Matt Yglesias on monetary policy

Matt Yglesias has an excellent post on how to think about the current overheating in the US economy. Here are a few excerpts:

So NGDP, even though it’s a bit of an unfamiliar indicator, is also a very simple one. Counting up the total amount of dollars spent across the economy isn’t a totally trivial task, and the official numbers are subject to error and revision. But it is absolutely the simplest part of the whole process. Calculating the rate of inflation is a much more conceptually difficult (how do you adjust for the changing quality of restaurant meals or haircuts?) and fraught enterprise. So even though the official names tend to call inflation-adjusted quantities “real,” NGDP has always struck me as considerably more real than RGDP. The former is an actual count of defined quantities (dollars spent) while the inflation-adjusted figures are necessarily an abstraction.

Yglesias cites David Beckworth’s chart showing NGDP rising above trend, and then suggests:

I spent more than 10 years consistently thinking that the Fed was erring too much on the side of inflation aversion, and I now think the reverse. Not because I’ve changed, but because this very simple indicator — NGDP — is now giving us a different message.

Unfortunately, the Fed has set policy at a level where they are expected to fail:

What I do feel strongly about is that if I had Jay Powell’s job, I would be saying to the staff, “I’m not an economist and I don’t know how to build a macroeconomic model, but we should be choosing the policy that, when plugged into our model, gives us the policy outcome we want to see.” This concept is called targeting the forecast. 

There’s only one part with which I slightly disagree:

By the book, then, they should be trying to average out the inflation of 2021 and 2022 with future years in which inflation is really low. It seems like they’re not actually going to try to do that because you’d probably have to deliberately engineer a recession in order to make it happen. So the Fed is making the correct policy choice, but that just shows that FAIT is a bad framework.

I wouldn’t call that policy framework “bad”, although I agree that FAIT is not optimal in the sense that other frameworks like NGDPLT are better. But even if the Fed had adopted a 4% NGDP level target from the beginning of 2020, the recent high inflation would end up being partly (not entirely) offset by lower than 2% future inflation, even if there were no recession. And I also agree with Jim Bullard that FAIT is pretty similar to NGDPLT, as the “flexible” part of FAIT suggests they’d allow small deviations for supply shocks.

For instance, let’s suppose that Covid permanently depressed RGDP by 1%. Then under NGDPLT you’d have 1% extra inflation over the long run. That’s not very much. Something similar could have occurred under a well managed FAIT.

The fact that suddenly dropping inflation to below 2% would trigger a recession is not an indication that FAIT is a bad policy, it reflects the fact that the Fed has not been doing FAIT, and has allowed the economy to overheat in a way that never would have happened under FAIT. If the Fed had told the markets a year ago that they were serious about FAIT, and acted like they were serious, then the markets would have done the tightening even before the Fed took any “concrete steps”. Instead we had all this happy talk about “running the economy hot”, and that’s what we got.

I mistakenly assumed the happy talk was empty rhetoric, and that FAIT was the actual policy. I was wrong.

PS. Among reporters who are not professional economists, Matt Yglesias and Ramesh Ponnuru are the two best people to read on monetary policy.

PPS. Powell has a new speech on monetary policy, which contains absolutely no discussion of average inflation, nor any sort of reference to the Fed’s new FAIT policy. The new policy is as dead as John Cleese’s parrot. Powell attributes the recent surge in inflation to supply problems, with little discussion of excessive nominal spending. He also suggests that the Fed has been tightening policy, which is incorrect.



31 Responses to “Matt Yglesias on monetary policy”

  1. Gravatar of Rajat Rajat
    21. March 2022 at 12:32

    I started reading Ygelsias’s post last night (Oz time), saw how long it was and went to bed instead. I know you’re very gracious, Scott, but those of us hooked on the ‘Murakami of monetary policy’ will wait to read the real thing rather than an imitation, even if all of your posts mention a cat, a distant wife or girlfriend, a precocious teenage girl and a sexual relationship with a self-assured older woman.

    Although Powell’s speech doesn’t refer to FAIT and does refer a lot to supply-side pressures, he did say that monetary policy would (now) be set in a way that didn’t assume any near-term ‘healing’ on the supply-side. That suggests that the period of looking-through perceived supply-side shocks is coming to a close. He then talks a lot about the difficulty of engineering a soft landing and bigger rate increases. You didn’t find anything to take comfort in? It’s true that equities fell on the news but recovered by the close and bonds don’t seem to believe that a true tightening is coming (yet).

  2. Gravatar of Rajat Rajat
    21. March 2022 at 12:45

    One more thing – to what extent do you think Powell might have acted differently over the last year if it wasn’t for the reconfirmation process?

  3. Gravatar of David S David S
    21. March 2022 at 12:54

    Scott, small typo here: “it reflects the fact that the Fed has not being doing FAIT”

    You also left out the nice section in Matt’s post where he describes why you shouldn’t reason from a price change, although he doesn’t use that phrase.

    You, Yglesias, Summers, and Krugman—among others, are all synchronized on criticism of the Fed. This has come together over a roughly 5 month period, which is a much faster reaction time than the 2006 thru 2010ish bad money era. If there’s a half point hike at the next meeting it might prove that they’re paying attention.

    I’ll try to do my part and not jack up my service fees for a few more months.

  4. Gravatar of ssumner ssumner
    21. March 2022 at 14:05

    Rajat, You said:

    “Murakami of monetary policy”

    But I never talk about cats. Maybe I’m the Knausgaard of monetary policy. (TMI also stands for too much information.)

    “One more thing – to what extent do you think Powell might have acted differently over the last year if it wasn’t for the reconfirmation process?”

    One answer is “he’s only human”. But who really knows?

    I do think Biden made a mistake in waiting so long.

    David, Great minds think alike.

    (And thanks, I corrected the typo.)

  5. Gravatar of Andy Harless Andy Harless
    21. March 2022 at 15:05

    I disagree with the consensus opinion that the Fed has (in retrospect) been too loose. I would put the anchor in Q42007 (the last time things were normal) and apply a 5% growth path from there. (5% approximates the relatively smooth NGDP growth rate for the 2 decades leading up to 2007, and 5 just seems like a reasonable number. One thing I would certainly recommend against is choosing the target growth rate based on anticipation of weaker potential RGDP growth, or population growth, going forward: if RGDP is going to grow slowly, we need the extra inflation to make up for that expected weakness and avoid having money once again become a store of value that competes with real assets.) Since I doubt any plausible actual Fed policy will get us back to that trajectory, I’m pretty much a permadove now, in practice if not in principle. Next time there’s a Great Recession, I hope (or rather wish, not realistically hope) people will have been taught to anticipate that any associated shortfall in NGDP growth will be *fully* reversed.

    Anyhow I’ve created a crypto token to track US NGDP growth. It will be worth $1 when and if NGDP ever reaches my preferred path. This is still in the very early stages, and there are still a lot of details to work out, but I did [a small transaction with myself]( just to establish an initial price based on Q42021 NGDP.

  6. Gravatar of Benoit Essiambre Benoit Essiambre
    21. March 2022 at 16:43

    Would they really have to engineer recessions to achieve FAIT?

    When the price level has reached a certain height a little early and prices have to move sideways for a while to correct course, businesses are still offering products and services at a higher price than if prices had stayed on course. Even with zero inflation during the corrective period, prices would hover above the targeted level for longer than expected until they’d get back on track. Why would they cut production in that scenario?Businesses would still have an easier time than predicted to pay their employees and their old debt.

    Wouldn’t recessions only happen if prices drifted downwards below their predicted path like they did in the 2010s and businesses wouldn’t get the prices they expected for their products so couldn’t keep up with their liabilities and had to downsize.

  7. Gravatar of ssumner ssumner
    21. March 2022 at 19:32

    Benoit, The longer they wait, the harder it would be to achieve FAIT without a recession. It’s still not impossible.

  8. Gravatar of ssumner ssumner
    21. March 2022 at 19:37

    Andy, You said:

    “I would put the anchor in Q42007 (the last time things were normal) and apply a 5% growth path from there.”

    I just don’t see the logic of that. Why not go back to 1907? Or 1807?

    To me, it makes sense to start the clock from when the policy was announced, or better yet go back to the most recent period before the policy was announced when the economy was in equilibrium. That would be the beginning of 2020. When the policy was announced in August 2020 we were already deep in recession, so you’d want to make up for that undershoot. But I don’t see the logic of going back earlier. And if we should go back earlier, why stop at 2007?

  9. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    22. March 2022 at 02:38

    Lester Chandler talked about targeting gdp in 1961. But to have a target you have to have a model to hit it. A futures market is not a model.

    Economics sucks. Economists are retarded. I alone predicted both the 4th qtr 2008 debacle and the 1st qtr 2020 decline. My previous model worked.

    The FED can’t hit any target. It doesn’t have a working model. The effective FFR has been @ 8% for 6 months straight. What kind of a policy is that?

  10. Gravatar of postkey postkey
    22. March 2022 at 02:49

    “Inflation is not exploding out of control and interest rate rises will not help” ?

  11. Gravatar of postkey postkey
    22. March 2022 at 02:52

    Spencer Bradley Hall

    What does you ‘current model’ ‘predict’? 🙂


  12. Gravatar of Andy Harless Andy Harless
    22. March 2022 at 03:10

    1. I don’t think the economy *was* in equilibrium at the beginning of 2020. People were still being drawn into the labor force. The subsequent recession was not the result of an economy that looked like it was going to overheat. There’s no telling how much further that expansion might have gone if COVID hadn’t hit.

    2. Even if it was an equilibrium, it wasn’t preceded by a period of stable NGDP growth. There was no immediate precedent to continue. We had a 20-years-or-so precedent at the point when the Great Recession hit. Why throw that away? Better to say, “We’re going back to something that worked” than “We’re starting over from scratch with a completely new policy.”

    3. If another Great Recession hits at some point, I want people to remember that the previous incident was eventually *completely* reversed, not that we waited 12 years and then gave up. It want it well established that money is not meant to be a store of value.

  13. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    22. March 2022 at 05:00

    “If we determine that we need to tighten beyond common measures of neutral (i.e. an interest rate that neither hinders nor fuels economic growth) and into a more restrictive stance, we will do that,” Jerome Powell announced during a speech at the National Association for Business Economics

    The money stock can never be properly managed by any attempt to control the cost of credit.

  14. Gravatar of Effem Effem
    22. March 2022 at 06:17

    I have no idea where this kneejerk “but it will cause a recession” comes from. Let’s say the Fed brings 10y inflation expectations down to 2%, which makes PCE somewhat lower. That’d eventually get you back on the proper path. Why on earth would that cause a recession?

    The Fed isn’t just Powell. If the actual economists there disagree with Powell (or did in the past) shouldn’t they be saying so? In reality, they seem to generally agree with Powell more than not. So what has influenced Fed economists to drift away from everything we thought they’d learned?

  15. Gravatar of Jeff Jeff
    22. March 2022 at 06:29

    >I would put the anchor in Q42007 (the last time things were normal) and apply a 5% growth path from there.

    While I agree that sticking to a target is better than floundering, I don’t understand this idea that policymakers can just pick a number as if it is equally possible to hit all targets. Some targets may be much more difficult to hit than others, just like how in choosing the placement of the hole on a putting green the course designer can dramatically vary the difficulty of the game. If you put the pin in a place that is naturally unstable, like at the top of a hump, you give golfers an extremely difficult hole to play. They are constantly going to be overshooting or undershooting.

    Isn’t it possibly the same in economics? This talk of “Goldilocks” long-term trajectories like stable 5% NGDP growth seems like a fairy tale to me. What if the only true long-term stable states are, roughly speaking, either Japan or Argentina? Anything else is just a hump on the putting green that you are never going to hit without ping-ponging back and forth.

    How could that be if, as Andy points out, we may have had approximately consistent 5% NGDP growth in the past? For one, that economy was different and RGDP growth made up a larger fraction of NGDP growth than at present. Isn’t it possible that people are just better able to anticipate and plan for real growth than inflationary growth? It may be easier for people to make investment decisions on a real basis (e.g. people are having lots of babies, this field is emerging, this area is growing in popularity, etc) rather than on an assumed future loss of purchasing power (e.g. this business is going to hell but I should buy it because my dollars are going to hell faster). The latter approach requires a highly quantitative way of thinking that is not intuitive and not possessed by many people. If real growth declines, I’m not convinced you can just fill that hole with inflation, at least not without creating a lot of other adverse effects.

  16. Gravatar of ChrisinVa ChrisinVa
    22. March 2022 at 07:57

    Scott, you say that the Fed has not been tightening policy. But if I read the headline correctly, they have stopped QE. Why does moving from a policy of QE to a policy of no QE not count as tightening?

  17. Gravatar of anon/portly anon/portly
    22. March 2022 at 08:16

    ” The new policy is as dead as John Cleese’s parrot. Powell attributes the recent surge in inflation to supply problems, with little discussion of excessive nominal spending. He also suggests that the Fed has been tightening policy, which is incorrect.”

    It’s Fed Chairmen like Powell wot cause unrest, eh?

  18. Gravatar of ssumner ssumner
    22. March 2022 at 16:50

    Andy, Well if we were not in equilibrium in early 2020 (a claim I doubt) then we were extremely close to equilibrium, as close as I’ve seen in my entire life. So then let’s go back to a point that is extremely close to where the economy was in early 2020. I’m fine with that.

    I just don’t see the argument that we need to make up for some sort of significant demand shortfall in early 2020. Where is the evidence for that claim?

    And NGDP growth had been very stable in the decade before 2020.

    ChrisinVA, QE is not a good indicator of the stance of monetary policy.

  19. Gravatar of MIchael Sandifer MIchael Sandifer
    22. March 2022 at 17:35


    The evidence for Andy’s claim that money was tight in 2019 includes, as I’ve pointed out many times:

    1. Falling yield curve that became significantly negative.

    2. S&P 500 fell more than 18% leading into the year and was on a much lower growth path for the remainder of the year. Yet, it appreciated far more than would be expected if economy was in equilibrium.

    3. Implicit acknowledgement that the Fed over-tightened, as they began lowering the Fed funds rate in mid-summer of that year.

    That’s not minor evidence.

    Evidence for your claim that there was a “boom” in 2019:

    1. Productivity growth was 2.1% in 2019, which was more than double the mean rate of the prior 10 years.

    2. NGDP growth, though declining in 2019, still averaged over 4%, consistent with the mean NGDP growth rate of the prior 10 years.

    3. Unemployment reach a historic low, at least in terms of the memories of most living people.

    So, I wouldn’t say you have no case for your perspective, but I do question some of the assumptions underlying it. Those assumptions include:

    1. Wages should have fully adjusted after the Great Recession by 2016 or so. Hence, roughly 4% NGDP growth with 2% or less real growth was the new normal. Empirical work by Reinhart and Rogoff cast serious doubts on that assumption, in my opinion.

    2. Productivity growth began declining in 2004, for secular reasons, including especially slowing demographics, shifts to service sector jobs, and perhaps diminishing low hanging fruit when it comes to innovation.

    I think the commodity shock that began just prior is a significant confounding variable.

    3. The 40 or so year decline in real interest rates has been due to secular factors. On its face, this seems obviously true, unless wages adjust much more slowly after recessions than is commonly believed.

    Stock price behavior suggests that the rate of negative nominal shocks was such that the US economy was rarely, if ever, in equilibrium over the past 40 years. That assumes that excess volatility in stock prices can be explained by macro disequlibrium, of course.

    4. 3.5% unemployment was close to the natural rate.

    I don’t know how much you rely on this assumption, as it may simply rely on some of the above assumptions, but you have mentioned it before as evidence of economic health. Here, you’d made incorrect predictions over the past decade about how low unemployment would go. It ended up much lower than you predicted.

    I can also point out that the Fed, on average, undershot it’s 2% inflation target during the last recovery, though this is not necessarily relevant for those who think wages had fully adjusted by 2016.

    If I didn’t interpret stock prices as I do, I would think Scott has a better argument, but I think he’s been off since 2016.

  20. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    23. March 2022 at 05:27

    re: “The 40 or so year decline in real interest rates has been due to secular factors”

    Economists are clueless. They don’t know a debit from a credit. They can’t differentiate between money and liquid assets. The deregulation of Reg. Q ceilings caused the S&L crisis (as Dr. Pritchard predicted in 1980). The deceleration in velocity (which is an integral part of lower real interest rates) was predicted in May 1980 by Dr. Leland James Pritchard, Ph.D., Economics Chicago 1933, M.S. Statistics, Syracuse

    “The Depository Institutions Monetary Control Act will have a pronounced effect in reducing money velocity”.

    The dystopian world is being thrust upon us. See the must read: “The Great Demographic Reversal” by Charles Goodhart and Manoj Pradhan.

  21. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    23. March 2022 at 05:42

    Leland Prichard was the smartest economist, and probably man, that ever lived. He always wore his Phi Beta Kappa key around his neck. He predicted both stagflation and secular stagnation in 1961.

    He predicted the GFC, as accelerated by Greenspan, in May 1980. He predicted the surge in FNMA and GNMA also in May 1980.

    In contrast to today, economists are bad at predicting anything. Bankrupt-u-Bernanke in his book “The Courage to Act”: “Monetary policy is a blunt tool” and “Unfortunately, beyond a quarter or two, the course of the economy is extremely hard to forecast”.

  22. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    23. March 2022 at 06:30

    @postkey – re: “Inflation is not exploding out of control and interest rate rises will not help” ?

    Mitchell is full of it. N-gDp PLT targeting had to begin well before covid or the war. The “base effect” is dependent upon the distributed lag effect of money flows, the volume and velocity of money – not a y-o-y figure.

    As Nobel Laureate Dr. Milton Friedman said: “Inflation is always and everywhere a monetary phenomenon, in the sense that it cannot occur without a more rapid increase in the quantity of money than in OUTPUT.” Output encompassing any supply-side gap.

  23. Gravatar of ssumner ssumner
    23. March 2022 at 10:58

    Michael, You said:

    “That’s not minor evidence.”

    Yes, it is. Yield curve inversions are much more likely to occur in booms than recessions.

    Stocks were incredibly high in early 2020.

    As for “Implicit acknowledgement that the Fed over-tightened, as they began lowering the Fed funds rate in mid-summer of that year.”

    . . . the Fed was merely following the fall in the equilibrium rate.

    You’ve got nothing.

    As for your claim that falling unemployment proves money is too tight, do you recall the 1960s?

    You can say I’ve been consistently wrong all you like, I’d say I’ve been pretty consistently right.

  24. Gravatar of Michael Sandifer Michael Sandifer
    23. March 2022 at 13:14


    Well, the 5 year inflation breakeven averaged only roughly 1.25% in core PCE terms during 2019, with the 10 year breakeven and 2019 inflation ratenot much higher. Those are even a pretty good bit lower than the 1.6% core PCE inflation rate during total recovery after the Great Recession.

    By 2% inflation targeting standards, there seems little question that monetary policy was tight in 2019.

    And the big difference between the falling unemployment of post the Great Recession period versus that of the Great Inflation is that inflation not only averaged well below the 2% Fed target in the former case, but obviously economic growth never even returned to the pre-recession trend path. Obviously, context matters.

    Again, I’m not claiming you don’t have a defendable case, but I’m hard pressed to see how the tight money view is indefensible.

  25. Gravatar of Michael Sandifer Michael Sandifer
    23. March 2022 at 13:19


    You wrote:

    “Stocks were incredibly high in early 2020.” By what standard? Had the S&P 500 returned to its pre-trade war/Fed rate raising growth path?

  26. Gravatar of Michael Sandifer Michael Sandifer
    23. March 2022 at 13:27

    Am I crazy, or is it reasonable to expect that when the economy’s in macro-equilibrium, the S&P 500 discount rate should equal the growth rate in earnings, which in turn, should equal the NGDP growth rate. Over the longer-term, mean NGDP = the mean discount rate, with divergences exactly as one would expect during periods of obvious disequilibrium.

  27. Gravatar of Effem Effem
    23. March 2022 at 15:49

    New high in 5y inflation expectations today.

    The famous Buffett quote comes to mind…

    “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”

  28. Gravatar of Michael Sandifer Michael Sandifer
    23. March 2022 at 19:49

    I have to admit, I’ve become increasingly concerned about inflation since the war in Ukraine began. It seems the eye of the needle that the Fed must thread for a soft landing is getting smaller. I’m not quite ready to concede Scott was right to be concerned before I was, but I’m heading in that direction.

    I still don’t think a recession is probable, but the probability is rising.

  29. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    24. March 2022 at 05:59

    Powell: “Why have forecasts been so far off? In my view, an important part of the explanation is that forecasters widely underestimated the severity and persistence of supply-side frictions”

    Powell is incompetent. Powell is trying to conflate other forecasts with his own. Monetary policy is executed with long lead times. I.e., it takes a persistent and longstanding series of mistakes to create a deceleration in N-gDp growth, aka Bernanke’s contractionary policy that caused the GFC.

    Monetary policy was way too tight in 2018 and 2019, an IOeR @ 2.40% and 2.35%

  30. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    24. March 2022 at 06:10

    Link: “How Robust Are Makeup Strategies to Key Alternative

    “We analyze the robustness of makeup strategies—policies that aim to offset, at least in part, past misses of inflation from its objective—to alternative modeling assumptions, with an emphasis on the role of inflation expectations.”

    Just like in the 4th qtr. 2008, you can’t suddenly unfuck what has already been fucked up.

  31. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    24. March 2022 at 08:16

    Even if you don’t like Dr. Philip George’s logic (“The Riddle of Money Finally Solved”), he was prescient: “Like Alfred Marshall’s “Cash Balances” – October 9, 2018:
    “At the moment, one can safely say that the Fed’s plan for three more rate hikes in 2019 will not materialise. The US economy will go into a tailspin much before that.”

    Subpar N-gDp growth is irreparable. There’s no makeup policy for an output gap. Powell was directly responsible for 2020’s gap.

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