Four facts about monetary policy

Here are four facts about monetary policy:

1.  The Fed’s official goal is 2% headline PCE inflation.

2.  PCE headline inflation has averaged 1.12% over the past 8 years.

3.  Thirty year TIPS spreads are 1.66%, equivalent to 1.4% PCE inflation.

4.  Top Fed officials are discussing the need to tighten monetary policy in the near future.

Three more bonus facts:

1.  The longest expansion in US history lasted 10 years.

2.  We are more than 7 years into the current expansion.

3.  The Fed has no credible plan for dealing with the next zero bound event.

PS.  JP Koning directed me to Ricardo Reis’s new paper on monetary policy.  In section 5.2 he revives Robert Hall’s 1983 JME proposal to index the interest rate on reserves to the price level, which is a sort of “futures” approach to stabilizing prices, but using the demand side rather than the supply of money approach that I’ve focused on.  For decades I’ve been telling people that Hall’s paper was brilliant, and unfairly ignored.  Great to see it finally getting some well-deserved attention.

PPS.  Reis cites Hall (1997), but really needs to cite the 1983 paper.



24 Responses to “Four facts about monetary policy”

  1. Gravatar of Scott N Scott N
    31. August 2016 at 19:05

    With regard to the Fed’s 2% inflation target, Narayana Kocherlakota recently explained that the Fed knows how to hit it’s target.

  2. Gravatar of Benjamin Cole Benjamin Cole
    31. August 2016 at 21:35

    No worries.

    The Fed has victoriously declared defeat!

    Evans of Chicago Fed says the outlook is for low inflation, low interest rates and low growth forever. So there is nothing the Fed can do.

    Rosengren of Boston Fed says there is too something the Fed can do: raise rates to avoid overheating.

    The guy who called it right for the last several years: Scott Sumner.

    Bond fund investment managers could have read Sumner for free, and made a mint. Oh, and helped clients too.

  3. Gravatar of Gary Anderson Gary Anderson
    31. August 2016 at 21:35

    @Scott Sumner:

    Jeremy Stein said this:

    Mr. Stein, known for staking out contrarian views as a policy maker, continues the trend with a new working paper that argues the Fed’s approach to interest rate increases may have been too gradual and predictable in the past. The paper is scheduled to be presented on July 10 at a National Bureau of Economic Research conference in Cambridge, Mass.

    “Society would be better off appointing a central banker who cares less about the bond market,” write Mr. Stein and co-author Adi Sunderam.

    But, Scott, that ain’t gonna happen. The Fed is perfectly happy if bond demand is through the roof. I wonder how negative it could go before they would be concerned.

  4. Gravatar of H_WASSHOI (MM lover, economist,NGDP futures 2015 2nd winner) H_WASSHOI (MM lover, economist,NGDP futures 2015 2nd winner)
    31. August 2016 at 23:09

    I fear 40% fall of stock prices

  5. Gravatar of Chuck Biscuits Chuck Biscuits
    1. September 2016 at 04:13

    Slightly OT, but the masks are starting to come off:

    Won’t be long before Sumner jumps on board as well.

  6. Gravatar of Chuck Biscuits Chuck Biscuits
    1. September 2016 at 04:15

    @Scott N

    Wow, a former Fed official who mouths pro-Fed propaganda? What a shocker. But what’s the market monetarists’ excuse?

  7. Gravatar of Ray Lopez Ray Lopez
    1. September 2016 at 04:26

    Another (inconvenient) fact: money is neutral, short and long term, so the Fed doesn’t matter, nor do Sumner’s ravings.

  8. Gravatar of ssumner ssumner
    1. September 2016 at 04:50

    Scott. That’s not at all what I recall.

    Chuck, You are entering Ray and Gary levels of stupidity. I’m probably the most pro-cash blogger in the entire blogosphere. I’ve done posts suggesting that we should go back to when the base was 100% cash. I’ve done posts criticizing the government for going after people who use cash—even so far as defending Denny Hastert.

    Are you actually Ray posting under another name?

  9. Gravatar of bill bill
    1. September 2016 at 05:01

    Serious thought: The Fed should not be allowed to pay IOR in excess of any Treasury rates (bills, notes or bonds).

    Speculative thought: The Fed should not be allowed to pay any IOR when core PCE is below target. And maybe even require negative IOR when it is so far behind a PCE level target.

    We definitely need level targeting – if we can’t get NGDPLT, at least a price level target would be an improvement.

  10. Gravatar of Todd Ramsey Todd Ramsey
    1. September 2016 at 05:59

    Scott, does this paper on expected future primary surplus/deficit jibe with your understanding?

    The paper seems easy to understand. If you can find time to connect the dots for us laypeople, I would greatly appreciate it. If not, I certainly understand. Thanks.

  11. Gravatar of rayward rayward
    1. September 2016 at 06:25

    You may have already commented and I missed it, but what do you think of Roger Farmer’s idea of raising interest rates while lowering the rate paid on reserves (so they match) and (this is his really big idea) the Fed intervening in the stock market.

  12. Gravatar of ssumner ssumner
    1. September 2016 at 08:39

    Bill, Those seem reasonable.

    Todd, I’m not a fan of the fiscal theory of the price level. Inflation has averaged 2% since 1990:

    1. Most economists say the Fed did that.

    2. FTPL supporters say Congress did that.

    Sorry to be rude, but the idea that Congress produced 2% trend inflation seems kind of laughable.

    That paper has lots of problems, starting with the very first paragraph—which completely misinterprets Keynesian and monetarist views about the stance of monetary policy. The concluding paragraph about Hume is also completely inaccurate, as he did not create a fiat money theory.

    We saw under Reagan that monetary policy, not fiscal policy, determines inflation. The Abe government showed this again, when it increased VAT rates.

    Rayward, I certainly favor lowering IOR–to zero. The fed funds target should be set at a level consistent with the Fed’s goals. Right now, I don’t see a need for a rate increase. Nor do I favor having the Fed buy stocks.

  13. Gravatar of Gary Anderson Gary Anderson
    1. September 2016 at 09:31

    But @Scott, you never talk about demand for bonds. You can’t hardly be in the conversation if you don’t do that. You never speak to the relentless decline in yields however you have spoken about the difficulty of raising even .25, or maybe that was the other Scott.

    It isn’t stupid to talk about bond demand, Prof.

  14. Gravatar of Chuck Biscuits Chuck Biscuits
    1. September 2016 at 09:56


    I’m sure the child molesters of the Republican Party appreciate your support.

    What of Kocherlakota’s argument? Since you believe rates are high relative to the natural rate, which seems barely positive (if that), how do you get rates below that in the presence of cash?

  15. Gravatar of Gary Anderson Gary Anderson
    1. September 2016 at 10:17

    Chuck, Sumner says he loves cash, but he loves Miles Kimball too. Miles has a sneaky way of destroying cash, as I wrote here:

  16. Gravatar of Gary Anderson Gary Anderson
    1. September 2016 at 10:22

    And Chuck, you will notice that I defended Prof’s statement that he would not want the elimination of cash. I still believe that. But you bring up an interesting dilemma.

  17. Gravatar of Ray Lopez Ray Lopez
    1. September 2016 at 12:32

    Prof Sumner: please read this paper and comment. And no, there’s only one Ray Lopez (TM), and always will be!

    OT- this Tyler Cowen linked paper “Prices and Policies- A Primer on the Fiscal Theory of the Price Level, Torgeir Høien, SKAGEN Funds, Stavanger, Norway, 29 August 2016” is a step in the right direction, a model that can be tested on historical data and falsifiable. It’s a simple model, apparently not geared for the real world, but it makes sense that the expected fiscal policy of a nation determines the price level of money, not just Hume’s Quantity Theory of Money (as adopted by Friedman, Sumner, et al)

  18. Gravatar of ssumner ssumner
    1. September 2016 at 17:02

    Chuck, Raise the natural rate, obviously.

    Ray, I already commented on that paper.

  19. Gravatar of Chuck Biscuits Chuck Biscuits
    1. September 2016 at 18:15


    That’s a very libertarian position.

  20. Gravatar of Brian Brian
    2. September 2016 at 13:32

    The Fed’s website says “The Fed often emphasizes the price inflation measure for personal consumption expenditures (PCE), produced by the Department of Commerce, largely because the PCE index covers a wide range of household spending. However, the Fed closely tracks other inflation measures as well, including the consumer price indexes and producer price indexes issued by the Department of Labor.”

    From that quote I didn’t arrive at the impression that the Fed’s target is 2% headline PCE. May be they target close to but less than 2% headline CPI because it’s more politically acceptable to use a measure that doesn’t “require” that consumers change their consumption mix when relative prices change. It’s rational to change the consumption mix and the mix will change but perhaps it could be argued that PCE inflation measures something that is similar to but not quite the increase in prices. Isn’t it more like “experienced inflation” but not actual inflation?

  21. Gravatar of ssumner ssumner
    2. September 2016 at 17:48

    Brian, They do target PCE inflation, not CPI inflation.

  22. Gravatar of Student Student
    4. September 2016 at 09:59


    Are you ever going to make an actual argument rather than just make assertions? Someone with your IQ is capable of making an actual argument, right?

    It’s so easy to write… Money is neutral, Scott is an idiot. It’s hard to actually make that case with novel argumentation, given the evidence is (at present) overwhelmingly not on your side. You seem to have all this free time. Do something productive with it smarty pants.

  23. Gravatar of Student Student
    4. September 2016 at 10:00

    And I am not talking about linking to something someone else already wrote.

  24. Gravatar of analyst analyst
    30. September 2016 at 11:07

    Mean regression would suggest that a period of contained deflation is followed by a period of uncontained inflation. That would also suggest stagflation, which would leave CBs unable/unwilling to raise interest rates. At least something along those lines appears to be the general expectation in the trader/investor community. Perhaps some supply chock such as China or oil (or politically motivated protectionism) will trigger the inflation.

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