Sandra Pianalto: The most powerful woman you’ve never heard of
Most educated people know about the three women on the Supreme Court, and are certainly aware of Hillary Clinton. Some may have even heard of Vice Chair of the Board of Governors, Janet Yellen. I’d like to argue that Cleveland Fed president Sandra Pianalto might well be more powerful than any of those five women, mostly because she appears to hold a swing vote at the FOMC. Thus it’s interesting to probe the thought process of a Fed moderate:
Sniderman: Let’s talk more directly about current circumstances. If inflation is near our goal right now, why not try to go faster and get that unemployment rate down sooner?
Pianalto: We always have to stay focused on a balanced approach. I would be concerned that if we were to provide even more policy stimulus, given my current outlook, we could risk an unwelcome rise in inflation. On the other hand, if we were to remove our policy accommodation too quickly, I would be concerned that we would risk slowing the economy and causing an unwelcome disinflation. I think we have to strike a balance, and I think we have a good balance with our current policy.
I’m almost certain Pianalto would say I’m mischaracterizing her views, but that answer has “zero fiscal multiplier” written all over it. Aggregate demand is right about where she wants it. But what happens if the economy goes off course, growing faster or slower than expected?
Sniderman: If we get into the summer and begin to see another one of these patterns of the economy slowing down, do you think that would be the time to support further easing in policy and maybe be willing to take a little more risk on the inflation side of things in order to get the economy moving again?
Pianalto: Right now my forecast is for the economy to grow a little more than 2.5 percent this year and 3 percent next year, with inflation staying close to 2 percent. My forecast for either economic growth or inflation would have to change for me to want to make a change in the stance of monetary policy. Given my current outlook for the economy, the current stance of monetary policy is appropriate. If my forecast were to change significantly, then I would want to look at the appropriate policy response, and perhaps make an adjustment to my monetary policy stance in response to a change in my forecast.
Again, zero fiscal multiplier. But that’s not really what interests me about this answer. Nor is it the implied 4.5% to 5% NGDP growth target, which sounds vaguely market monetarist. That’s certainly the NGDP growth she expects, but she does not indicate that she puts equal weight on short term deviations in inflation and growth. And she does not seem to favor level targeting; so although the NGDP forecast looks decent, it’s actually a bit below what most market monetarists would prefer, given the huge undershoot since 2008.
What interests me most is that she talks as if the Fed is still steering the nominal economy, despite near zero interest rates. Other people may not see it that way, but swing voters at the FOMC certainly talk like they are still “doing monetary policy.” In one sense that’s reassuring—we’d hate to see those at the controls claiming that the steering mechanism for the economy was stuck. On the other hand it’s also a bit dismaying, as the marginal crew member of USS Nominal GDP seems happy with the ship’s course; even as Obama, Romney, Bernanke, 14 million unemployed, and the US stock market think it’s obvious that aggregate demand is too low.
PS. A note to commenters: Please don’t tell me what Mr. Etch-a-Sketch is saying right now, I’m only interested in his views on monetary policy before he felt he had to kowtow to the Tea Party.
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17. April 2012 at 19:05
but…but…but 4.5% – 5% ngdp growth is neutral not accomodative. I’d hate to see what tight money look like. oh wait…
17. April 2012 at 20:05
Pianalto: “If my forecast were to change significantly,”
A wide bid-ask spread written all over it. Cut taxes, make her tighten policy.
17. April 2012 at 20:57
Superb blogging.
Yes, the Fed is under the illusion that if you are dead in the water, the motor is broke, the sails are down, but you are drifting in the right direction and not taking on too much water, then that is good enough. You may not be steering or under power, but perhaps land will come into view soon….
17. April 2012 at 21:24
Yeah let’s dig a bit deeper:
http://ibmag.com/Main/Archive/The_Power_100_Sandra_Pianalto_25.aspx
“Whether she’s addressing economics majors or a chamber of commerce, Pianalto argues in favor of “creative destruction” in the economy. She challenges the common platitudes that tie Ohio’s economic woes to the loss of manufacturing jobs. Too few of the region’s traditional jobs have been shed for renewal and innovation to take root, she argues.”
This is:
1. not wanting to save the losers (moral haz)
2. proof the woman has a life OUTSIDE the Fed, where she is telling Ohio how to win in the next decades.
Her ideas are founded from and buit on “how to survive” a massive change for the future.
AND YOU want her to prop up the current players (stabilize) and then have policies for future.
BUT SHE IS terrified of what is happening in Ohio,and she’s far less concerned about re-arranging deck chairs, she’s preaching how to survive interregnum.
You Scott are pointing at the bear, while that wily gal is putting track shoes on Ohio so it outruns the the other backpackers (states).
Perhaps being Fed Prez in CLEVELAND carries a certain relative morality.
Have you seen Ohio’s econ numbers since Kasich?
17. April 2012 at 21:47
So she’s basically doing the wrong thing in the right way.
17. April 2012 at 22:07
To be fair, the Fed is not a level-targeter (or doesn’t see itself that way), so she would feel uncomfortable loosening to close the output gap for the same reason that Bernanke said he wasn’t going to use Rooseveltian Resolve.
17. April 2012 at 22:19
P.S. Check out what Phelps says in the latest Historinhas:
http://thefaintofheart.wordpress.com/2012/04/17/the-harm-a-nobel-prize-can-do-the-case-of-edmund-phelps/
18. April 2012 at 05:58
I’ll have to ask my friend about Sandra. He was a senior advisor t the Cleveland Fed until 2007. She seems to take the Greenspan approach of an implicit NGDP target, which really isn’t a bad option. Evidently her forecasts were way off in 2008, or she had less power then. Assuming accurate forecasts a NGDP target is exactly like a NGDPLT starting at t + 0. I wish they could just make the target the explicit goal and use market forecasts, then we’d be in great shape going forward.
18. April 2012 at 06:10
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18. April 2012 at 08:32
dwb, I think the answer is of course it is neutral. That is the essence of a pure growth rate targeting approach: to keep policy set at neutral rather than speculating about concepts such as the natural rate of unemployment or potential output.
Such a policy is never wrong, although it may not be right.
Both the Taylor rule and ngdp level targeting attempt to be backward looking… But, but how do you know the AS curve isn’t very steep, maybe the natural rate of unemployment is what it is today–similar to levels we can see in Europe.
It is not trivial when you realize that the AS curve is shaped by expectations. If the CB loses the faith of the public that trend inflation is not X but Y instead, the AS curve will distort such that we need a higher trend rate of inflation.
I was at the fore calling fed policy tight in 2008, but I continue to believe that policy should always strive to be neutral. That means abandoning the conceit that fiscal or monetary policy can emend any fluctuation in output. The optimal policy is always the one keeps growth rates in the medium term at their long term trend rate.
18. April 2012 at 08:56
@jon,
if you said, “policy should strive to be neutral on a forward looking basis,” i would agree. now, $#;1 happens unexpectedly. i think the lack of a make-up promise to fix unexpected shocks (both good and bad) is where i would depart. lower than potemtial current growth should be made up with higher later (and vice versa, so that we achieve neutral on average).
honestly, i dont know how to define neutral except in terms of some concept of NAIRU. i am pretty sure 10% trend results in about 7% inflation. nobody really knows potential output. if the fed targeted 5% and observed 3% trend inflation, i expect theyd start targeting 3% trend growth (measured inflation ovetstates actual inflation). id expect theyd target a growth rate consistent with zero actual inflation. implicitly, they are looking at some concept of NAIRU (maybe not unemployment per se).
18. April 2012 at 11:29
dwb, Yeah, I wonder what that would look like.
123. The bid-asked spread effect is a cognitive illusion. In the short run it seems to matter, but that’s an illusion. I did a blog post once explaining why the marginal cost of an additional student at Bentley is much higher than zero, even if most classes have lots of empty seats. If policy changes are discrete, you need to consider not just the probability of change but also the size of the change. When both are factored in it’s as if the function is continuous.
Thanks Ben.
Morgan, You said;
“Have you seen Ohio’s econ numbers since Kasich?”
No, but manufacturing fell more than services in the recession, and it’s bounced back more in the past two years. Ohio is a manufacturing state–does that explain the Kasich effect? (I’m not hostile to Kasich, BTW, as you know I favor supply-side policies.)
Saturos, You said;
“To be fair, the Fed is not a level-targeter (or doesn’t see itself that way), so she would feel uncomfortable loosening to close the output gap for the same reason that Bernanke said he wasn’t going to use Rooseveltian Resolve.”
I’d have more respect for that point of view if the Fed would issue the following press release:
“The Fed opposes fiscal stimulus, because we think AD is just fine. Not only do we oppose it, but if it happens we will root for it to fail, as we don’t want more AD. Not only will we root for it to fail, but we will actively try to make it fail.”
I’m all for transparency, but let’s then have all branches of the government explain exactly what they are doing and why. Explain their policy goals, and where we are relative to those goals. I guarantee if you are right, and if the Fed sent out a press release like I suggested, Congress would throw a fit, as would the press–the same press that currently praises Bernanke.
Cthorm, Over the last year they’ve even undershot 4.5%.
Jon, You said;
“But, but how do you know the AS curve isn’t very steep, maybe the natural rate of unemployment is what it is today-similar to levels we can see in Europe.”
That seems very unlikely, as the unemployment rate has fallen from 9.8% in November 2010 to 8.2% today, and it’s likely to keep falling. And that occurred with AD growing below trend. What if NGDP had grown at a decent rate? I’d guess unemployment would have fallen even faster.
Ultimately I’d like to see the Fed ignore unemployment and target NGDP. But you do have an argument that the best initial point to start the trend line may depend on estimates of “slack.”
18. April 2012 at 11:46
“I’m all for transparency, but let’s then have all branches of the government explain exactly what they are doing and why. Explain their policy goals, and where we are relative to those goals.”
Yeah, good luck with that. The Fed is redacting the heck out of its minutes as it is. And of course as Nick says, the fact that “explain their policy goals” is needed at all is itself a clear sign of regime failure.
18. April 2012 at 12:03
“I’m all for transparency, but let’s then have all branches of the government explain exactly what they are doing and why. Explain their policy goals, and where we are relative to those goals.”
This is like expecting parents to divulge all their secrets to their children. Nonsense.
18. April 2012 at 13:49
Scott,
If Bentley pegs the class size at 20-30, in a class with 25 students the marginal cost of an additional student is not zero, but much lower than the average cost. Pianalto says there are 25 students in the class.
“When both are factored in it’s as if the function is continuous.”
OK. Fiscal multiplier is a continuous function of the expected AD. Expected ex-ante multiplier can be large even if the expected NGP is above target if we assume negative shocks are likely because of the deleveraging. Median ex-post multiplier zero, if the expected NGP is above target.
19. April 2012 at 06:16
Saturos, That may all be true, but it in no way negates my criticism of your claim that Fed policy was defensible because they aren’t level targeters.
123, The flaw in your argument is that it always seems like the current stance is close to the middle of the desired range, so it always LOOKS LIKE there is room to move. But logically that can’t be the case, the number of students is equally likely to be anywhere in the range of 20 to 30, and over the last three years the actual NGDP level has floated all over those ranges. That means there are brief periods where the fiscal multiplier is positive, but they are offset by brief periods where it is negative. On average it is zero. Pianalto seems to imply we are in the middle of her range, but probably not the middle of the overall Fed’s range. We are equally likely to be anywhere along the range.
And even if we were near the edge of her range, she’d probably talk like we were in the middle. They never like to say “one epsilon less NGDP and I call for QE3,” it makes them look like idiots. It makes it look like one epsilon is stopping them from saving lots of jobs.
19. April 2012 at 09:04
Scott, I certainly agree that over long periods of time the average multiplier is zero.
“They never like to say “one epsilon less NGDP and I call for QE3,” it makes them look like idiots. It makes it look like one epsilon is stopping them from saving lots of jobs.”
In August 2010, WaPo “one epsilon less NGDP and I call for QE2″ op-ed made Bernanke look like a smart central banker.
“That means there are brief periods where the fiscal multiplier is positive”
Normally these periods are brief, and at the same time the size of the stimulus with a positive multiplier is very limited.
However, when the bid-ask spread is large due to the lack of the clear central bank target, due to lack of experience with the policy tools when rates are low, and due to mismeasurement of central bank risk-taking capacity, these periods can be quite long, especially in the face of the persistent shocks that lower the natural interest rate.
19. April 2012 at 12:17
But one epsilon IS keeping them from saving lots of jobs.
Anyway, are you at all familiar with the modern economic history of Argentina Scott? It would make for a great post in light of recent events. Especially if you share my opinion of the IMF advice they got in the late 90s:too much focus on inflation and not AD & the slope of AS. Too tight policy soured the country against free markets. My Argentine friends are distraught.
20. April 2012 at 14:06
123, Yes, but these wide bid-asked spreads can produce either a positive or negative fiscal multiplier.
cthorm, That’s exactly my view, and have done several posts on Argentina–but not recently.
21. April 2012 at 12:04
Scott, yes, that’s why it is very important to get the approval of the central bank if you plan fiscal stimulus.
22. April 2012 at 07:55
123. Not just the approval, but a description of their policy w/o fiscal stimulus.