Concrete steps are not enough, we need regime change

Central banks are conservative; they don’t like change. I worry the Fed will respond to this crisis with concrete steps like liquidity injections during periods of market turmoil, and interest rate cuts. Those steps may be beneficial in isolation, but they won’t do much.

We need a regime change; at a minimum an immediate switch to level targeting. Perhaps they could start the PCE clock at December 2019, and promise to target the 5-year forward PCE price index along a 2%/year trend line.  (A total increase of 10.4%.)  Then promise to do whatever it takes.

Time for the expectations fairy:



26 Responses to “Concrete steps are not enough, we need regime change”

  1. Gravatar of Michael Sandifer Michael Sandifer
    15. March 2020 at 11:38

    Yes, this is exactly what should be tried, before more extreme solutions such as helicopter drops. If we need to do helicopter drops at some point, I like Beckworth’s idea. If we do, it will be due to a need to establish Fed credibility.

    My biggest concern economically is that we end up in an even worse post-crisis depression, in which most of the problem is AD-related, but people will claim supply-side secular stagnation just ends up being worse than expected.

    People don’t seem to value market expectations for long-run growth pre-crisis, as we learned post-Great Recession.

  2. Gravatar of ssumner ssumner
    15. March 2020 at 11:45

    Michael, We won’t ever “need” helicopter drops. If we decide to do them it’s because we are too stupid to utilize monetary policy appropriately.

  3. Gravatar of Kgaard Kgaard
    15. March 2020 at 11:50

    Scott … Powell is clueless about this no? Isn’t it only really Clarida who understands the concept of NGDP targeting (and maybe one other dove)? Seems like a long way from here to there.

    What if they just kept upping the ante on QE? Kept buying more stuff? They were willing to do $5 trillion in repos so they don’t seem to be shy about big numbers. Perhaps the fact that nobody bit on the repos told them they needed to get more creative?

  4. Gravatar of Market Fiscalist Market Fiscalist
    15. March 2020 at 12:04

    Given that we may very well see a significant decline in RGDP this year isn’t a 2% PCE target likely to be (accidentally) deflationary ? Shouldn’t we be pushing for an NGDPT with a commitment to stick to it even if leads to temporary double digit inflation?

  5. Gravatar of The Freeconomist The Freeconomist
    15. March 2020 at 12:49

    Hi Scott,

    I have always agreed with you that the Fed’s monetary policy regime should change (ideally to NGDPLT).

    But wouldn’t you agree that in the special case of the corona shock it also matters how the central bank achieves the stabilisation of NGDP?

    … Normally, keeping NGDP stable is the only important thing for monetary policy, while the choice of monetary policy instrument(s) to achieve this goal is not relevant. – But in the case of a temporary shutdown of the economy (resulting, in this case, from measures taken to contain a pandemic), isn’t the provision of credit to businesses which had to shut down the best method to stabilise NGDP?

    By providing credit to businesses during the shutdown the central bank can enable a restart of the economy at its pre-pandemic level of productive capacity once health experts have given the green light for that to happen.

    Let’s assume the central bank chose a monetary policy measure other than lending in order to stabilise NGDP, for example sending people checks. “Success” of this measure would mean that demand for products and services from that part of the economy that is not shutdown would increase enough to make up for zero demand for products and services from the part that is shut down, thereby keeping NGDP (in the economy as a whole) unchanged.

    But given that, in the short term, productive capacities are more or less fixed, this means that the additional demand for the products and services from the part of the economy that is not shut down would merely result in higher prices. Meanwhile many of the businesses in the part of the economy that is shutdown would run out of cash and go bust, hurting the long-term productive capacity of the economy.

    My conclusion would be that the most important task for the Fed now is to make sure that businesses have access to credit, enabling them to pay out wages and stay afloat during the shutdown.

    Would you agree with this? Or is there something I’m missing or not conceptualising correctly?

  6. Gravatar of Garrett Garrett
    15. March 2020 at 12:51

    It’s painful watching breakevens get tighter and tighter. The spread is inverted through the 2 year. Right now the 2y spread is -15 bps and the 3y spread is 6 bps. Granted TIPS reflect headline CPI so it includes the impact from oil.

    This is the implied headline CPI from breakevens:

    2020 -0.65%
    2021 0.36%
    2022 0.47%
    2023 1.25%
    2024 1.25%
    2025 0.88%
    2026 0.88%
    2027 1.58%
    2028 1.58%
    2029 1.58%

    There’s illiquidity in the 6y and 7y because the Treasury only issues 5s/10s/30s, but it’s clear that the market isn’t pricing in level targeting right now.

  7. Gravatar of Garrett Garrett
    15. March 2020 at 12:55

    Put another way, the 10y breakeven is 0.92%. That means no catch-up inflation. And with negative real growth 2020 could see negative NGDP.

  8. Gravatar of ssumner ssumner
    15. March 2020 at 13:12

    Kgaard, Time will tell.

    Market Fiscalist, Yes, NGDPLT would be much better, but even PLT would be much better than what we are likely to get. See Garrett’s comment.

    FreeEconomist, I’d rather have commercial banks (and bond markets) provide the credit, while the Fed provided enough money to keep NGDP growing. I’m not sure if the Fed is well equipped to provide credit to millions of small firms. Who determines who gets the credit?

    Garrett, I agree.

  9. Gravatar of Ray Lopez Ray Lopez
    15. March 2020 at 13:19

    @ssumner – “Kgaard, Time will tell.” – that’s it? That’s all you’re going to say about the Fed agreeing to buy $5.5T in paper? Trading good greenbacks for junk IOUs issued by banks? Wow. Are you for real? So you do or don’t think injecting $5.5T, which is more than doubling the Fed balance sheet, is sufficient? Give us a concrete answer please. Your ability to not just talk from both sides of your mouth but also not give a straight answer is amazing.

  10. Gravatar of Michael Sandifer Michael Sandifer
    15. March 2020 at 13:25


    Yes, you convinced me many years ago that “concrete steppes” are only needed to the degree that credibility is lacking.

  11. Gravatar of Michael Rulle Michael Rulle
    15. March 2020 at 13:38

    Well, I assume you are right, but I don’t think they would have done this 2 years ago. Summer minus 2 years might be the best we can hope for

  12. Gravatar of Ram Ram
    15. March 2020 at 13:47

    The statement today is so, so close. They said:

    “The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”

    They should have said:

    “The Committee will maintain this target range until the PCEPI meets or exceeds a 2% per year growth path, beginning at the 12/19 level.”

    The problem is “expects” and “on track”. The FOMC shouldn’t expect anything—it should tell us under what conditions it will move from its current stance. And if that condition is being “on track”, we need to know what that means.

    This was a lot closer to what I hoped for than what I expected. But in this business it’s only As and Fs, no Cs. There’s still time to straighten this out at the press conference, but I’m guessing if he had the support to be clearer they would have made the statement clearer.

  13. Gravatar of dlr dlr
    15. March 2020 at 14:29

    ironically they do have one concrete step available that has no natural ceiling: IOR. the fed could almost surely push us into an neofisherian equilibrium if it announced it was rasing IOR with the express intention of raising the future price level. alltough a higher IOR doesn’t change the current demand for the medium of account, it does raise the expected future price level if not offset, just like a stock dividend. i am not a neofisherian. i don’t think we are in that equilibrium. but that is solely because of how the fed communicates about IOR, not because of any inherent liquidity effect (as long as there is no significant gap between IOR and T-bills, if there were marginal convenience yield on base money, it would be different).

  14. Gravatar of Kgaard Kgaard
    15. March 2020 at 14:30

    Ram — Yeah I felt the same — it’s like they are inching their way there but don’t want to make the leap because then they’d be boxed in and HAVE to do what they are SUPPOSED to do.

  15. Gravatar of Brian Donohue Brian Donohue
    15. March 2020 at 15:06

    Sure, but today Powell showed some Chock Norris-like spine. Good job.

  16. Gravatar of dlr dlr
    15. March 2020 at 15:14

    it’s better than nothing but this ain’t chuck norris.

  17. Gravatar of ssumner ssumner
    15. March 2020 at 15:40

    Everyone, I reacted to today’s move over at Econlog.

  18. Gravatar of Benjamin Cole Benjamin Cole
    15. March 2020 at 15:59

    I wouldn’t call a move to helicopter drops “stupid.” After all, highly intelligent observers, such as Stanley Fisher and David Beckworth, were calling for helicopter drops as an option even before the coronavirus panic hit.

    To be sure, the Federal Reserve should target a robust nominal GDP growth target at this time, and make it public.

    Follow with aggressive quantitative easing. Rates are already at zero.

    But the Trump administration’s plan for a payroll tax holiday is a good one and the Fed should accommodate it, preferably by printing money and placing it into the Social Security trust fund to compensate for lost tax receipts. This may take some new authority, but perhaps Congress is in the mood to grant new authority.

    I’m not sure that helicopter drops on Wall Street (conventional quantitative easing) will accomplish what helicopter drops on Main Street can.

    Congratulations, fear-mongers. You rule.

  19. Gravatar of Thaomas Thaomas
    15. March 2020 at 16:01

    PL targeting is clearly better than what we’ve had since 2008, but shouldn’t the Fed be doing NGDP targeting, which with real income falling implies more than 2% inflation. If they need a public, shouldn’t they work out the price level implications of NDGP targeting and announce the PL target?

  20. Gravatar of ssumner ssumner
    15. March 2020 at 17:11

    Thaomas, Yes.

  21. Gravatar of foosion foosion
    15. March 2020 at 17:20

    Did anyone ask about level targeting at today’s press conference? I didn’t think so, but might have missed it.

    Powell explicitly said the Fed was acting to keep the treasury and MBS markets liquid to keep credit flowing. He said more was the job of fiscal policy and especially healthcare.

    I’m not clear on how we’re going to have much of an economic recovery until the virus abates. Mass shutdowns and social distancing don’t seem conductive to a strong economy, whatever monetary and fiscal policy might be.

  22. Gravatar of foosion foosion
    15. March 2020 at 17:24

    Powell also said that Q2 GDP would be lower than Q1. This seems a statement that we’re in a recession and it seems odd for a Fed chair to say that so early in the cycle.

  23. Gravatar of John Winthrop John Winthrop
    15. March 2020 at 19:27

    Great blogging as always, Scott. While I agree with your ideas regarding monetary policy, I still despair regarding their prospects for being implemented. Even this big of a shock hasn’t seemingly forced the Fed to look seriously at true regime change.

    Off topic: Where is the Benjamin Cole YouTube channel? I think he’s an interesting long-standing commenter, had no idea he had a channel, and I can’t find it myself.

  24. Gravatar of Ray Lopez Ray Lopez
    15. March 2020 at 23:50

    @John Winthrop – see: The Tin-Foil Hat Economist for Ben Cole’s vlog. It’s not “Benjamin Cole” which is some motorcycle enthusiast.

    Here’s how to get attention from Sumner: “Scott, don’t you think the Fed should be doing NGDPLT now?” Sumner: “Yes, [poster’s nym here] I do.” It’s all so grade school-ish, like a bunch of barking seals, all the commentators trying to be teacher’s pet, none of them exhibiting independent thought.

  25. Gravatar of Thaomas Thaomas
    16. March 2020 at 07:52

    “Did anyone ask about level targeting”

    Larger question, “Why do we have such economic ignoramuses as economic journalists?

  26. Gravatar of dtoh dtoh
    16. March 2020 at 12:19


    We’ll be looking at a drop of 5 to 10% in RGDP next quarter.

    The whole point of monetary policy is to overcome wage and price stickiness.

    We will need PCE target of 10 to 15% over the short term

    Or better yet… target NGDP.

    Let the Fed buy anything.

    Fed should immediately move to negative IOR.

    To prevent cash hoarding, Fed should charge a fee for net incremental cash withdrawals. Banks will pass this on in the form of a fee for cash withdrawals and a premium for cash deposits.

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