    This guy has some interesting ideas, he calls forc hopper drops, and the Fed to buy and hold Treasuries in perpetuity and to say that is what it plans to do, thus effectively freeing up taxpayers.

    The Fed “by proclaiming that government bonds purchased under unconventional and radical rounds of QE will never be sold and will be replaced at maturity on the open market, central banks can easily “engineer” declines in public debt-to-GDP ratios that would then help make political room for fresh rounds of fiscal support.’


    Obviously, this is the way to go.

    This is no time for refugees from “The Weenie Bar” to run fiscal-monetary policy.

  8. Gravatar of Michael Rulle Michael Rulle
    20. March 2020 at 05:42

    I compare the comments—and the lead editorial—-in the WSJ versus here, and the focus is different. There is an increasing amount of emotional uptick on the Lockdown strategy. People are getting frustrated—-various versions of “cure is worse than the disease”—which it may be. In Scottlandia, the focus is on what to do given the lockdown. And Scott’s educated belief that we cannot get back to normal for a year or two is based on his assumptions that problems caused by virus and our (in)ability to handle it are the reasons behind his gloomy view——and he may be right.

    My perception of what the de facto head of the Coronavirus strategy (A. Fauci) wants to accomplish is to make sure our healthcare system does not get “overrun”. That is important because if it does, we may have serious outbreaks of social disorder. It would be more than a medical,problem. When Trump, Cuomo and Newsom all agree with Lockdown——that should tell us this is far more dangerous than the WSJ thinks.

    If Fauci’s objective is kept to one simple—-but perhaps difficult to achieve ——objective, ( no flooding the healthcare system) I am in full agreement.

    Beyond that, I am against any other objective. But we do not have the least clue if we can achieve the first objective.

    We don’t have tests—-or at least enough—-and not organized. Fauci keeps pointing to “next week” because companies like Abbot are promising results.

    The worse the economic impacts, the more danger we are in. A great Reagan quote is we are never more that one generation away from losing freedom. Today that seems optimistic——meaning one can easily imagine we are potentially 1 year away from losing freedom.

    Back to my point. We should have one objective only—of which their are components. Keep the health care system working——without a shutdown.

    Given the elderly literally have a 55 times greater chance of dying from this disease (if we believe Korea)—-elderly defined as 70+(death rate 7%)—-and sub 60 have a .13% death rate (again Korea)——one should think we might be able to handle this. My kids already (they live real close) won’t see me.

    We do not yet have a path—-and it can go in a variety of ways.

    But at least we should have a Central Bank who recognize that it really does require anything and everything we can do now.

    Using the Catholic Church analogy again—-I feel like they are saying—-“well, maybe we can have women Deacons, as long as they are widows without boyfriends”

  9. Gravatar of ssumner ssumner
    20. March 2020 at 09:37

    Ben, I stopped reading after the first sentence. Do you want to be taken seriously?

    LGS, I’d be thrilled with either 2% inflation or 5% NGDP growth, as each would be far better than what we’ll actually get (which is less than 2% inflation).

    Michael, Just to be clear, I am pessimistic about NGDP in future years, I’m agnostic on how bad and how long the epidemic will last. No one knows.

  10. Gravatar of Justin Justin
    20. March 2020 at 10:12

    It is wonderful that we have NGDP contracts funded right now. Also, in the past I have said that quarterly growth contracts are a non-optimal use of scarce prize moeny, and we should have instead consecutive YoY contracts. However, in this situation it is super useful to have them.

    Q1 could be a pretty good NGDP quarter, a lot of the durables purchases were already done when people finally realize the obvious peril we were in. Then an historic grocery buying spree began. Q2 will be the worst NGDP quarter on record, I reckon. Q3, I don’t know and no one else seem confident either based on the distribution on Hypermind. Q4, who knows.

  11. Gravatar of Ray Lopez Ray Lopez
    20. March 2020 at 10:22

    @Dr. Sumner – “Readers know that I’ve long recommended the Fed ask Congress for the ability to buy a wider range of assets during a crisis.” – do you really think the Fed has not bought junk paper, commercial paper, and does not have it in their $4.5T reserves? You’ve dodged this question repeatedly. You once said that everything in the Fed reserves (base money) is 100% sound, implying it’s all government paper. Since the Fed has never been audited, why not confess that you’re clueless about what the Fed has on their books? I would not be surprised if the rumored “PPT” (Plunge Protection Team) is a Fed Reserve fact and they even have stock index funds and futures on their books.

    Let’s face it, you’re pretty ignorant about how the Fed operates–as we all are–and the Ron Paul ‘audit the Fed’ proposal is probably a good idea, agree? PS–thanks for not banning me. Not that I care, but for the sake of your readers.

  12. Gravatar of Christian List Christian List
    20. March 2020 at 10:45

    The most respected German virologist says neither the malaria drug chloroquine nor the HIV drugs ritonavir/lopinavir are promising. Both are being investigated in clinical trials, but the results so far are not convincing. In other words, nearly my entire stock of drugs is useless.

    He sees remdesivir as the most promising option right now.

    One problem here seems to be the patent(s). The active ingredient is hardly available, the only manufacturer cannot keep up with the demand. You cannot buy remdesivir throughout Europe, it is not even approved.

    And the manufacturer only allows its use under a special protocol in people who are already seriously ill, and only in a small window of time. But in the case of acute virological diseases, the earlier the therapy is started, the better. The first 24 to 72 hours are often decisive.

    Another source says Israel and India have already lifted the patent protection on some drugs and now want to produce the drugs themselves.

    There would be more than enough work, just as there was more than enough work during WWII. The current problem is the transition.

    Arnold Kling put it just right:

    We are acting as if our biggest worry is how to get back to our “normal”, pre-war economy. Our biggest challenge instead is to win the war. By worrying about the conversion back to peacetime now, we are getting ahead of ourselves.

  13. Gravatar of foosion foosion
    20. March 2020 at 10:58

    The UK: Government to pay 80% of wages for employees not working, up to £2,500 a month, Chancellor Rishi Sunak says

  14. Gravatar of ssumner ssumner
    20. March 2020 at 16:11

    Christian, You said:

    “The most respected German virologist says”

    You mean that you trust him over Ben?

  15. Gravatar of Some of the bailout reading I compiled – Freethinking Economist Some of the bailout reading I compiled – Freethinking Economist
    29. April 2020 at 05:23

    […] Sumner on Yellen and Bernanke on monetary policy options […]

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