Market monetarism on the march?

Back in the old days, Fed officials like Jeremy Stein suggested that there was a trade-off between growth and stability. While low interest rates promote growth, it might come at the cost of financial stability.

Market monetarists warned against reasoning from a price change. Low rates often reflect weak NGDP expectations, and in the long run the best way to avoid financial crises is to make sure that NGDP keeps growing at an adequate rate.

Now the Fed seems to be coming around to this view:

People sometimes tell me that Powell is better than Yellen. Here’s how I’d put it. When Yellen was chair, Powell was no better on monetary policy, maybe a tiny bit worse. But Powell has benefited by observing 4 years of market monetarist critiques of Yellen’s policies. He saw how we warned that Phillips Curve models were not reliable, and that market indicators suggested that inflation was likely to undershoot the Fed’s target. When it did, Powell was a quick learner. In 2019, the Fed didn’t make the mistake previous Fed chairs would have made, they cut rates sharply on market forecasts of a slowdown, even though Phillips curve models said 3.5% unemployment should drive inflation higher.

He learned from market monetarists that it’s not enough to target inflation at 2%, you need to catch up to the previous trend line when there’s a big undershoot, and AIT was adopted in 2020. Going forward, this should allow the Fed to avoid the mistakes of the 2010s, when there was no catch-up. Time will tell.

He learned from market monetarists that financial crises are caused by falling NGDP, and that one cannot assume that money is too easy just because interest rates are low.

So if it ends up being true that Powell’s term has been more successful than Yellen’s (and it’s too early to say) it won’t be because Powell is more talented, it will be because he came later. He had more time to benefit from market monetarist insights.

Or at least that’s what I’d like to believe. 🙂

PS. The same is true of Australia. Mercatus just published a new working paper by Stephen Kirchner with the following abstract:

It’s now completely obvious that the RBA blew it in the years leading up to the Covid recession. In recent years, Stephen Kirchner, David Beckworth and I all pushed back against their policy of allowing inflation to fall below the target range because of fears that ultra low rates could lead to financial excesses. In the long run, contractionary monetary policies push interest rates even lower than what you’d get with a more expansionary policy, with no gain in financial stability.



25 Responses to “Market monetarism on the march?”

  1. Gravatar of Michael Sandifer Michael Sandifer
    27. January 2021 at 18:40

    AIT is a step in the right direction, but of course it is not complete level targeting and hence is significantly suboptimal. The biggest problem, if executed well, is that the approach demands that inflation be held down for a period to make up for higher inflation during say, a negative supply shock.

    I really like the way Kirchner uses the term “information problem”. Very apt description, though I don’t necessarily think there is an inherent information problem. The Fed definitely has an information problem.

  2. Gravatar of Ray Lopez Ray Lopez
    27. January 2021 at 19:20

    This is economic science? Unsubstantiated allegations pretending to be facts? (Sumner) “In the long run, contractionary monetary policies push interest rates even lower than what you’d get with a more expansionary policy, with no gain in financial stability.” – OK, if you say so…but cite please?

    (Ray Lopez): “If we had a better patent system, we’d have a cure for old age, cancer, and a flying car”. See where I’m going with this?

  3. Gravatar of ssumner ssumner
    27. January 2021 at 22:50

    “See where I’m going with this?”

    Actually, no.

  4. Gravatar of Apisith Apisith
    27. January 2021 at 23:50


    Can we have your opinion on what’s happening with the Gamestop stock? Does the movement in price disqualify any form of the EMH? Do attempts at short squeeze that materially affect the price of a stock mean that the strong forms of the EMH are demonstrably false?

    Is Gamestop a bubble?

  5. Gravatar of David S David S
    28. January 2021 at 03:52

    I think Scott gave a technical answer to the Gamestop question a few blog posts back. I think it’s best to understand EMH as a solid theory when looking at the stock market in aggregate over the “long run.” The Gamestop stock price, in my opinion, has ceased to be about ordinary market functions and is instead a brief, mildly entertaining media story.

    Sumner doesn’t like the term “bubble” when applied to any asset price, but he might concede that Gamestop is a demonstration of Wile E. Coyote herding. In case you’re wondering, the edge of the cliff is fifty feet behind most of the people who bought this stock. But cartoon physics is at work here—everything is okay as long as you don’t look down.

  6. Gravatar of marcus nunes marcus nunes
    28. January 2021 at 05:04

    Friedman set the stage for NGDP LT 50 years ago!

  7. Gravatar of marcus nunes marcus nunes
    28. January 2021 at 05:17

    Australia did not learn from it´s own experience!

  8. Gravatar of Michael Rulle Michael Rulle
    28. January 2021 at 06:02


    I asked this a week or so ago——but you never answered. What is the look back period to “catch up” to?. I think Powell uses PCE ex food and energy—- Which has not reached 2% in 11 years although the Dallas Fed’s trimmed rate (why do we need or want a trimmed mean rate—-Maybe it it replaces food and energy?)) has been very close to 2% for 5 years.

    The question is how do we assess how the Fed has done. I assume we know how to assess how the market thinks the Fed will do (break even inflation/TIPS)

  9. Gravatar of Michael Rulle Michael Rulle
    28. January 2021 at 06:07


    Break even is about 2.1 says Fred

  10. Gravatar of Spencer B Hall Spencer B Hall
    28. January 2021 at 06:17

    Sumner: “In the entire investment universe there is no asset that measures risk free ex ante real interest rates more accurately than TIPS.”

    TheMoneyIllusion » TIPS spreads are a big problem

    Market monetarism is sheer ipsedixism.

    10-Year Treasury Inflation-Indexed Security, Constant Maturity (DFII10)
    10-Year Treasury Inflation-Indexed Security, Constant Maturity (DFII10) | FRED | St. Louis Fed

    Adding infinite, artificial, and misdirected money products (LSAPs on sovereigns) while remunerating IBDDs (inducing nonbank disintermediation), generates negative real rates of interest; has a negative economic multiplier; stokes asset bubbles (results in an excess of savings over real investment outlets); exacerbates income inequality, produces social unrest, and depreciates the exchange value of the U.S. $.

    (“It is the real interest rate that affects spending”, pg. 19 Marcus Nunes and Benjamin Cole’s “With Market Monetarism – a Roadmap to Economic Prosperity”).

  11. Gravatar of Spencer B Hall Spencer B Hall
    28. January 2021 at 06:19

    the copy function truncated ipsedixitism

  12. Gravatar of Michael Rulle Michael Rulle
    28. January 2021 at 06:30

    The belief in markets, and which is promoted (the belief that is) among the young/users of Reddit is there is a purposeful short squeeze being perpetrated by this crowd sourced type of Reddit users. I have never seen this before

    I have always thought short squeezes were very dangerous to the squeezers——although it happens in many markets and has forever. The most famous one (for me at least) was when the 9 billion dollar diversified hedge fund, Ameranth, lost $9 billion (all its money) because the “street” lined up against their natural gas trader who was long the March/April spread.

    It worked the prior year, but everyone saw it coming months before he knew everyone was lined up against him. In fact, the more he was gaining in the short run, the bigger the positions were growing against him. Since they were bigger by far, eventually his P&L began to lose—and the Futures exchanges margined him out and they were done.

    I don’t really know who these guys are——-the “winner” has to have more money and more nerve. But I don’t if new players will enter to support the guys already short—although it is a great time to do it. Short squeezes to me are dumb—-but who knows on this one.

    Its almost a joke—-I almost believe the story—-a store chain that sells video games. Because this is a “crowd” you have far more guys squeezing than shorting—-so their risk reward may favor them

    This has nothing to with EMH——it is a legal manipulation—-which should be allowed—as the cure is worse than disease.

  13. Gravatar of Spencer B Hall Spencer B Hall
    28. January 2021 at 06:36

    Yeah, like “Silver Thursday”

  14. Gravatar of Ryan Ryan
    28. January 2021 at 06:53

    Has your stance on bubbles changed given the current state of the market? Even if you believe the possibility of squeezing shorts makes the behavior rational, I find it hard to come up with any other word to describe it.

  15. Gravatar of Michael Rulle Michael Rulle
    28. January 2021 at 07:00

    @ Spencer B Hall

    I used to believe MM was circular reasoning——-so I am sympathetic to your concept that it is just an asserted idea with no evidence. I do like the idea of supply and demand for money as one cornerstone and I also like the idea of never reason from (just) a price change. At least it does not follow the absurd Phillips Curve (it’s absurd, because it “sounds good” but is completely a failure at prediction). Don’t know if Phillips Curve has been the cause of tightening——and economics is not the ideal (to say the least) “science” for making definitive proofs—-so to demand that of MM is not reasonable. But to my surprise, Powell always seemed to know when (and to communicate why) it was necessary to go “loose” (not really loose—just meeting demand) . Didn’t some think a supply side crisis might have been immune to MM? Powell did not—-it might have been a coincidence it seems to have worked. In the end, theories will be judged by outcomes.

  16. Gravatar of Spencer B Hall Spencer B Hall
    28. January 2021 at 07:08

    How do you explain real yields continuing to fall at the same time the economy is “slowing”? Link “Fed Leaves Interest Rates Near Zero as Economic Recovery Slows” – NYT

    Interest is the price of credit. The price of money is the reciprocal of the price level. An artificial exogenous increase in money products reduces the real rate of interest. An endogenous increase in the utilization / activation of savings products increases the real rate of interest.

    Real output is following the distributed lag effect of money flows, volume times transactions’ velocity.

  17. Gravatar of Michael Rulle Michael Rulle
    28. January 2021 at 08:32

    @ Spencer Hall

    I will be honest, I am not the one who can answer technical questions accurately.

    However, I can look at your premises.

    Is the economy “slowing”? Or is it expected to slow? Didn’t we get a 4% annualized GDP number? When something grows at a lower rate than a prior period, technically it is “slowing” —-but growing at 4% annual rate is is high for “slowing”. But it is the expected growth rate that matters now—-which ranges from 4.3% to 5.2% (WSJ survey and IMF)—-so at least from that perspective, which I have always not taken that seriously, it is not slowing.

    Real rates are negative—-But the 10 year yield did rise 55-60 basis points since the summer (constant maturity)—-and PCE trimmed inflation dropped 30 bps since summer—-so using the 10 year, real rates have been rising not falling—-although still negative.

    Not sure what your point is, but would be happy to get clarification.

  18. Gravatar of Michael Rulle Michael Rulle
    28. January 2021 at 08:41

    @ Spencer

    Yes like silver in 1980. That was unreal. Forgot it was the Hunt family, who owns the Chiefs. Don’t know their motivation—-maybe they believed Silver was under valued—-although no one else did. They lost 1 billion, and if I am doing my calculations right that is 26 billion in today’s terms—-about 10 times the estimated the value of the Chiefs. It is most definitely fun to be rich!

  19. Gravatar of Michael Rulle Michael Rulle
    28. January 2021 at 08:44

    Calculation way off——3 billion plus in today’s terms on Hunt—-still they lost the value of their football team. Still fun to be rich

  20. Gravatar of ssumner ssumner
    28. January 2021 at 10:11

    Apisith, I don’t believe bubbles exist. I don’t know much about Gamestock; indeed I don’t really follow individual stocks.

    Michael, I’m using the beginning of 2020. I seem to recall Chicago Fed president Evans mentioning a similar date.

    Ryan, No, I don’t believe in bubbles.

  21. Gravatar of Thomas Hutcheson Thomas Hutcheson
    28. January 2021 at 11:20

    Market Monetarism or just a return to actually attempting to achieve its Congressional mandate?

  22. Gravatar of Garrett Garrett
    28. January 2021 at 11:21

    Regarding Powell vs Yellen, I think your point is similar to the idea that I’m not “better” than Euclid because I know some basic calculus.

  23. Gravatar of Spencer B Hall Spencer B Hall
    28. January 2021 at 12:28

    @Michael Rulle

    Economics is an exact science. But the lexicon used is specious. Like Dr. William Barnett said (a former NSA Rocket Scientist).
    “the Fed should establish a “Bureau of Financial Statistics”.

    10-Year Treasury Inflation-Indexed Security, Constant Maturity

    2020-01-01 0.04
    2020-02-01 -0.11
    2020-03-01 -0.12
    2020-04-01 -0.45
    2020-05-01 -0.44
    2020-06-01 -0.54
    2020-07-01 -0.83
    2020-08-01 -1.01
    2020-09-01 -0.98
    2020-10-01 -0.92
    2020-11-01 -0.84
    2020-12-01 -0.98

    Monetary flows, proxy for inflation. Shows that the trend and level will accelerate over the previous decade, esp. after Jan. 2021.

    04/1/2020 ,,,,, 0.47
    05/1/2020 ,,,,, 0.54
    06/1/2020 ,,,,, 0.61
    07/1/2020 ,,,,, 0.65
    08/1/2020 ,,,,, 0.68
    09/1/2020 ,,,,, 0.68
    10/1/2020 ,,,,, 0.76
    11/1/2020 ,,,,, 0.87
    12/1/2020 ,,,,, 1.26
    01/1/2021 ,,,,, 1.31 plateau
    02/1/2021 ,,,,, 1.27
    03/1/2021 ,,,,, 1.21
    04/1/2021 ,,,,, 1.25
    05/1/2021 ,,,,, 1.21
    06/1/2021 ,,,,, 1.18
    07/1/2021 ,,,,, 1.20
    08/1/2021 ,,,,, 1.19
    09/1/2021 ,,,,, 1.15
    10/1/2021 ,,,,, 1.16
    11/1/2021 ,,,,, 1.06
    12/1/2021 ,,,,, 1.11

    R-gDp is decelerating:

    04/1/2020 ,,,,, 0.40
    05/1/2020 ,,,,, 0.47
    06/1/2020 ,,,,, 0.53
    07/1/2020 ,,,,, 0.55
    08/1/2020 ,,,,, 0.56
    09/1/2020 ,,,,, 0.52
    10/1/2020 ,,,,, 0.60
    11/1/2020 ,,,,, 0.82
    12/1/2020 ,,,,, 0.89
    01/1/2021 ,,,,, 0.56
    02/1/2021 ,,,,, 0.50
    03/1/2021 ,,,,, 0.43

  24. Gravatar of agrippa postumus agrippa postumus
    28. January 2021 at 16:32

    sumner: “i don’t believe bubbles exist”. how can you “believe” something doesn’t exist that you you use as the anchor of your disbelief? perhaps you mean that the term “bubble” as understood by those who contend it describes a set of facts is in fact explained by a different word that explains the existence of those facts. so, sumner, what are the facts you say others refer to as a bubble and what is your word for those set of facts and why? bonus answer, explain the south seas trading company collapse.

    sumner, repetitively as if its empirical: “never reason from a price change”. ok, then what can we deduce from a price change.

  25. Gravatar of ssumner ssumner
    29. January 2021 at 16:46

    Thanks Marcus, That’s great stuff. I’ll do a post on that.

    Garrett, Good analogy.

    Agrippa. Bubble in the sense of obviously mis-priced assets traded in highly liquid free markets.

    I’m not an expert on the South Seas fiasco.

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