Do your job or resign
Reuters has an article discussing the views of Kansas City Fed President Esther George on the Fed’s inflation target:
In fact, she suggested, inflation could sink to well below the Fed’s 2% target and she might remain unfazed.
“I find it more realistic to accept that there will be both temporary and persistent fluctuations around this long-run target and, as long as they don’t exceed a reasonable threshold — perhaps as big as 50 or even 100 basis points — they should be tolerated, depending on broader economic conditions,” she said.
That view is at odds with concern expressed by much of the Fed leadership over years of missing the central bank’s 2% inflation goal.
If that’s her view, then she should resign.
It’s fine to oppose the 2% inflation target. If I were at the Fed I’d argue for changing the 2% inflation target to a 4% NGDP level target. But as long as the 2% inflation target is official Fed policy, FOMC members have an obligation to try to achieve the target. George’s views are not acceptable.
This is one reason why level targeting is superior to inflation targeting. It forces everyone at the Fed to buy into the official policy. Unfortunately, growth rate targeting allows Fed officials to advocate instrument settings that result in inflation rates that are consistently below target.
This is also wrong:
Kansas City Federal Reserve Bank President Esther George on Sunday rejected the notion that the U.S. central bank should cut interest rates to try to boost low inflation, which she said is largely a result of global forces that U.S. monetary policy can do little to counter.
Argentina, Zimbabwe, Venezuela, Turkey and many other countries have no trouble creating inflation despite “global forces.”
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6. October 2019 at 23:10
Esther George has an MBA from the University of Missouri–Kansas City. I think she knows what she’s talking about. You know more than an MBA??
7. October 2019 at 02:12
Good point on Venezeula, etc.
7. October 2019 at 02:41
Kansas City Federal Reserve Bank President Esther George on Sunday rejected the notion that the U.S. central bank should cut interest rates to try to boost low inflation, which she said is largely a result of global forces that U.S. monetary policy can do little to counter.–Reuters
It ain’t only George. Central bankers globally are saying long-term interest rates and inflation are set globally, including Mark Carney of the Bank of England. The latest hip thing is to talk about r* and how it immutable to the actions of a lone central bank. BIS officials are advising use of the “fiscal space.”
One can view this as:
1. Responsibility-dodging.
2. Some measure of truth-telling. After all, we live with globalized real and capital markets, where money crosses borders at the click of mouse.
3. Old-fashioned tight-moneyism masquerading as policy thought.
Interestingly, Wall Street is calling for money-financed fiscal programs.
7. October 2019 at 04:30
It seems to me that the low inflation story still dominates public discourse but has not been true for some time. Core inflation has been above 2% since March 2018: https://www.usinflationcalculator.com/inflation/united-states-core-inflation-rates/. If the Fed’s policy is to target 2% inflation, it seems that they have achieved or even exceeded it.
7. October 2019 at 05:35
Good post. These things must be said over and over today for some reason.
7. October 2019 at 06:20
Wait, how does a Fed President get it into their head that “low inflation… is largely a result of global forces that U.S. monetary policy can do little to counter?” Am I misunderstanding something here?
7. October 2019 at 07:24
Mark,
Fair point.
Two (or three) caveats.
PCE is the target and it tends to run about 0.3% below CPI.
The target is actual PCE, not core. The value of core is that it is a better predictor of future inflation than current actual is.
As of Friday, the market is predicting 1.27% CPI over the next 5 years (so about 1% PCE).
We really need level targeting. I’d prefer NGDPLT, but if we had to choose between a price level target based on 2% inflation or an NGDP target with the current bygones are bygones approach that lets all the Fed members indulge their personal theories on all manner of things impacting the rate of growth on any given date, I’d choose a level target all day long.
7. October 2019 at 07:49
@Luc Mennet and ssumner:
Isn’t referring to ‘global forces’ another way of pointing out how the dollar being the world’s most important currency affects inflation? Venezuela, Turkey, Argentina etc. have no problem generating inflation and plummeting currencies (which of course they probably do not want) because outside of those smallish economies, those currencies have no value.
The world always wants dollars, and that keeps the dollar strong and inflation low.
7. October 2019 at 07:50
Mark, That’s the CPI. The Fed targets PCE inflation, which is running below target.
Luc, That surprised me too.
7. October 2019 at 08:38
These statements from a Fed President are especially worrisome given that the Fed Funds rate are well above non-zero.
In an above-zero environment, there should be absolutely no ambiguity: the central bank can control aggregate demand using short-term rates. Conventional wisdom dictates that if inflation is below target, it’s because rates were raised too quickly or weren’t cut quickly enough. “Conventional”, Taylor-rule-like, monetary policy works. I thought that this was well-accepted by economists. It Esther George claiming otherwise?
(Of course, in a zero-or-negative interest rate environment, things become murkier, and there is less of a consensus.)
7. October 2019 at 08:38
These statements from a Fed President are especially worrisome given that the Fed Funds rate are well above **zero**.
7. October 2019 at 10:26
Former Johnson economic adviser and some say candidate for next Gov of B of E, Gerard Lyons, told Bloomberg today that B o E should reconsider its mandate including looking at ‘moneyGDP targeting’. Some background on Mr Lyons here. https://en.wikipedia.org/wiki/Gerard_Lyons
7. October 2019 at 17:21
It seems a bit of a recurring sadness: significant Federal Reserve figures who do not seem to know what they are talking about.
7. October 2019 at 17:59
Total incompetence. I might give her some slack if the yield curve were upward sloping, but it’s sharply downward sloping, and CPI futures are well below 2%. So … absolutely she should resign.
Why is she not FIRED? What is her alibi? I guess it’s the dual mandate. That thing is annoying.
8. October 2019 at 11:00
Thanks wlb. I’ll do a post.
9. October 2019 at 13:29
Scott, glad you have come to understand the 4% NGDPLT is more realistic than 5%.
4% REALLY lets the conservatives have a true RDGP target of 4% -they can imagine it. They can squint and see 0 inflation.
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I’ve asked about this for years, but it’d be great to see what I assume is a month-to-month “boat” correction would look like just on paper.
The starting point is today, the level target is 4% going out say 5 or 10 years like a laser line.
So for each month ongoing the Fed is making minor adjustments always pulling the wheel back towards the laser line.
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Scott is this right? Is it more like quarter by quarter?
And whats official measure of GDP, how do you deal with the endless revisions?
10. October 2019 at 11:02
Morgan, You said:
“you have come to understand”
You are so clueless on this. I have not “come to understand” anything of the kind.
I know you like Trump, but do you have to lie like him too?