Bill Dudley on money and inflation

This paragraph in a FT article has me confused:

We still have people talking about money supply growth as a big driver of economic activity, when money supply is mostly driven by QE and QT. When the Fed’s doing QE, money supply grows fast; when the Fed’s doing QT, money supply shrinks. And those things may be correlated with economic activity. When you’re doing QE, you’re trying to stimulate the economy; when you’re doing QT, you’re trying to restrain the economy. But it’s not like money growth is directly responsible.

I don’t follow this. QE means increasing the monetary base. So Dudley is saying:

1. QE leads to a larger money supply.

2. QE is expansionary for the economy.

3. Money growth doesn’t matter.

The first two claims represent the classic monetarist position. The base impacts the broader money supply. Check. Increases in the base are expansionary for the economy. Check. But somehow the money supply doesn’t matter? Does the monetary base matter? If not, why is QE expansionary?

This all seems like word games. When thinking about causality one must think in terms of policy counterfactuals, otherwise any statement is simply incoherent. We saw a huge rise in M2 during Covid. Dudley seems to think that was caused by QE. Fine. But what about a counterfactual where the Fed does just enough QE to allow for only a small rise in M2. (Much less than they actually did.) Is Dudley denying that that counterfactual policy would have been less inflationary?

In the rest of the interview, Dudley insists that monetary policy is all about interest rates. That’s just wrong. Did low interest rates cause the German hyperinflation? Or was it printing a zillion German marks worth of currency?

PS. Later, Dudley says:

Continuing with QE did two things. Number one, it added more deposits to the banking system and probably created more temptations for banks like Silicon Valley Bank to take on excessive interest rate risk in their portfolio.

Now I’m even more confused, as that also sounds like monetarism. The monetary base matters, and bank deposits matter, but M2 doesn’t matter? M2 is composed of currency and bank deposits. Can someone help me out?



15 Responses to “Bill Dudley on money and inflation”

  1. Gravatar of MSS1914 MSS1914
    15. November 2023 at 12:54

    I read the article and here’s the best I can do to sum up. Dudley thinks:
    1.) QE increases the money supply
    2.) Due to IOER, QE may not be expansionary for the economy, since the IOER changes could result in more money being “parked” at the Fed and not loaned out to increase AD
    3.) Therefore, in an IOER regime, money supply growth may not result in inflation.

    To use your counterfactual, Dudley appears to be arguing that if the Fed did a “small” QE, resulting in a much lower M2 growth, then there would have been less inflation, assuming IOER regime was kept the same. If the IOER was changed, then, he seems to argue, its not clear what the inflationary impact would have been.

    Dudley seems to think that the Fed can hit their target inflation rate by increasing or decreasing IOER alone, with one exception. If the Fed lowers IOER to 0 and still is not hitting the inflation target they want, they can do QE to further put expansionary pressure on the economy.

    When they need to then pivot to lower the inflation rate, they do not need to do QT, they can simply raise IOER up from 0 however much they need to. This leaves the money supply growth unchanged but is contractionary to economy and should lower inflation. The risks of not doing QT though are interest rate risks such as paying out in IOER more than the Fed is receiving from the bonds it holds.

    As you can tell I’m not an economist. This is my lay interpretation of what he said in the article.

  2. Gravatar of ssumner ssumner
    15. November 2023 at 14:07

    OK, maybe I misread the first quotation. But in the second he seems to suggest QE is expansionary. This:

    “Continuing with QE did two things. Number one, it added more deposits to the banking system and probably created more temptations for banks like Silicon Valley Bank to take on excessive interest rate risk in their portfolio.”

  3. Gravatar of Solon of the East Solon of the East
    15. November 2023 at 15:47

    PPI for final demand declines 0.5% in October; goods fall 1.4%, services unchanged

    The Producer Price Index for final demand fell 0.5 percent in October. Prices for final demand goods decreased 1.4 percent, and the index for final demand services was unchanged. Prices for final demand rose 1.3 percent for the 12 months ended in October.


    The problem is?

  4. Gravatar of spencer spencer
    16. November 2023 at 05:47

    re: “But it’s not like money growth is directly responsible.”

    Look at Scott Grannis’ graph: “M2 Growth vs. Federal Budget Deficit”!

    Scott Sumner’s blog is on Scott Grannis’ recommended list.

  5. Gravatar of spencer spencer
    16. November 2023 at 06:37

    Dudley: “What really matters is the interest rate that the Fed sets on reserves.”

    Dudley is talking like outside money doesn’t matter. Directly stoking housing prices matters.

  6. Gravatar of spencer spencer
    16. November 2023 at 06:55

    RE: “it switched to QE for monetary policy reasons — trying to find another way of adding accommodation with interest rates at zero.”

    Yeah, you get “pushing on a string” like during the Great Depression, when the FED waits way too long to act, i.e., vastly undershooting N-gDp trends.

  7. Gravatar of spencer spencer
    16. November 2023 at 08:54

    Note that the 2-year rate-of-change in AD, which the FED can control, peaked in the 2nd qtr. of 2006 @ 12%. Bernanke let it fall to 8% by the 4th qtr. of 2007 (or by 33%). N-gDp fell to 6% in the 3rd qtr. of 2008 (another 25%). N-gDp then plummeted to a -2% in the 2nd qtr. of 2009 (another – 133%). That’s why the FED must target N-gDp.

  8. Gravatar of spencer spencer
    16. November 2023 at 10:48

    If you use the same metric, the FED would have started tightening in the 4th qtr. of 2020.

  9. Gravatar of spencer spencer
    19. November 2023 at 07:51

    Draining the O/N RRP facility is the monetization of the Federal Deficit.

  10. Gravatar of spencer spencer
    20. November 2023 at 07:42

    The issue is that MMMFs are nonbanks, not banks (as the FED identifies them). MMMFs balances are erroneously included in the tabulations of the money stock. That would be double counting if the MMMFs balances weren’t subtracted out of the DFIs balances. But I’m not going to check it because I doubt that there are two separate errors.

    It’s virtually impossible for the Central Bank or the DFIs to engage in any type of activity involving non-bank customers without an alteration in the money stock.

  11. Gravatar of David S David S
    20. November 2023 at 11:06

    Bleg for a post on Javier Milei. I know you posted on him a few months ago, but now that he’s won, what should he do? Or, try to do, because I’m not certain how much power he’ll have when it comes to monetary policy.

    I’m predicting an attempt at Turkish style strategy, which will fail.

  12. Gravatar of Edward Edward
    21. November 2023 at 00:01

    Scott, Javier Millei has won in Argentina.


  13. Gravatar of ssumner ssumner
    22. November 2023 at 14:02

    I did a post on Argentina a couple days ago.

  14. Gravatar of Sara Sara
    25. November 2023 at 23:45

    Sumner is anti-millei.

    In one hate-filled post, not too long ago, he went on a tirade against the Mises Institute, which has become the biggest advocate of anarcho-capitalism, and Millei is an anarcho-capitalist.

    Not a fan of the anarcho-capitalists, but at least they have coherent view.

    Sumner doesn’t have a coherent philosophy. He’s more or less a utilitarian, very willing to use anyone as a means to his end. He is a pro-romney, pro-bolton (Not the beautiful singer), but the Iraqi war liar and civilian killer, and pro-cheney, a corrupt Wyoming family that has been booted from politics for their pay-to-play, backdoor “grants”, and endless taxpayer subsidies.

    Sumner rejects the rights of states under the constitution (abortion), laments that the electoral college exists, but only when his candidate loses. For further information see his 2016 November posts in which he rails against the electoral college, which was designed by the framers to protect rural areas from the tyranny of the majority. He also believes that every country should be part of NATO which would logically translate to a one-world-NATO: that is, a one world government (pretty scary)

    In other words, he’s pro-globalist, pro-big government, pro supranational, anti-liberty, anti-millie, economist.

    And if that wasn’t odd enough, he calls himself “elite”

    Mileii would never call himself “elite”

    He’s not so arrogant to think he’s better than everyone else, or that he can plan their money supply with perfect precision, which is precisely why he subscribes to the free market, anti-Fed view, which is the only view that permits liberty to exist at all.

  15. Gravatar of ssumner ssumner
    26. November 2023 at 11:27

    Sara, You said:

    “Sumner is anti-millei.”

    Perhaps, but I’m pro-Milei.

    Almost all of your other comments incorrectly describe my views. Why are you so inaccurate? Is it that hard to read my posts?

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