Judge the Fed on output, not inputs

I see a lot of people in the media gushing about all of the actions that the Fed has recently taken. The Fed has been unusually active, but it’s important to always keep in mind that what matters is output, not inputs.

If NGDP growth is inadequate then monetary policy is too tight, regardless of what the Fed is doing. This isn’t the Boy Scouts, there are no badges earned for effort.

I don’t expect the Fed to maintain steady NGDP growth during the current lockdown, but we absolutely should expect expected NGDP a year or two from now to be on target. In my view, the current market expectation for NGDP in 2021 and 2022 is lower than we would like (although it’s hard to be sure.)

So while the Fed has appropriately been very active in various stimulus measures, let’s hold our applause until we see various futures markets provide evidence that expected NGDP growth is on track.

Printing money is basically costless, and requires essentially zero effort. All that matters is whether they’ve printed enough and whether they are aiming at the right target. Right now, I’m not convinced on either count. The Fed needs to announce a level targeting policy regime and they need to generate bigger TIPS spreads.

PS.  Stephen Kirchner interviewed me a few weeks ago:


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34 Responses to “Judge the Fed on output, not inputs”

  1. Gravatar of Benjamin Cole Benjamin Cole
    14. April 2020 at 16:18

    The Fed appears to be doing enough, or nearly enough, to somewhat stabilize financial markets. That is probably a worthy goal, and avoids financial snowballs going downhill.

    I doubt Fed spending in globalized capital markets—-that is, conventional QE—-will have much impact on aggregate demand inside the US.

    In this regard the viewpoints of Stanley Fischer and David Beckworth come to the fore. Even for a pending garden-variety recession, Fischer has recommended (in August 2019) that the Fed be given a toolkit that includes helicopter drops.

    My guess is that today Fischer would call for a tool kit that includes money-dropping B-52’s.

    I am worried about debt peonage coming out of this recession, if we come out. Saving people and industry from financial oblivion by loading even more debt onto them strikes me as a dubious policy.

  2. Gravatar of Matthias Görgens Matthias Görgens
    14. April 2020 at 16:34

    The current praise for the Fed comes from the power of beating very low expectations.

    I should look up how other countries around the world are doing. Especially Israel, Australia and England.

  3. Gravatar of Rajat Rajat
    14. April 2020 at 17:16

    It occurred to me recently that the ‘chainstore paradox’ might be usefully applied to the question of question of the amount of asset purchases that central banks need to make. I’m not sure if you have referred to this previously. While it’s easy to read you or posts by Nick Rowe (https://worthwhile.typepad.com/worthwhile_canadian_initi/2011/10/engdp-level-path-targeting-for-the-people-of-the-concrete-steppes-.html) pointing out that so long as they set a clear level path and threaten to do ‘whatever it takes’ to achieve that target, using backward induction the central bank may not need to actually buy very much to shift market expectations to target, in reality, uncertainty around the central bank’s commitment means they have to prove their mettle. This is akin to a new entrant competitor to a incumbent chain store needing to wear any temporary losses from a deterrent strategy and continue opening new stores to get the incumbent to adopt the rational ‘accommodate’ strategy.

  4. Gravatar of Keenan Keenan
    14. April 2020 at 17:40

    Scott,

    Do you have a view on the new Fed programs? This post I agree with, but a lot of the policy decisions have not been just printing money. It’s direct loans to private companies at off-mkt rates. Seems like the exact sort of thing you’d be quite against, and I’m sure you are, but surprised I haven’t seen much about it from you. Hope you see this, looking forward to hearing your thoughts

  5. Gravatar of Thaomas Thaomas
    14. April 2020 at 18:18

    “In my view, the current market expectation for NGDP in 2021 and 2022 is lower than we would like (although it’s hard to be sure.”

    Epistemic modesty is fine, but isn’t the 5yr TIPS less than 1% pa, when PCE inflation equivalent is at least 2.5% a dead give away that no one is expecting 4%-5% NGDP growth anytime soon?

  6. Gravatar of Benjamin Cole Benjamin Cole
    14. April 2020 at 20:08

    “The International Monetary Fund says the “Great Lockdown” recession will be the steepest in almost a century and warned the world economy’s contraction and recovery would be worse than anticipated if the coronavirus lingers or returns. In its first World Economic Outlook report since the spread of the virus and subsequent freezing of major economies, the IMF estimated on Tuesday that global gross domestic product will shrink 3% this year. That compares to a January projection of 3.3% expansion and would likely mark the deepest dive since the Great Depression.”—Bloomberg

    So far, about one in every 10,000 people in Sweden has died from COVID-19 (in combination with other co-morbidities). Their curve is bending down too.

    Nevertheless, we have implemented the 2020 Depression. But we still have a naive population and a novel virus.

    And Plan B is? Well, actually does the US even have a Plan A?

  7. Gravatar of Benjamin Cole Benjamin Cole
    14. April 2020 at 20:57

    OI, but interesting headline.

    “Study points to evidence of stray dogs as possible origin of SARS-CoV-2 pandemic”
    by Oxford University Press

    You may have to lockdown cats and dogs too.

  8. Gravatar of Michael Rulle Michael Rulle
    15. April 2020 at 06:31

    Scott asserts again we need NGDP targets—-not that my opinion adds value—-but I accept his prescription. However, he also admits he does not know whether Fed’s current actions are good enough or not. —-in other words, they might be or might not be. This is not a prediction—-it is an “I don’t know”. I don’t knows are perfectly acceptable—-as long as after the fact we don’t declare ourselves correct—-although we have plenty of time to change opinions as much is happening and that is fair.

    Scott obviously assumes he can make better predictions than “I don’t know” if the Fed explicitly targeted NGDP——duh—-he has only been saying this forever—-so I accept him at his word we need NGDP targets for better predictions.

    So while FED appears to have made progress, it is one big step short. Scott has to work with less than optimal info—-and I prefer his “I don’t know” than a statement that the Fed is way off.

  9. Gravatar of The Freeconomist The Freeconomist
    15. April 2020 at 06:39

    Hi Scott,

    I have a question regarding the topic of neutral (non-distortionary) monetary policy you briefly discussed in the interview with Stephen Kirchner.

    You prefer the central bank to buy and sell treasuries in order to achieve its monetary objectives.

    This is the Anglo-Saxon view – which regards the central bank as part of the government – and says that monetary policy is most neutral when its asset purchases are limited to treasuries. Doing so minimizes the government’s financial market footprint since from a consolidated government balance sheet it’s a wash (basically a debt swap).

    The German view – according to which the central bank is completely separate from the government – says that monetary policy is most neutral when it buys the average investor’s portfolio so that it is not distorting market prices.

    My question is this: why not use a combination of helicopter money and interest on reserves to conduct monetary policy? To ease monetary policy transfer money to each citizen’s bank account. Once the economy recovers, raise interest on reserves in order to prevent excessive NGDP growth (inflation).

    That way the central bank wouldn’t have to buy or sell any assets. Wouldn’t this be the most neutral way of doing monetary policy?

  10. Gravatar of AL AL
    15. April 2020 at 07:13

    It’s terrifying. Santa Monica is talking about cutting 25% of its workforce within three weeks.

    We are conducting an unprecedented experiment into exactly how much carnage a modern economy can tolerate before a depression becomes inevitable. I can’t believe the USG is allowing so many people to become jobless, rather than doing everything possible to try to freeze everything in place.

    The future depends on our ability to quickly ramp up when the all-clear comes. If all that’s left are ruined businesses, crushing debt, and shattered dreams, I don’t see how recovery is possible.

  11. Gravatar of ssumner ssumner
    15. April 2020 at 09:31

    Rajat, Good analogy. But keep in mind that monetary stimulus is not costly for the central bank. So its job is easier than a new entrant.

    Keenan, I’d prefer they rely more on buying Treasuries, but I do think the current programs are much better than nothing. And of course level targeting is the key.

    Thaomas, Probably.

    Freeconomist, If central banks would conduct their affairs in such a way that nominal rates stayed positive, then the assets being bought would not matter very much. The quantities would be small (assuming no IOR). But I’m not sure what an average portfolio looks like. Does it include junk bonds, real estate, cruise ships?

    I oppose helicopter drops because they are inefficient, requiring higher future taxes than ordinary monetary policy. (And cleaning up the mess with IOR doesn’t solve the problem, as IOR reduces seignorage, requiring more ordinary taxes.)

    You could pay for existing government programs, like civil servant salaries, with newly created money. But this is identical to buying Treasury bonds, as it would mean the government would not have to borrow as much. But that’s not a helicopter drop.

    AL, Agree that we need to start getting the economy back relatively soon.

  12. Gravatar of P Burgos P Burgos
    15. April 2020 at 09:38

    @AL

    The all clear probably isn’t happening anytime soon, with the earliest date being sometime in 2022 when we have a vaccine produced in sufficient quantity for heard immunity. Many industries are not coming back in anything close to the same form as they had before.

    So a combination of something approximating a UBI and bailouts that save the financial system are probably the most helpful for the economy, given that we don’t want to freeze it in place, but want the economy to change quite a bit (more delivery drivers, grocery store workers and fulfillment center workers, public health workers, etc).

  13. Gravatar of Ray Lopez Ray Lopez
    15. April 2020 at 10:54

    As Freeconomist (I like that name “Free – Con – o mist”) says, the Germany monetary policy is to buy assets the average person has. A quick Google search says 52% of Americans own stocks. On March 15 the US Fed said they would support stocks in the QE program. Shortly thereafter the market rallied to stem the spiral downwards. Sumner says: “But I’m not sure what an average portfolio looks like. Does it include junk bonds, real estate, cruise ships?” – seemingly oblivious to stocks. Sumner in the past–as he seemingly has in this post–has eschewed having the Fed buy stocks. Why?

    Reminds me of the adage “snatching defeat from the jaws of victory”. Why is Sumner so against what the JP central bank does, and that is, to buy stocks? Why has he not even speculated that perhaps the US Fed has, akin to a “Plunge Protection Team” mandate, bought stocks to prop up the stock market? The one victory I’d like to credit the Fed with is the mysterious halt in the downward spiral the US stock market had prior to the Fed March 15 announcement, yet Sumner refuses to mention it. Sumner is so conservative sometimes, like his Chicago school roots.

    And why is Ben Cole so obsessed with helicopter drops? Crazy.

  14. Gravatar of Thaomas Thaomas
    15. April 2020 at 13:29

    @ M Rulle

    I say having the 5 year TIPS at less than 1% (and it fell today) is loud and clear evidence that the Fed is not doing enough to create expectations of 4-5% growth in NGDPL. Without an NGDPL futures market, TIPS is the best we have.

  15. Gravatar of Thaomas Thaomas
    15. April 2020 at 13:39

    @ Scott
    Thanks for “probably”

    I think the reason not to do “helicopter drops” is that they do not target relief to where is will assuage the most pain: unemployment insurance at some high percentage of lost wages and grants to States and local governments to make up for lost revenues and pandemic-recession induced needs.

  16. Gravatar of Benjamin Cole Benjamin Cole
    15. April 2020 at 15:57

    Well, let’s see.

    Lockdowns might save an unknown number of lives, although that unknown number seems to be rapidly shrinking.

    Lockdowns are implementing an economic depression, from which an exit is not certain.

    And the vast majority of American economists support the lockdowns (University of Chicago – Booth poll)

    When did American economists go from being of dubious value to being an active menace to prosperity?

    Dr. Ray Lopez: why helicopter drops? Perhaps it is a question of different life experiences. I started my own business and worked as an employee for decades and I knew what it was like to survive on a shoestring. You were born into the top 1% and for you an economic depression might only be a buying opportunity.

    But you can take comfort that you have many allies, observers in sinecures in accademia, think tanks and inside the Federal Reserve.

    I think I will always err on the side of creating more economic growth and tightening job markets inside the US. If that is a sin, I hope to roast in the 7th rung of hell.

    Besides all that, Stanley Fisher advocates helicopter drops. Although his insights into monetary matters may not match yours, in this particular case I think he is right.

  17. Gravatar of agrippa postumus agrippa postumus
    15. April 2020 at 16:12

    what all you arm chair economists and sumner can’t see is that in crisis of this magnitude the masses will want EVERYONE to have pain, and it is grabbing the tiger by the tail for the fed to support asset prices in this situation. the public image of wall street rallying, junk bonds being bought and fat cats getting bailed out and fed at the trough, while people see their lives imploded and gross uncertainty about the future, is a conflagration waiting to happen. the fed should exclusively focus on getting money into the hands of the people in whatever ways legal and socially acceptable. the generals always fight the last war, and then comes anzio.

  18. Gravatar of Benjamin Cole Benjamin Cole
    15. April 2020 at 16:14

    “the Washington Post reported that US Embassy officials expressed concern as long ago as January 2018 about a Wuhan lab that was conducting dangerous studies on coronaviruses from bats.

    Officials were sent down to the lab on multiple occasions by the US Embassy in China, the paper reported, and were so alarmed by what they saw on their visits that they dispatched two diplomatic cables to Washington warning about safety and management risks and proposing they send more help.

    The first cable also warned that the lab’s work on bat coronaviruses and their potential human transmission showed a risk of a new SARS-like pandemic.”

    But CNN says only a nut job would believe COVID-19 was artificially created.

  19. Gravatar of Benjamin Cole Benjamin Cole
    15. April 2020 at 17:37

    You could pay for existing government programs, like civil servant salaries, with newly created money. But this is identical to buying Treasury bonds, as it would mean the government would not have to borrow as much. But that’s not a helicopter drop.—Scott Sumner

    A Mobius strip obviously has two sides, but just as obviously has only one side.

    But it would be unfair to single out macroeconomists for fundamental and diametrically opposed differences of opinion within their profession.

    On the basis of expert medical opinion, in recent weeks we have been told that masks do not work but they work, that the virus escaped from the Wuhan lab but it did not escape from the Wuhan lab, and that nations should target herd immunity but they should not target herd immunity.

    But I like a macroeconomists, so I should love public health professionals.

  20. Gravatar of Thaomas Thaomas
    15. April 2020 at 18:02

    I still do not understand the rationale for helicopter drops.

    Let’s say we agree on “relief,” transfers to groups of people/institutions particularly had hit by unemployment and loss of income or who have particularly large need created by the pandemic like S&LG and hospitals.

    Is it your position that in addition, the federal government should increase the deficit by an additional $X to send $X/P to each resident (or P-undocumented immigrants) if that did cause the Fed to increase its purchases of financial assets that is has decided on to reach whatever target it has(it will buy $X less from other bond sellers) OR do you assume that the additional $X of deficit will cause the Fed to increase its purchases of financial assets by $X?

    [I think Fischer assumed that the Fed was constrained in the amount of financial assets it would buy and that the $X additional deficit would lead the Fed to buy more financial assets than it otherwise would have. In 2009, I agree with that. In 2020 I’m not sure.]

  21. Gravatar of Thaomas Thaomas
    15. April 2020 at 18:03

    oops. The above was directed at B Cole

  22. Gravatar of Lorenzo from Oz Lorenzo from Oz
    15. April 2020 at 18:55

    The health benefits from the economic shutdown versus the health costs of the economic shutdown may be a more difficult balance than people realise, so by all means let us focus on judging actions by their outputs.
    https://www.creators.com/read/betsy-mccaughey/04/20/shutdown-could-kill-more-americans-than-covid-19

  23. Gravatar of Benjamin Cole Benjamin Cole
    15. April 2020 at 19:43

    Thaomas–

    You realize that Michael Woodford says that federal deficits in combination with conventional QE is a helicopter drop?

    https://voxeu.org/article/helicopter-money-views-leading-economists

    Here is Fischer:

    https://www.blackrock.com/us/individual/literature/whitepaper/bii-macro-perspectives-august-2019.pdf

    I am not sure I understand your question.

    But then, in the Mobius strip, the difference between one or two sides is hallucinatory.

    At times, the difference in fiscal spending and helicopter drops is like a Mobius strip….

  24. Gravatar of Negation of Ideology Negation of Ideology
    16. April 2020 at 06:42

    Ben –

    “You realize that Michael Woodford says that federal deficits in combination with conventional QE is a helicopter drop? ”

    Ok, if you want to define ‘helicopter drop’ that way then aren’t we almost always doing a helicopter drop?

    To me, for any term to have any useful meaning it has to somehow distinguish itself from ordinary time.

    I’ve always thought ‘helicopter drop’ meant the Treasury issuing notes directly, without issuing bonds – like the US Notes from the 1860s.

  25. Gravatar of Spencer Hall Spencer Hall
    16. April 2020 at 07:06

    re: “If NGDP growth is inadequate then monetary policy is too tight, regardless of what the Fed is doing”

    Spot on. If the FED is content with stabilizing interest rates, and not pumping up the money stock, the economic stimulus will fail. I.e., the rate curve must be pushed lower on the front-end than the current Daily Treasury Yield Curve levels.

  26. Gravatar of msgkings msgkings
    16. April 2020 at 08:03

    @NoI:

    Yes, it’s basically arguing about a vocabulary word. The way Ben defines it, pretty much any time the Fed buys T-bonds it’s a “helicopter drop”. OK call it what you want Ben, whatever. You ‘win’.

  27. Gravatar of The Freeconomist The Freeconomist
    16. April 2020 at 08:19

    @Scott:

    “But I’m not sure what an average portfolio looks like. Does it include junk bonds, real estate, cruise ships?”

    Ideally (in a world without transaction cost), the portfolio the central bank holds would even contain fine art, millions of tiny stakes in non-publicly traded companies, etc. … That is, the central bank portfolio would include every type of asset available in the investment universe, with each asset weighted in proportion to its total presence in the market.

    In the real world (with transaction costs), the central bank will only be able to roughly replicate the financial market portfolio (containing all assets traded in financial markets) rather than the whole market portfolio (containing all assets in the world).

    I prefer the German view because it doesn’t subsidize the government by lowering the government’s funding costs relative to other debtors, it doesn’t depend on there being enough government debt and it avoids the Zero-Lower Bound problem.

    Unfortunately, as you know, not even the ECB follows the “German view” because it buys only highly secure debt instruments.

  28. Gravatar of Spencer Hall Spencer Hall
    16. April 2020 at 09:55

    link: Daniel L. Thornton, Vice President and Economic Adviser: Research Division, Federal Reserve Bank of St. Louis, Working Paper Series

    “Monetary Policy: Why Money Matters and Interest Rates Don’t”

    bit.ly/1OJ9jhU

    Thornton: “the interest rate is the price of credit, not the price of money (i.e., the price level.)”

  29. Gravatar of myb6 myb6
    16. April 2020 at 11:38

    Agrippa, haha if you’re not an armchair economist than what the hell are you doing HERE? Meant as a friendly jest. Agree with what you wrote.

    Unfortunately, operationally it’s difficult. See how many weeks it took for stimulus checks, or how many still having trouble getting enhanced UI, or how long it took for PPP to get rolling and how badly they underestimated the demand. I’m hoping but not betting that Main Street Lending Program proves better.

    To me, the lack of a fast and scalable Fed/ MainSt channel is the elephant in the room. If we had that, little need for bank nor corporate bailouts nor the endless cat/mouse regulatory game nor the partisan gamesmanship during an emergency.

    I totally get how that shouldn’t be the case, in theory, in the long-run, but to me it’s quite plain it is indeed the case in practice in the short (even medium) run.

  30. Gravatar of myb6 myb6
    16. April 2020 at 11:40

    I always understood “helicopter” to mean the purchased govt debt was torched. If the CB buys govt debt and intends to collect coupons and principal (or sell on 2ndary market), it’s not really helicopter. Right?

  31. Gravatar of myb6 myb6
    16. April 2020 at 12:05

    Scott, but doesn’t buying riskier assets (or no asset, if I’m right in defining ‘helicopter’) help raise inflation expectations? Yes, explicit forward guidance would seem to be a much better first strategy, but sometimes markets just don’t seem to believe CB statements.

  32. Gravatar of myb6 myb6
    16. April 2020 at 12:47

    Scott,
    “monetary stimulus is not costly for the central bank”: it’s politically costly, not financially costly.
    “the assets being bought would not matter very much” mentioned in my reply to Agrippa but to direct to Scott, I just don’t really buy this, in practice and in the short/med run. I get the theory, just IRL frictions are clearly strong enough to ruin the theory. Especially in a massive liquidity crunch, it really matters who gets the first bite of new money.

    So to sum up my word vomit of commentary (apologies to Scott), I see the Fed’s relevant constraints right now as (1) lack of credibility in raising inflation (let alone NGDP) expectations (2) bad lags to spending for conventional asset purchases during an intense crisis (3) backlash against massive printing that (4) isn’t going to regular Americans. Refocusing Fed purchases to Main St assets should help with all four!

    Keenan, Main St Lending Program is interesting. Originator holds 5% and Fed buy the other 95%, as equals, so piggybacking on the originator’s incentives. In non-emergency, I would prefer the originator 5% being a junior position and some of the senior position offered to market for pricing purposes.

    Freeconomics, any good recommendations for studying the German view? While the Fed is weird as the global reserve issuer, in a more generally-applicable CB theory don’t such volatile assets make for a rather risky backing for currency? I think that’s why, in eras past, non-govt CB assets were gold or very short-term low-risk good-bank backed commercial bills.

  33. Gravatar of Ray Lopez Ray Lopez
    16. April 2020 at 13:14

    re: “If NGDP growth is inadequate then monetary policy is too tight, regardless of what the Fed is doing” – not falsifiable, hence from a Popper viewpoint this is not science.

    Thought experiment: if money is largely neutral, would the above quote hold true? I think so.

    “Nothing succeeds like success” – Charles-Maurice de Talleyrand-Périgord, 1st Prince of Benevento, then Prince of Talleyrand, diplomat, lawyer and chess player.

  34. Gravatar of ssumner ssumner
    16. April 2020 at 13:48

    Freeconomist, You said:

    “I prefer the German view because it doesn’t subsidize the government by lowering the government’s funding costs relative to other debtors, it doesn’t depend on there being enough government debt and it avoids the Zero-Lower Bound problem.”

    The second point doesn’t matter, as I advocate buying risky assets if they run out of safe assets to buy. The first point also doesn’t matter, as the Fed is part of the government in a fiscal sense. So there’s no harm in the Fed subsidizing the Treasury. That’s what seignorage does. And the subsidy is quite small, relative to buying alternative assets such as corporate bonds.

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