Monday morning quarterbacking

David Beckworth recently interviewed Megan Greene:

Beckworth: But I want to read a quick excerpt here from what he wrote. He goes, “Africa was neither responsible for the pandemic nor the war in Ukraine. The first is undoing years of human development gains. The second has unleashed a wave of food and energy inflation. Now, the Fed is adding a potential debt servicing crisis to the cocktail.” He goes through examples like that, and I guess this raises the question, could this part of the perfect storm been avoided had the Fed raised rates sooner, say mid to late 2021? Now, again, this is hindsight and Monday morning quarterbacking, but let’s just say they could have seen all this coming. Would it have made enough difference to avoid some of these challenges today?

The Macroeconomic Hindsight of Earlier Fed Rate Hikes

Greene: I’m not sure it would’ve made a difference. When Chair Powell said, I think at the Jackson Hole Fed Conference, “Look, if we had hiked rates a few months earlier, it probably wouldn’t have made any difference at all,” I was pretty sympathetic to that view. I think it’s important to consider what the Fed is responding to in trying to figure out whether they’ve acted appropriately or not or if they had done something differently, if it might have helped. They were clearly responding to inflation, but the nature of inflation in the US is very different from the nature of inflation elsewhere, primarily because it’s got a big demand component to it. Whereas, in Europe in particular, inflation is mostly supply-driven. If the Fed had hiked earlier, maybe it could have headed off that demand spike a bit, but I’m pretty skeptical that it would’ve made a big difference and the Fed would’ve been the only major central bank in the developed world hiking at that point, so in terms of currency impacts, I still think the dollar would’ve been driven higher.

This is a good example of why I prefer not to discuss the stance of monetary policy in terms of interest rates. Monetary policy can affect interest rates in multiple ways, including the liquidity effect, the income effect and the Fisher effect. You might respond that in this discussion the implication is that higher rates are a tighter monetary policy. But in that case Greene is wrong, a significantly tighter monetary policy would have significantly slowed growth in aggregate demand.

So why is the economy still booming in late 2022? Because this particular increase in interest rates has not been associated with a significant tightening of monetary policy—NGDP growth continued at an extremely rapid rate in 2022. (Perhaps the Fed’s abandonment of FAIT has pushed the equilibrium interest rate higher.)

It’s OK to say that tighter money might involve higher interest rates.

It’s OK to say that higher interest rates might not slow AD.

It is not OK to say that tighter money might not slow AD.



7 Responses to “Monday morning quarterbacking”

  1. Gravatar of George George
    8. November 2022 at 15:19

    Election cheaters are getting caught red handed all across the country, especially in Arizona and Pennsylvania, as I type this.

    On site intelligence is being submitted and disseminated in real time.

    PA announced ‘it may take days’ to determine the winner. More Democrat absentee ballots in Pennsylvania’s Allegheny County than in Philadelphia County despite there being 275,000 more Democrats in Philly. Leaders of that County sold the people out to the CCP and the PLA. The entire PA voter registration file is living on a server in China.
    And, machine serial numbers, ballot bundle numbers, and …
    They didn’t steal it. They gave it to the CCP and PLA.

    Allegheny County is going to need to compare the serial numbers of those ballots against the ones found on that Chinese server.

    In Arizona, machines suddenly ‘breaking down’ all over the place. People told to wait in line…and wait…and wait…hoping they will all go home. 20% of the so-called Voting Machines in Maricopa County are not counting the Votes that have been placed in the Machine. Only Republican areas, what a coincidence.

    In Detroit, LARGE numbers of voters are showing up only to be told ‘our records show you already voted’.


  2. Gravatar of foosion foosion
    8. November 2022 at 15:43

    Given the relation between NGDP and AD, it seems somewhat tautological to measure tight monetary policy by the rate of NGDP growth and then say it is not OK to say that tighter money might not slow AD. What am I missing?

  3. Gravatar of Dr Richard Dr Richard
    8. November 2022 at 20:25


    I am not understanding what you are saying the Fed should have done in 2021. Should they have raised Interest rates in 2021? If so, When? How much should the rates have been raised?

  4. Gravatar of Spencer Spencer
    9. November 2022 at 05:18

    re: “NGDP growth continued at an extremely rapid rate in 2022”

    AD = M*Vt. According to George Garvey, Deposit Velocity and Its Significance, demand deposit turnover, bank debits to deposit accounts, underweights Vt. Greenspan eliminated the only valid velocity figure for spurious reasons.

    Remember that in 1978 (when Vi, income velocity, rose, but Vt, transactions’ velocity fell) all economist’s forecasts for inflation were drastically wrong.


    Vt can move in the opposite direction as Vi.

    Historically, given a large injection of new money, the transactions’ velocity rises immediately thereafter (after the roc in DDs peaked in Feb 2022). Thus, it is no happenstance that N-gDp and thus inflation has remained higher than expected when relying solely on the roc in our means-of-payment money supply.

    “The first lesson of economics is scarcity: there is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.” – Thomas Sowell

  5. Gravatar of Spencer Spencer
    9. November 2022 at 05:24

    Correction: “when Vi, income velocity, fell, but Vt, transactions’ velocity rose)

  6. Gravatar of ssumner ssumner
    9. November 2022 at 09:22

    foosion, You asked:

    “What am I missing?”


    Dr. Richard, The Fed shouldn’t even target interest rates. They should have committed to a symmetrical FAIT policy in 2021. Their failure to do so was the problem. People need to stop thinking in terms of “concrete steps”. I have a new book coming out soon that explains this.

  7. Gravatar of Spencer Spencer
    9. November 2022 at 11:02

    Example (reduced AD)

    2007-01-03 99.252 peak
    2007-01-17 97.855
    2007-01-31 95.708
    2007-02-14 90.876
    2007-02-28 94.690
    2007-03-14 91.334

    2007-01-01 98.511 peak
    2007-02-01 92.469
    2007-03-01 91.587

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