Music to my ears
I’ve focused on advocating three major policy changes:
1. Target the market forecast.
2. Level targeting.
3. Do “whatever it takes” to achieve the target.
Obviously the Fed is now relying more heavily on market forecasts than in the past. In addition, average inflation targeting is being considered as part of the Fed’s review of its policy regime—that’s sort of like level targeting. So the other major challenge is getting Fed people to think in terms of a “whatever it takes” approach to policy, especially at the zero bound.
This is from a recent speech by Charles Evans, president of the Chicago Fed. I decided to bold the good parts:
In terms of a broad monetary policy strategy, I favor a powerful, full-throated commitment to follow outcome-based monetary policies aimed at achieving maximum employment and symmetric 2 percent inflation within a reasonable time. The best tactics to achieve these outcomes may change over time. For example, at times this approach could prescribe forward guidance with thresholds that need to be met before changing rates. At other times, it could prescribe overshooting our 2 percent inflation objective with momentum. The point is to focus on our objectives—and not on the specific operational tools used to obtain them.
Importantly, in a world where monetary policy is challenged by low equilibrium rates and elevated odds of hitting the ELB, outcome-based policy calls for a relentless focus on our symmetric 2 percent inflation objective throughout the cycle. We have to have a “do-whatever-it-takes” attitude toward policy all the time—in a downturn, when we are constrained by the effective lower bound, as well as in an expansion, if inflation remains stubbornly below our objective.
I recognize and accept that monetary policy will never be a panacea to all the negative shocks hitting the economy. But when it comes to price stability, the monetary authority has the sole responsibility for achieving an inflation objective. For us, that is symmetric 2 percent inflation.
My God! I could have bolded almost the entire quotation. It’s all “good parts”.
My favorite part is where Evans suggests that fiscal policy should play no role in achieving the inflation objective.
HT: Alex Schibuola
Tags:
8. October 2019 at 01:12
“My favorite part is where Evans suggests that fiscal policy should play no role in achieving the inflation objective.”
The word “fiscal” only appears once in the article, and is quite complementary about the effect of fiscal stimulus!
8. October 2019 at 05:55
“We have to have a “do-whatever-it-takes” attitude toward policy all the time”
Amen. God bless this man.
Hey Scott, I was just thinking about interest rate tightening and loosening “cycles”. The whole idea seems to reinforce whatever real business cycle is out there.
Why shouldn’t the path of short-term interest rates follow a random walk instead — largely as likely to move up or down largely independent of the previous move?
Interest rate markets were on board for the tightening through the end of 2018 (indeed, even leading the Fed in late 2018), then abruptly pivoted, accelerating negative since June, and they have stayed a step ahead of the Fed since. If the Fed “gets out front” (Chuck Norris here says 50 bps), that could stabilize things to such an extent that the Fed increases rates again in early 2020. What’s wrong with that?
I can envision a policy where short-term rates fluctuate between 0% and 2.5% with 2%ish inflation indefinitely (like, for the rest of your life, or mine even.) We’ve been in this New Normal world for years already.
8. October 2019 at 06:58
Ralph, You must have missed this:
“the monetary authority has the sole responsibility for achieving an inflation objective”
That means no one else is responsible.
Brian, Yes, on a daily basis rates should be as likely to rise as to fall.
8. October 2019 at 10:20
So refreshing. Let’s hope his views spread.
8. October 2019 at 10:46
This speech is indeed encouraging.
I noticed one sentence fragment that worried me a little:
“symmetric 2 percent inflation objective throughout the cycle.”
Of course an NGDP target would result in counter-cyclical inflation (best result) and still hit a 2% symmetric target. But a truly symmetric target throughout may not. It may even produce pro-cyclical inflation.
That said, it’s the only negative comment I saw and I may not even be reading it correctly.
8. October 2019 at 11:05
How concerned are you that he wants to target inflation and not NGDP? I would think that it leaves in place at least two problems:
– the need to measure real gdp
– pro-cyclical behavior during times of good deflation
8. October 2019 at 11:38
I find the speech frightening.
Why does a member of the FOMC have to make such a speech? These are the absolute basics and essentials of monetary policy on which there should be absolute agreement. Imagine one has to make a speech about the fact that the earth is a sphere and orbits the sun. If Evans has to make such a speech, it can only mean that there is no agreement on the absolute basics.
Not to mention: These people can’t even agree on the absolute basics, but somehow they are supposed to agree on NGDPL targeting in the future??? Scott, I want what you are having, it must be the really good stuff.
8. October 2019 at 13:45
Bill, Procyclical inflation is something that I also worry about.
Carl, I’d certainly prefer NGDP targeting. But a lack of “whatever it takes” has been the Fed’s biggest failing since 2008 (until recently, when bad inflation forecasts were the problem.)
9. October 2019 at 19:52
If there’d never been any fiscal stimulus, there’d be no base money in private hands. That would mean the only way households and firms could get hold of dollars would be to borrow them from private banks at interest.
Given that creating base money is costless, as Milton Friedman said, applying for loans from private banks, depositing security etc etc is a ridiculously expensive way of supplying the economy with money.
As MMTers keep pointing out, dollars must first be spent into the private sector by the state BEFORE the state can borrow them back, and do monetary policy.
10. October 2019 at 09:11
Ralph,
Didn’t you just say that creating base money is costless??? What???
So the state has to spent in order to borrow back in order to be able to create (let me guess: in order to spent). What??? Ingenious system.
10. October 2019 at 10:58
Ralph, MMT? LOL.
10. October 2019 at 20:48
Christian List, The indisputable fact is that govt cannot borrow something that does not exist. When govts borrow, they borrow base money. Ergo base money must first be created and spent into the private sector BEFORE govt can borrow from the private sector.
Now explain where the flaw is in that argument.
Scott, Re your comment “MMT, LOL”, my response is “Scott Sumner, LOL”. That’s not my idea of an intelligent comment, but presumably you think it’s pure genius.
11. October 2019 at 15:21
Hi scott,
i’d like to agree with you that the Fed is more focused now on targeting market forecasts. before i can do that though — what market forecasts are you referring to? when i look at break even inflation it really doesn’t seem like the fed is focusing on these. BEI has moved down over the last few months and the Fed has done very little (at least as measured by their speeches). it is true that in late 2018 when BEI fell a lot the Fed eventually responded. but with the benefit of hindsight it appears they were more focused on the stock market (this time around the plunge in the stock market has been relatively shallow). so it would appear to me that the Fed is more focused on the stock market forecast than the BEI forecast. BEI is far from perfect but i would think this would be a better variable for the fed to target.