Rate hikes do not represent “tightening”

Yahoo recently described the views of Fed Governor Christopher Waller and St. Louis Fed president James Bullard:

Fed Governor Christopher Waller and St. Louis Fed Bank President James Bullard argued that critics don’t take enough account of the tightening of financial conditions that the Fed engineered even before it began raising interest rates in March.

“Credible forward guidance means market interest rates have increased substantially in advance of tangible Fed action,” Bullard said in remarks prepared for a conference organized by the Hoover Institution at Stanford University. “This provides another definition of ‘behind the curve,’ and the Fed is not as far behind based on this definition.”

Waller, who was previously head of research at the St. Louis Fed, made a similar point, arguing that a shift in Fed rhetoric led investors in financial markets to start pricing in rate increases in September, leading to a rise in 2-year Treasury yields that he estimated were equivalent to two quarter-point rate increases by the central bank.

I recall Fed officials making the same sort of claims in the 1970s. But higher rates don’t necessarily represent tighter money. Over the past year, higher interest rates partly reflect higher inflation expectations, and perhaps to some extent a stronger economy. The same sort of confusion occurred in the 1970s.

The Fed still has not come to grips with their policy failure—although in fairness, the Fed’s critics also misunderstand the fundamental problem. I see very few people on either side of the debate pointing out that the Fed has abandoned average inflation targeting. That’s the key policy failure, not the delayed rate increase.



57 Responses to “Rate hikes do not represent “tightening””

  1. Gravatar of Michael Sandifer Michael Sandifer
    8. May 2022 at 08:51

    I acknowledged you were much closer to correct on the risks of overheating as you saw them months ago. My alarm bells didn’t go off until 5 year inflation expectations hit 3% in March, which is much too late, in retrospect. I’ve still never been as concerned as you are about the Fed’s current stance, as I see more uncertainty than you do, but I acknowledged that you certainly would have done a better job running monetary policy in the current Fed regime than I would have.

    That is to say, that I came to understand more about your concerns about unstable monetary policy, but I’m still not as convinced that the manifest current problem is as severe as you think it is. If you were running monetary policy now, you would run a significant risk of overtightening, because you lack a comprehensive, reliable set of forward indicators.

    I think your model of stock prices is fundamentally flawed, and hence you miss the fact that the mean expected NGDP growth path has fallen nearly 0.6% since the year began. As I just pointed out on an older thread, this fact is increasingly showing up in the employment data, including EPOP and the unemployment rate, though we don’t have a lot of data points yet.

    It’s puzzling that you cite real shocks as having brought down stock prices this year when, particularly as inflation expectations fall, that should indicate that NGDP growth expectations are falling. Inflation expectations have been down since March.

  2. Gravatar of sd0000 sd0000
    8. May 2022 at 09:32

    Scott – wanted to follow up on the conversation we had in the other thread. What else would explain real rates (TIPS yields) shooting up since March other than increase in default probability? Markets have fallen precipitously, so it’s not real growth… that just leaves default risk. Unless there’s some other hidden residual that I’m not thinking of.

    You also said that negative real yields throughout most of 2020 and 2021 weren’t an indication of slower real growth forecasts. But how is that possible? If the markets were expecting a strong economy, why would anyone accept negative real yields? Is your argument that excessive fiscal stimulus pushes down real yields through some kind of saving effect?

    This article talks about real yields during pandemic, but implies that low fed funds rate targets were the cause of low real yields – which I don’t understand at all…


  3. Gravatar of Rodrigo Rodrigo
    8. May 2022 at 11:13


    Following the above comment, 5 year inflation expectations have fallen slightly over the last month but markets continue to price in a massive policy error. Granted fed policy has been less than ideal but shouldn’t we start seeng a better reaction from the markets? What is causing this divergence?

  4. Gravatar of m m
    8. May 2022 at 12:04

    Particularly egregious considering 5yr inflation expectations started shooting up in October. https://fred.stlouisfed.org/series/T5YIE

  5. Gravatar of TSJ TSJ
    8. May 2022 at 13:26

    this is maybe a stupid question, but supposing you are really committed to AIT — What is the right time frame to measure? I.e., the average over what time period?

    (Obviously you must look back to some extent. How far? And how far forward?)

    Put somewhat differently, suppose you said “well, we really screwed up for the past ten years and we were too low or too high. But rather than trying to fix that, we are just going to start from here and do 2% average going forward.” Is there ever a time where it would make sense to do that?

  6. Gravatar of ssumner ssumner
    8. May 2022 at 19:27

    Michael, I don’t have strong views on what causes stock price movements.

    sd0000, Perhaps stronger economic growth has pushed up real rates. Or perhaps it’s due to lower saving rates.

    Rodrigo, I don’t try to explain every up and down in the stock market.

    TSJ, When they announced the policy I argued that December 2019 was a logical starting point. I suppose it would make sense to average inflation over 3 or 4 years.

  7. Gravatar of MichaelM MichaelM
    9. May 2022 at 05:00

    “Michael, I don’t have strong views on what causes stock price movements.”

    Except under the gold exchange standard between 1929 and 1932 😛

  8. Gravatar of ChrisinVa ChrisinVa
    9. May 2022 at 05:20

    Scott, I’ve been re-reading portions of your book and your description of the 4 interest rate effects may finally be starting to make sense to me. So the Fisher Effect and the Income Effect could both be pushing interest rates up naturally, neither of which would be a sign that inflation is being checked in any way by recent Fed actions. In fact, as long as the natural interest rate is higher than the Fed funds rate, then it would still be safe to say that the Fed’s position is expansionary (inflationary), correct?

    Of course, the effects of the Income Effect might be weak, and for all we know we are already in a recession, as you say, not only can a recession not be predicted, it can’t even be “nowcasted”. But for sure anticipated inflation remains high, so the Fisher Effect is definitely at play.

    However, recent trends have finally shown a slight (<1%) decrease in the Fed balance sheet. This after a 100% increase in the balance sheet since March of 2020. But down is better than up, right? Or does it even matter, given how far behind the curve the Fed still is?

  9. Gravatar of Michael Rulle Michael Rulle
    9. May 2022 at 05:31


    I may be wrong, but I believe this is the first time Scott put a time frame around FAIT. I have always said on this site that FAIT was hard to implement without a well defined time frame—-which was never stated by the Fed before rejecting FAIT.

    Scott now says 3-4 years, which seems fine. But which 3-4 years? For me, rolling 3-4 years makes the most sense. Or pick any rolling period. It has to be rolling to make any sense. Or—-something very similar. The Fed never did define it——so they abandoned it instead.

    The key phrase in Scott’s essay is not the title but the following “….higher rates don’t necessarily represent tighter money” . Key word—“necessarily”—-which is how I have always understood Scott. That means sometimes it can—-I assume one of those times is now—-as Scott wanted a 75bp hike this past week.

    Monetary policy continues to elude my intuition——except for the general idea of supply and demand for money ——-(but not what generates the latter—-that eludes my intuition)

  10. Gravatar of sd0000 sd0000
    9. May 2022 at 05:34

    “sd0000, Perhaps stronger economic growth has pushed up real rates. Or perhaps it’s due to lower saving rates.”

    Stronger economic growth wouldn’t jive with the market nosediving during that same time period, though.

  11. Gravatar of ssumner ssumner
    9. May 2022 at 06:19

    MichaelM, Yes, I should clarify that I don’t have strong views on the sorts of stock price moves that they are discussing, which tend to be quite modest. There are times when the causal factor is pretty clear, such as the 1930s.

    Chris, Yes, down is better, but the Fed may still be behind the curve. The demand for base money may be falling faster than the supply.

    Michael Rulle, You said:

    “Key word—“necessarily”—-which is how I have always understood Scott. That means sometimes it can—-I assume one of those times is now—-as Scott wanted a 75bp hike this past week.”

    This confuses cause and effect. The stance of monetary policy depends on the relationship of the market rate to the equilibrium rate.

    sd0000, Stocks may be falling due to inflation worries. That happened during the 1970s.

  12. Gravatar of Michael Sandifer Michael Sandifer
    9. May 2022 at 07:48


    Yes, I’m surprised Scott isn’t more curious about the relationship between stock prices and economic growth expectations. An increasing number of economists are taking a look at my model, and I had an email exchange with a Fed economist about it recently.I’m also increasingly having economists follow my blog and recommend it. There’s a little buzz beginning to pick up.

    When one starts to follow the streaming inputed mean expected NGDP forecast, it really begins to change the perspective on economics and finance. I’m trying to play a role in introducing macroeconomics for the 21st century.

  13. Gravatar of Michael Sandifer Michael Sandifer
    9. May 2022 at 07:51

    The big recent advance for me was discovering a way to input the expected economic growth rate in forward-looking data, instead of relying on trailing P/E. I’ve even had a large investment firm in the UAE reach out to me to see a business plan, wanting to explore investment opportunities.

  14. Gravatar of Michael Sandifer Michael Sandifer
    9. May 2022 at 07:51

    “Impute”, not “input”, above.

  15. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    9. May 2022 at 08:41

    re: “But higher rates don’t necessarily represent tighter money”

    Link: Further Evidence on Greenspan’s Conundrum

    Greenspan dropped legal reserves by 40%. That caused the GFC. Powell eliminated them, bypassing FAIT and stoking inflation.

  16. Gravatar of sd0000 sd0000
    9. May 2022 at 09:09

    “sd0000, Stocks may be falling due to inflation worries.”

    But the inflation forecast didn’t change in that same period.

    Even besides that point. If real growth market estimates are unchanged and inflation estimates go up – wouldn’t that cause the nominal price of equities to go UP, not down?

    “That happened during the 1970s.”

    I’m assuming real growth estimates fell during that time though?

  17. Gravatar of sd0000 sd0000
    9. May 2022 at 09:13

    @michael – out of curiosity, how would your model explain:

    Real rates (TIPS yields) being deeply negative post-pandemic (until recently) even though equities soared.

    Real rates recently surging while equities fell and inflation outlook stayed largely flat.

  18. Gravatar of Anon Anon
    9. May 2022 at 09:39

    I had a weird idea, and I wanted to fly it by.

    Did the Fed trying to get the economy back to trend growth in 2020 and 2021 help exacerbate the COVID pandemic here in the states?
    In March 2020, the economy was depressed, people were staying home in an effort to avoid COVID-19. Then the FED began pumping trillions into the economy to get back to trend, pushing people to go out and shop, work, hang out with others. Higher inflation meant that people had to get a job since their cash savings were losing value(more of a problem in 2021).

    In China, the opposite kind of happened. The economy was forcefully brought to a standstill for three months or so until the pandemic was manageable and stamped out. Then they spent everything to get it back to growth. Meanwhile in America we immediately started to spend to get back to growth, so people may have been incentivised to move out prematurely, causing the high spike in deaths. Perhaps if the Fed waited till May or something to start the printing press, perhaps the virus would have been much more mitigated than it was originally.

    This also had a negative impact since some states were trying lockdown policies, so you had high demand, restricted supply, and without any real drop in cases until the vaccine’s came.

    So the difference in America vs China is we immediately started stimulating the economy, and in China they wanted a couple months of no growth before stimulus. The former failed, while the latter seemed to have worked.

  19. Gravatar of Michael Sandifer Michael Sandifer
    9. May 2022 at 09:53


    First, the model I refer to above merely relates changes in stock prices to changes in expected economic growth rates. It doesn’t address real interest rates.

    Second, in the short-run, changes in the real interest rate are usually related to changes in RGDP growth and inflation expectations.

    Third, in the long-run, I suspect that the neutral real interest rate should equal the expected economic growth rate, in macro equilibrium. There is significant evidence that the mean nominal return on capital equals the mean nominal economic growth rate over a period of years.

  20. Gravatar of ssumner ssumner
    9. May 2022 at 09:58

    sd0000, Real growth was reasonable during the late 1960s and 1970s, the big problem was high inflation.

    Someone should do a study of the correlation between TIPS spreads and stocks, and especially how that correlation changes over time. I recall that David Glasner did such a study for the Great Recession.

  21. Gravatar of sd0000 sd0000
    9. May 2022 at 11:25

    Or correlation between TIPS yields and RGPD futures. Or govt bond yields and NGDP futures.

  22. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    9. May 2022 at 12:41

    LOL. The djia is down 653 now. Does that mean the FED should buy bonds?

  23. Gravatar of James James
    10. May 2022 at 05:17

    I have an idea!

    We can split the country into two: North and South or East and West.

    The democrats and soft money folks can establish a country with no white people, and perhaps no straight people, so that they can live without “oppressors”; they can have a central bank, soft money, subjective laws with no inalienable rights, create interminable hate speech lists, no fly lists, establish a ministry of truth, replace the family with a collective community, subsidize public education, late term and partial birth abortion, focus on military expansion and financial aid to foreigners, and prohibit oppressive religious folks from opposing their views. They can use intimidation tactics, burn down buildings, harass religious people at their places of worship, and spit at people they disagree with.

    Republicans will choose to establish a government identical to the constitution. They will accept people of all colors and creeds, have open debate, permit speech no matter how wacky the idea, use the gold standard or BTC, replace unnecessary quotas with merit, respect the rule and spirit of the law, permit freedom of religion, establish a bill of rights to protect the individual, agree upon and protect the right to life at either quickening or conception, eliminate federal income tax, leave schooling to the private sector, cut all federal safety nets, and ask politely that people accept responsibility for their choices – especially the bad one’s. Poverty programs may exist at the state and community level, but certainly not at the federal level. No long term patents, no subsidies to corporations, and no permanent standing army.

    When can we make this deal? I’m waiting with bated breath.

  24. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    10. May 2022 at 07:25

    “the correlation between changes in the funds rate and the 10-year Treasury yield declined—effectively to zero”

    One dollar that turns over 5 times can do the same work as five dollars turning over only once. Thus, rather than a short-term spike in nominal interest rates, you force a continuous deceleration in AD. That means tight money today, tomorrow, and for long as it takes (24-months) to wipe out inflation. You don’t “wash out” any gains.

  25. Gravatar of Thaomas Thaomas
    10. May 2022 at 07:39

    I’m still trying to understand why you think the Fed h as change it’s policy instead of just mis estimated the settings of of its policy instruments to achieve it’s policy.

  26. Gravatar of sd0000 sd0000
    10. May 2022 at 09:09

    Scott – does this from FT make sense to you?

    US inflation-adjusted bond yields are on the verge of turning positive for the first time since March 2020 in a surge that is heaping further pressure on riskier corners of financial markets.

    So-called 10-year real Treasury yields have soared more than 1 percentage point since early March, hitting a high of minus 0.04 per cent on Tuesday, in a sign bond payouts are coming close to exceeding medium-term inflation expectations.

    The jump in real yields has been triggered by the Federal Reserve’s bid to slow intense price growth by aggressively tightening monetary policy. The move is already eroding one of the pillars that has underpinned a powerful rally in stocks and riskier corporate bonds from the depths of the coronavirus crisis two years ago.

    “The Federal Reserve is going to be draining liquidity,” said David Lefkowitz, the head of US equities in UBS’s chief investment office. “It is those more speculative parts of the market that benefit the most when the Fed is adding liquidity and they [may] face some . . . headwinds when the Fed is going the other way and pulling back.”

  27. Gravatar of Jeff Jeff
    10. May 2022 at 09:42

    Biden said: “The number one threat is the strength, and that strength that we’ve built is inflation”.

    How do people buy this nonsense anymore? Is the American left really this stupid? 40% of Americans have an education, but they don’t know the basics of supply and demand?

    Inflation is not a strength, and it is not a sign of a strong economy. But it is a clear sign of printing money.

    Next, the left will try to dupe Americans into believing that wages are rising, and explain how they’ve helped the working class to acquire higher wages when actually the wages are falling. Nominal has increased, not real wages.

    After the economy crashes, they’ll tell us how they need to restrict ATM withdrawals to reduce the panic. They’ll tell us we need to consume less for the planet’s sake, eat weeds and worms, and be happy with a minimalist lifestyle.

    And then comes authoritarianism, social credit scores, and gulags.

  28. Gravatar of Todd Ramsey Todd Ramsey
    10. May 2022 at 11:27

    @Thaomas: I asked this question on EconLog. Scott gave as evidence the fact that in the March 2022 survey, the median Fed Governor had a stated goal of 2% for “longer run” inflation. If the Fed is still committed to FAIT, the “longer run” goal should be less than 2%, because we have averaged significantly higher than 2% over the last 15 months or so.

    If I understand correctly.

  29. Gravatar of Brent Buckner Brent Buckner
    10. May 2022 at 12:08

    @Thaomas & @Todd Ramsey
    See also Powell’s words on not trying to run inflation below 2%:

  30. Gravatar of Michael Sandifer Michael Sandifer
    10. May 2022 at 12:58

    Yes, the best interpretation seems to be that FAIT+, the “+” referring to employment, is a largely undefined asymmetric inflation target, which means it’s so vague as to hardly be useful.

  31. Gravatar of Kevin erdmann Kevin erdmann
    10. May 2022 at 14:16

    Aswath Damodarans estimates of expected returns on equities suggest there is little correlation between real yields and expected equity returns. However expected returns are a combination of current earnings yields and growth expectations. Since real yields are correlated with growth expectations, this means that the composition of expected equity returns changes with long term real yields.
    I think there is an interesting model to be developed there. As far as I know nobody has.

  32. Gravatar of Michael Sandifer Michael Sandifer
    10. May 2022 at 17:32

    I’m curious as to why there’s interest in the relationship between real rates and stock prices. Expected NGDP growth is the macro factor that drives stock prices, period.

    Low rates, nominal or real can be associated with higher or lower earnings multiples, depending on the relative balance between near-term and long-term NGDP growth.

    In the US, for example, lower rates have typically been associated with temporary slowdowns in NGDP growth or recessions, with higher P/E ratios predicting economic recovery.

    In Japan, in contrast, for most of the last 2 generations or so, there’s a long-term trend of low rates and lower stock prices, ultimately reflecting a lot of secular stagnation, along with central bank that sets inflation low, and hence permanently lower NGDP growth.

    Both interest rates and stock prices are determined by expected nominal economic growth rates, so to examine the relationship between the two doesn’t necessarily make any sense. The standard finance model that employs real interest rates in stock valuation is simply wrong.

  33. Gravatar of Kevin Erdmann Kevin Erdmann
    10. May 2022 at 18:09

    Michael, do you have any public posts where you explain your model with more detail.
    I would expect stocks to rise with experienced nominal growth. All else equal, if NGDP growth has a 5% shock, I would expect stocks to rise an additional 5% with it. But if today we suddenly expected a 5% inflation shock I wouldn’t expect stocks to rise 5% today, but if we suddenly expected a 5% real shock, I would expect that to be reflected in todays price.

  34. Gravatar of David S David S
    10. May 2022 at 18:10

    I’m glad to see that Kevin Erdmann is debasing himself with a comment on this blog—welcome to the gutter rats!. I’m uniquely unqualified to comment on what’s happening in the stock market, other than to point out that we saw way more excitement in spring of 2020. The Fed is following, not leading right now, and while I think we could tolerate NGDP growth in the 5% range over the next few years it will take some strong medicine to even get us to that level path. Volcker and Greenspan did it for the 90’s—no shame in using that playbook.

    On a side topic, and one that happens to be deep in Kevin’s territory, I’m unimpressed by what’s happening with the housing and mortgage markets. There’s probably a mild drag effect from higher loan rates, but that’s nothing compared to historically low inventory levels* which are a decade long phenomenon. I think that energy prices are probably more important for causing some short run misery.
    We also need to start killing all the tariffs, especially on Canadian lumber.

    *This article is amusing:

  35. Gravatar of ssumner ssumner
    10. May 2022 at 19:38

    anon, Possible, but that seems unlikely. The key difference was China’s zero Covid policy, which was largely unrelated to the economy.

    James, Your description of the GOP is hilarious. This party is currently a banana republic style personality cult headed by an idiot.

    Thaomas, I have many Econlog posts on that topic.

    Jeff, “And then comes authoritarianism”

    Yup, the authoritarianism is coming in 2024.

  36. Gravatar of Michael Sandifer Michael Sandifer
    11. May 2022 at 03:26


    I don’t have any public posts with that detail, but I do have a short PDF I can send you. Feel free to email me at m_sandifer@yahoo.com.

  37. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    11. May 2022 at 05:17

    re: “Expected NGDP growth is the macro factor that drives stock prices, period”

    Yes. Except that N-gDp growth is unquestionably driven by the lags in money flows. The March 2009 stock bottom is prima facie evidence.

    How would stock prices react to Putin retaliating against Biden’s proxy war? (or a “Black Swan”)

  38. Gravatar of w d w w d w
    11. May 2022 at 06:21

    i still wonder how raising rates will solve a physical problem, the global supply chain crash, or the pandemic. the last info i saw said basically said the US is basically back to 2019 levels demand. but it has not got supply to match, as to many things are just broken. and given the higher prices of many goods and services i would expect that demand would crash any way (since prices are so high, for example used vehicles are selling for more the MSRP when they were sold). and buyers are already starting to just put off buying )the price is too high), except for those who have no other choice (vehicles do tend ware out, be damaged to the point of not be usable for transportation)

  39. Gravatar of msgkings msgkings
    11. May 2022 at 06:59


    ‘Putin retaliating’


    Welp, there goes any shred of credibility you had.

  40. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    11. May 2022 at 07:11

    8.3% CPI. How do you define a “soft landing”?

  41. Gravatar of bdw bdw
    11. May 2022 at 14:23

    is it just US inflation or it world wide inflation? with maybe 1 exception?

  42. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    12. May 2022 at 07:15

    8.3% inflation rolling over? The CPI is fully 0.976 of the prior month. It is 4.15x the FED’s 2% target (price stability).

    When Paul Volcker made his Oct. 1979 policy pronouncement to target the money supply, it then took c. 26 months to tame inflation.

  43. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    12. May 2022 at 09:42

    Interest is the price of credit / loan-funds. The price of money is the reciprocal of the price level. Jacking up interest rates reduces short-term money flows, proxy for real output (causes a recession acting principally on Vt), rather than long-term money flows, proxy for inflation (acting on the money supply reducing N-gDp).

    The money stock cannot be properly managed by any attempt to control the cost of credit.

    As I said: The only tool, credit control device, at the disposal of the monetary authority in a free capitalistic system through which the volume of money can be properly controlled is legal reserves. The FED will obviously, sometime in the future, lose control of the money stock.
    May 8, 2020. 10:38 AMLink

    Implementing monetary policy in an ample reserves regime abdicates the FED’s Open Market Power.

    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”

  44. Gravatar of Christian List Christian List
    12. May 2022 at 12:25

    Is there a theory that inflation is politically desired because the state wants to relieve itself of debt in this way? Is there any current desire at all to stop inflation? At least in the EU, quite obviously not really. In addition, there are effects that people call “cold progression” in Germany, i.e. more tax revenue due to bracket creep and so on.

  45. Gravatar of ssumner ssumner
    12. May 2022 at 13:38

    wdw, You said:

    “the last info i saw said basically said the US is basically back to 2019 levels demand.”

    No. Demand is well above trend, which is the problem.

    bdw, The problem here is worse than in most other developed countries.

    Christian, There are many such theories, as well as theories that governments like low inflation. All pretty much worthless.

  46. Gravatar of Cameron Cameron
    12. May 2022 at 17:42

    Not sure if this been pointed out, but this increase in NGDP growth has coincided with what is arguably the tightest fiscal policy in US history. Fiscal policy is simply IRRELEVANT in comparison to monetary policy when it comes to affecting demand.


  47. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    13. May 2022 at 02:31

    The Democrats have a hidden economic agenda. It’s not as Powell says: “So I would say that we fully understand and appreciate how painful inflation is, and that we have the tools and the resolve to get it down to 2%, and that we’re going to do that.”

    If you want to break inflation, then allow non-union workers and truckers to unload the docks in Long-Beach harbor.

  48. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    13. May 2022 at 04:32

    The “cost-of-living-crisis” is causing permanent “demand destruction” (Real Personal Income (RPI) dropping by .17% since March 2021).

    Interest rate manipulation (suppression, the stoking of alternative asset prices away from bonds), the FED’s monetary transmission mechanism, drove up the April PPI by 11% y-o-y. It’s Gresham’s law: “a statement of the least cost “principle of substitution” as applied to money: that a commodity (or service) will be devoted to those uses which are the most profitable.

  49. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    13. May 2022 at 05:50

    re: “A credible NGDP target would also anchor inflation expectations at the horizon over which output is expected to converge to potential.”

    “An NGDP-targeting strategy would prescribe removing policy accommodation more rapidly than currently expected in order to keep incomes nearer their prepandemic trends and reduce the long-run price-level impact of the pandemic.”

  50. Gravatar of Thaomas Thaomas
    13. May 2022 at 06:41

    Wouldn’t readers of this blog benefit rom knowing how you distinguish between a departure from average inflation targeting and mis-setting the instruments to achieve it? And if the latter and you have an insight, why they mis-set the instruments? I do not see how to reject the possibility that the Fed just mis-judged real growth obstacles like higher international prices of petroleum, supply chain disruptions, and in last summer fall less vigorous growth in the labor force?

  51. Gravatar of ssumner ssumner
    13. May 2022 at 09:06

    Cameron, Good point, although it also makes me wonder about the way they measure the stance of fiscal policy.

    Thaomas, I’ve answered that many times. They’ve admitted they are not trying to offset the previous high inflation. They are forecasting failure.

  52. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    13. May 2022 at 10:52


    “The Fed uses four main tools to carry out monetary policy. Two of these tools are methods for increasing or decreasing the size of the monetary base”

  53. Gravatar of Christian List Christian List
    13. May 2022 at 14:42

    Thank you, Scott for your response and your assessment. Much appreciated.

  54. Gravatar of Nick S Nick S
    13. May 2022 at 18:43

    Cameron- it’s called base effect brutha. Turns out that when the government spends almost $2 trillion in a previous period, that on a relative percentage basis, fiscal policy looks “tight” in the next period.

  55. Gravatar of Effem Effem
    14. May 2022 at 03:41

    I think we need an Econlog post discussing Jeff Bezos claim on twitter that higher taxation has nothing to do with bringing down inflation.

  56. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    14. May 2022 at 06:26

    Sumner: “The most important tool is open market operations, which is the buying and selling of government securities. Buying securities directly puts more base money into the economy, while selling securities takes money out.”

    The FED is still buying securities, but Reserve balances with Federal Reserve Banks over a 8 month period are now down by 318.5b. The decline is due to O/N RRPs and uptake in the General Fund Account.

    Powell is relying entirely on the effective federal funds rate to manage the economy.

  57. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    15. May 2022 at 07:15

    Stagflation is money illusion. Presupposed R * is the modeled effective funds rate (convergence of market rates to neutral rates), the administered rate, which produces the actual yield curve, presupposed AS / AD equilibrium. NO, it’s not closing the gap between R * and the administered rate, it’s the closing of the gap between short-term and long-term money flows, the volume and velocity of money.

    Re: “What separated the soft landings from these crash landings was that the Fed ignored its money-supply altimeter.”

    The worst Federal Reserve Chairman in history is ignorant. “In statistics and econometrics, a distributed lag model is a model for time series data in which a regression equation is used to predict current values of a dependent variable based on both the current values of an explanatory variable and the lagged (past period) values of this explanatory variable.”

    “Fisher’s Purchasing Power of Money as well as the work of Pigou and Marshall were the basic building blocks for later students of monetary economics.”

    “The theory of distributed lags is that any cause produces a supposed effect only after some lag in time, and that this effect is not felt all at once, but is distributed over a number of points in time. Irving Fisher initiated this theory and provided an empirical methodology in the 1920’s”

    “Friedman and Schwartz (1963) “Money and Business Cycles” showed that NBER specific cycles in money growth preceded NBER reference cycle turning points, that the degree of severity of business cycles was closely correlated with the amplitude of cycles of money growth , and that evidence contradicted the view that cycles in money growth were mainly a lagged response to changes in the business cycle.”

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