I demand perfection from the Fed

I don’t favor a 2% core inflation target, but if that were the target, then I’d want the Fed to set policy at a level expected to produce 2% core inflation.  Not 1.99% expected core inflation, and not 2.01% expected core inflation.  Precisely 2.0%.  Even better (and more consistent with the Fed’s dual mandate) would be a 5% target for expected NGDP growth.

Dallas Fed President Richard Fisher is one of the more colorful members of the FOMC.  Sort of the Rick Perry of Fed officials.  Here he indicates that he sets the bar for Fed policy at a level slightly below perfection:

Oct. 3 (Bloomberg) — Federal Reserve Bank of Dallas President Richard Fisher said the central bank has “plenty of ammunition” left if the economic situation turns “horrific,” while reiterating his view the Fed has provided enough stimulus.

One searches hard for analogies:

1.  Time to take a shower and cut my hair when my wife regards my appearance as horrific?

2.  Time to clean the bathroom when its smell is horrific?

3.  Time for the captain to adjust the steering wheel when the ship is off course to a “horrific” extent?

Maybe commenters have some better suggestions.

BTW;  What does “enough stimulus” mean? I thought Fisher believed the Fed had provided too much stimulus.  Wouldn’t the “horrific” situation be hyperinflation, calling for less ammunition?

HT:  Steve.



43 Responses to “I demand perfection from the Fed”

  1. Gravatar of Silas Barta Silas Barta
    5. October 2011 at 13:02

    How much monetary stimulus does it take to find an innovative way to employ the labor of all the uselessly-educated law graduates out there?

  2. Gravatar of bill woolsey bill woolsey
    5. October 2011 at 13:33


    Sumner (nor I) advocate using monetary policy to target the unemployment rate, the employment rate, or real GDP.

    And certainly not the unemployment rate for specific trades.

    My view, anyway, is that the best envirnoment for adjustments to be made, including unemployed lawyers accepting some alternative career, is slow, steady growth in money expenditures on output.

    Having all prices and wages fall to a lower growth path so that the real quantity of money will rise to meet an increase in demand is just not desirable. And so, the nominal quantity of money should always rise to meet the dmeand, however high, conditional on slow steady growth in nominal expenditure on output.

    If this condition is violated–spending falls below that growth path, it should be returned as soon as possible.

    There is no notion that this will result in zero structural unemployment.

  3. Gravatar of Dan Kervick Dan Kervick
    5. October 2011 at 13:35

    Scott, when Fed officials make these statements about having plenty of ammunition left and not being out of bullets etc. you always take them at their word, and then assume they are not doing their job since they have all this ammunition, but they aren’t using it.

    But what if they don’t really believe they have lots of ammunition left – at least of the kind the Fed can deploy by itself? Maybe the statements about having more ammunition left are just designed to sooth panicky folks inclined toward bearishness who believe with a childlike faith that the Fed is in charge and has some reserve ammunition left in reserve to use if things get really, really bad.

    Most of this so-called ammunition consists in placebo pills that don’t appear do much of anything. What efficacy they have consists only in the fact that some market participants believe they work.

  4. Gravatar of Morgan Warstler Morgan Warstler
    5. October 2011 at 13:43

    LISTEN to the interview I posted a link to it earlier.

    He’s pretty damn clear.

    1. Right now things are moving forward. Slowly, but still forward.
    2. The Fed has provided liquidity. It is not being lent out for a number of reasons.
    3. It is now time for the gvt. to get its fiscal stuff straight, he’s says OUT LOUD that everybody always asking about the Fed keeps the Congress and Administration from acting.

    He says OUT LOUD they could always print money, but that he doesn’t see that being needed right now.

  5. Gravatar of Silas Barta Silas Barta
    5. October 2011 at 13:57

    @bill_woolsey: Sumner (nor I) advocate using monetary policy to target the unemployment rate, the employment rate, or real GDP.

    That wasn’t my point. My point was that monetary stimulus cannot make someone figure out optimal uses of resources necessary to establish sustainable new modes of production, and if difficutly of figuring out what to do with all the useless factors of production is the real cause of our problems, then monetary stimulus can’t possibly help.

    My view, anyway, is that the best envirnoment for adjustments to be made, including unemployed lawyers accepting some alternative career, is slow, steady growth in money expenditures on output.

    The problem isn’t just getting them to accept a different job, but for someone to produce a different job that intelligently uses their skills.

  6. Gravatar of grcridlan grcridlan
    5. October 2011 at 14:16

    Barta: Enough to reduce the average salary of lawyers to the point that the lower quartiles of law graduates are worth the money. This may or may not happen (even under nominal GDP targeting). Structural unemployment is when it doesn’t happen. This would happen much less often in an environment of “normal” (4-6%) NGDP growth.

    It isn’t a problem of optimal resource allocation. We have markets for that (and we emphatically do not have banks or central banks for that). It’s a problem of nominal growth. We either need to get richer so that those people are worth more, or debase our currency so they don’t realize how little they’re worth.

  7. Gravatar of Jason Odegaard Jason Odegaard
    5. October 2011 at 14:18

    @Silas – nominal wage rigidity causes unemployment in the short-term when the money supply contracts. So shifting employment to a field that intelligently uses their skills (which often involves moving to one or more different jobs) happens more easily when the money supply is growing slowly and steadily. Central banks can offset the short-term contractions/expansions to keep this money supply growing slowly and steadily, and I think that is the point Bill is trying to make.

    Monetary policy doesn’t address structural changes. But it makes structural changes far, far easier.

  8. Gravatar of StatsGuy StatsGuy
    5. October 2011 at 14:20

    The military will dedicate more resources to the War in Afghanistan if events turn horrific.

  9. Gravatar of Meets Meets
    5. October 2011 at 14:54

    So according to Fisher, the economy’s problems are structural unless there is some sort of “horrific” standard that is met? Then it turns into a demand problem?

    In any case, 9% unemployment should be classified as horrific.

  10. Gravatar of dlr dlr
    5. October 2011 at 15:18

    This is the version of Operation Twist that actually reflects an important change in monetary policy: The Fed has bought up the last of our Greenspan puts and sold us a boatload of Fisher self-destruct buttons, strike price = horrific situation.

  11. Gravatar of Dan S Dan S
    5. October 2011 at 15:29

    This isn’t related to the post in any way, but in case you haven’t seen or heard, Bruce Bartlett was on CNBC this morning, and he explicitly said he thinks the Fed should be targeting NGDP.

    Also late last night I accidentally dropped all my necessary toiletries into the toilet, and my second thought (the first being “Dammit!”) was “Somewhere, Paul Krugman is smiling.”

  12. Gravatar of Scott Sumner Scott Sumner
    5. October 2011 at 15:47

    Dan, There is almost zero chance you are right.

    1. Bernanke said the Fed was never out of ammo when he was a professor. He had no incentive to lie at that time.

    2. He is saying the same thing now.

    3. They have lots of tools they haven’t even used, so they aren’t out of ammo.

    Silas, Recessions exist. You need to accept that. It’s not all reallocation.

    Statsguy, I hope not.

    Meets, I can accept someone saying 9% is less than horrific, what I can’t accept is that “not horrific” is the standard. The standard should be perfection.

    dlr, Good one.

    Dan. My brain is fried by now, but the Krugman joke went over my head for some reason.

  13. Gravatar of Gabe Gabe
    5. October 2011 at 15:51

    FEMA will dedicate more of our resources towards prison camps if things get horrific. Aggregate Demand problem will be solved! Federal Reserve intact, JPM, Goldman Sachs, Government Motors intact hurray!

  14. Gravatar of Benjamin Cole Benjamin Cole
    5. October 2011 at 15:51

    Horrific? Let’s see more than 9 percent unemployed, property values cut in half, interest rates going to zero.

    I suppose if one is ensconced in a sinecure somewhere, or comfortably retired, this is not horrific. If you are small business or looking for work, it is horrific.

    If property is part of your retirement portfolio, it is horrific. If equities doing nothing for 12 years is acceptable, then it is not horrific.

    Japan, here we come.

  15. Gravatar of Gabe Gabe
    5. October 2011 at 15:53

    Equities DOWN over 12 years…don’t forget to make the prices real.

  16. Gravatar of marcus nunes marcus nunes
    5. October 2011 at 16:09

    The last 4 posts are really just 1 post in four parts! The other day I reached the conclusion that Bernanke had to be “reevaluated”. Basically all he ever showed as a prof. and also as Fed governor and then Fed Chairman is his great distaste and “fear” of DEFLATION. He´s a rabid inflation targeter, so to him all the danger is located in the “left fat tail” of the distribution. It must have been in reference to “Deflation, making sure “it” doesn´t happen here” from 2002 that he means the “Fed is never out of ammo” and never with regard to the capacity of the Fed to “get nominal spending up”. He certainly fooled me!

  17. Gravatar of Dan S Dan S
    5. October 2011 at 16:43

    I had to immediately go out and buy new stuff for work the next day, which some would say stimulated the economy a little bit. It was the fallacy of the broken window in another form, I suppose.

  18. Gravatar of Gabe Gabe
    5. October 2011 at 16:43

    NGDP targeting is not want by the banksters. They want the debts paid with higher taxes on the American public, they are in favor of VAT, carbon taxes, national sales taxes, millionaire taxes, payroll taxes. They want all of them.

    They do not want reductions in military or homeland security spending.

    Allowing debts to be paid off via inflation is not acceptable to the banksters and they run the show. Bernanke takes orders. Bernanke is putting the heat on to raise taxes… The standard austerity package that the banksters have put in place in all countries they get involved in.

  19. Gravatar of John John
    5. October 2011 at 17:15


    If inflation stays between 3-4% until 2013, are you going to admit that monetary policy has been ineffective?

  20. Gravatar of John John
    5. October 2011 at 17:18

    I should be more clear on that question. Will you admit that they made a reasonable effort and failed? There’s only so much you can do when inflation is at 3-4%. First off the public won’t have it. Second, it seems really unlikely any monetary policy that boosts inflation, which is basically all expansive monetary policy does, will have any significant effect on unemployment as unemployment has stayed high over the past year.

  21. Gravatar of M M
    5. October 2011 at 17:53

    Scott, ignoring the actual justification for NGDP targeting, is it even possible for the Fed to change the policy regime out of the blue? I have no idea what the rules are in the U.S, but in Canada this can only be done once every few years (the potential renewal of the inflation targeting framework is coming up).

    Even if the Fed can technically explicitly switch regimes as they please, it may not be practical. They would need to have devoted significant resources to researching the merits of NGDP targeting, which to my knowledge they have not. Perhaps it is better to focus more on what they can do within the current framework.

  22. Gravatar of Britmouse Britmouse
    6. October 2011 at 00:56

    Central bankers, still getting schooled by the SNB.

    Swiss CPI up 0.3% month on month – it had been falling since May. Deflation: whacked.


    SNB foreign currency reserves up 11% to 282bn CHF in September from 253bn in August. Given that EUR/CHF appreciated by about 7% over that period, it implies a pretty small intervention since they devalued.


  23. Gravatar of Gabe Gabe
    6. October 2011 at 03:43

    Your logic regarding what the Fed can seems to ignore the times the Fed jumped in and lent 16 trillion dollars to banks all over the world, including the bank of libya without going through the significant resource devotion that you think is neccesary for them to do anything.


  24. Gravatar of dwb dwb
    6. October 2011 at 03:51

    post from Tim Duy in case you missed it.

    His blogs are often low-key on the Fed, this one is pretty harsh. finally! How about an open letter to Bernake-san you are screwing up.


  25. Gravatar of Left Outside Left Outside
    6. October 2011 at 03:52

    QE alert in Britain! An extra £75 bn. Looks like Adam Posen is gaining the upper hand over here, which is nice.


  26. Gravatar of dwb dwb
    6. October 2011 at 04:12

    Apartment vacancy rates dropping, while mortgage and home prices are also dropping. (Apartment vacancy rates are dropping in part because of tight lending standards and in part because people have been scared out of the housing market until prices stabilize).

    So if OER goes up in the CPI because rents go up is that inflation or substitution? Do we really know what “core inflation” is anyway? If I really knew what core inflation was I would agree with the degree to which you say the Fed should target it. There are definitely days when I prefer ye olde definition of inflation as an increase in the money supply, period. Much more measurable.


  27. Gravatar of dwb dwb
    6. October 2011 at 04:13

    calculated risk permalink.

  28. Gravatar of Britmouse Britmouse
    6. October 2011 at 04:30

    @Left Outside. Good news indeed. No stated target for nominal spending though… bah.


  29. Gravatar of todd todd
    6. October 2011 at 05:10

    I find the title of the post amusing. What do you say when someone on the left comes to you and demands perfection from the market? Do you expect the government to outperform the market?

  30. Gravatar of Morgan Warstler Morgan Warstler
    6. October 2011 at 05:25


    Trust me, the bankers do not want higher taxes. They ALL KNOW that their real money comes from loaning.

    Everything else you are correct about.

  31. Gravatar of John John
    6. October 2011 at 07:24

    Here are some analogies

    1. Time to see a doctor when your vital signs are “horrific.”

    2. Time to break up with the girlfriend when the sex is “horrific.”

    3. Time to throw out the milk when the taste is horrific

  32. Gravatar of Scott Sumner Scott Sumner
    6. October 2011 at 09:37

    Marcus, You may be right about Bernanke, but it’s hard to know because there are so many rumors about disputes within the Fed. I just don’t know what to think. For instance, why does he seem to support fiscal stimulus?

    Dan, Yes, some would say that, but not me.

    John, As you know I don’t consider inflation numbers to be meaningful. In addition, there are two ways monetary stimulus could fail; it could fail to boost NGDP, or more NGDP could fail to boost RGDP. Which are you referring to?

    I don’t agree that the public likes low inflation. The past three years have been the lowest inflation in my lifetime. I don’t think the public has enjoyed it. Most of the public doesn’t know the difference between demand-side and supply side inflation, so public opinion on this issue is essentially meaningless. All we really know is they don’t like supply-side inflation, i.e. when prices rise but their incomes don’t.

    M, You asked:

    “Scott, ignoring the actual justification for NGDP targeting, is it even possible for the Fed to change the policy regime out of the blue?”

    Yes, indeed they’ve done it recently. The Fed is not an official inflation targeter, so there would be no change in their official policy. They could continue to talk vaguely about roughly 2% being a long term inflation goal, and then say they intend to achieve that goal by focusing on 5% NGDP growth, level targeting. A means to an end, which also fulfills their dual mandate.

    I agree it’s highly unlikely in the short run, which is why I’ve always insisted I’m fighting the next battle, the next recession. I know that we have lost this one–I’m not stupid. But more and more people are discussing NGDP all the time. The Economist magazine, Bruce Bartlett, Matt Yglesias, Brad DeLong, the list keeps getting longer.

    Britmouse, Yes, and I’d add that the dollar is up by even more than 7%, so it’s not clear they had to buy anything.

    dwb, That’s good to hear.

    Left Outside, Good, but they still need level targeting of NGDP, or currency depreciation, or something. QE won’t be enough.

    dwb, Case Shiller says housing costs are down 32% in 5 years. The CPI says it’s up 7.7%. Which is right? I say C-S is closer.

    todd, Good point, but this task is sooooo easy that even the government can be perfect.

  33. Gravatar of Left Outside Left Outside
    6. October 2011 at 11:10

    Scott, are you in correspondence with any central bankers, like Adam Posen? Have you considered just striking up a conversation and seeing how far you get?

  34. Gravatar of Britmouse Britmouse
    6. October 2011 at 11:40

    Mervyn King is still too obsessed with his “international rebalancing” project to remember he controls domestic AD. It is kind of tragic to watch.


  35. Gravatar of Becky Hargrove Becky Hargrove
    6. October 2011 at 17:40

    I need to learn how to do links. The last paragraph of an article by Conversable Economist (Timothy Taylor) you may be interested in, “Why Didn’t Dot-Com Crash Hurt Like Housing Crash Did?” It seems to explain why perhaps Bernanke doesn’t want to be fettered by NGDP.

  36. Gravatar of Morgan Warstler Morgan Warstler
    7. October 2011 at 05:08


  37. Gravatar of Gabe Gabe
    7. October 2011 at 05:38

    Bernanke supports fiscal programs that will be rigged to make more money for banksters, they want to set up complicated infrastructure loan programs, where banksters have hundreds of billions intaxpayer gauranteed loans that will result in banisters owning our infrastructure. Focus groups found the phrase “infrastructure” polled well so they will incorporate the phrase in the next scam they plan.

  38. Gravatar of Jason Odegaard Jason Odegaard
    7. October 2011 at 07:38

    Stolen from another blog, but thought it is good for a laugh:


    I was down there on Wall Street the other day, and I didn’t see this poster though. Wish I had. Saw more posters complaining that Bernanke is a Santa for Wall Street, which disappoints me. I have a hard time talking those people out of that notion.

  39. Gravatar of John Thacker John Thacker
    7. October 2011 at 09:12

    Fisher had some more comments today where he said inflation isn’t a problem, and that he’d favor monetary stimulus if he thought it would work, but he doesn’t.

    Maybe you’re slowly winning Scott.

  40. Gravatar of John John
    7. October 2011 at 12:22


    I was saying that it could fail to boost both NGDP and RGDP up to levels that would be compatible with recovery. In both cases however, it would be because real growth isn’t fast enough. I think most people can agree that the Fed boosting inflation above 5% would be undesirable and that’s probably what would be required to bring NGDP to the levels compatible with the 1982-4 recovery.

    Public opinion on inflation, however ignorant, is definitely important as far as what economic policies the government and Fed put into place.

  41. Gravatar of Confused_Reader Confused_Reader
    8. October 2011 at 10:47

    I’m confused as to how it is that, considering money is long-run neutral, NGDP targeting is any different than inflation targeting

  42. Gravatar of anon anon
    8. October 2011 at 15:07

    Confused_Reader, NGDP targeting lets inflation rates fluctuate in response to short-run supply shocks (say, a sudden rise in commodity prices). Inflation/price-path targeting accommodates supply shocks by varying NGDP. (AIUI, price-path targeting also makes the price level more predictable in the very long run, whereas NGDP targeting makes “shares in the economy” more predictable. Either of these enhance long-run contracting, though in subtly differing ways.) What’s better partially depends on your underlying preferences, and perhaps on political economy considerations.

  43. Gravatar of Scott Sumner Scott Sumner
    8. October 2011 at 16:33

    Left Outside, Once in a great while.

    Britmouse, Yes, I agree.

    Becky, That’s a slightly different issue, bonds indexed to NGDP.

    Thanks Morgan.

    Gabe, I’m not that cynical.

    Jason, I also found that amusing.

    John Thacker, But he needs to be more specific–not work for NGDP, or RGDP?

    John, You said;

    “I think most people can agree that the Fed boosting inflation above 5% would be undesirable and that’s probably what would be required to bring NGDP to the levels compatible with the 1982-4 recovery.”

    I don’t agree. Who are these “most people?” Our textbooks suggest it would work.

    You don’t understand my comment on public opinion. I’m not saying they have wrong opinions, I’m saying they have no opinion, because they don’t understand demand-side inflation. When it happens, they may well support it. The public thinks “inflation” is supply side inflation. Naturally they don’t support that.

    Confused, It’s different because money is not neutral in the short run. But you are right that in the long run both produce equal inflation rates, so it has nothing to do with one’s preference for high or low inflation.

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