Show some Rooseveltian resolve (and do it NOW)

People keep asking me what the Fed should do. I’ve been answering that question for 11 years, and my answer is always the same:

1. Stop paying IOER right NOW. It was a mistake from the very beginning in October 2008. It’s a contractionary policy, as even the Fed acknowledges. Why would you want a contractionary monetary policy in October 2008? Why would you want a contractionary monetary policy today?

2. Switch to level targeting NOW, at least during the crisis and recovery. Preferably NGDP level targeting, but more realistically price level targeting.

3. Ask Congress for more tools NOW. One possibility is negative rates, but I much prefer the Fed asking Congress for the right to buy a much wider range of assets. Congress should give the Fed this tool NOW. Even if the Fed doesn’t ask for it.

4. The Fed should buy as many Treasuries (and MBSs) right NOW as required to raised the expected price level two years from today to a level 4% higher than today. Not gradually; buy them NOW.  Only buy other assets when you run out of conventional ammunition (which is not likely to happen.)

Notice that I didn’t even mention cutting interest rates. Interest rates are not monetary policy.   If the Fed does what I suggest then interest rates might well increase. Ten year bond yields are much higher in a world with expectations of robust nominal growth than they are in the world we actually live in right now.

The coronavirus has no bearing on the question of whether the Fed can raise inflation expectations (core PCE) to a total of 4% over 2 years (i.e. 2%/year). It’s simply not an issue. The Fed could create 20% inflation if they wanted to.  What the coronavirus problem does do is make a short recession likely this summer, even in a world where prices are expected to be 4% higher two years from today. But with this policy in place, the hit to employment should be relatively mild. Maybe just “mini-recession” levels. If not, then I shudder to think what might happen to animal spirits, and then investment, and then the labor market.

PS.  David Beckworth has a very good post that makes some similar points.  The biggest difference is that David suggests a fallback provision where the Fed would also be able to use a fiscal facility in a crisis.  That would probably work, but I believe it would be much easier to get Congress to give the Fed the option to buy a wider range of assets than to get them to allow the Fed to operate a fiscal facility.  Congress jealously guards its control over the distribution of fiscal largesse.  Also, Dems and the GOP would not agree on the appropriate level of progressivity.



67 Responses to “Show some Rooseveltian resolve (and do it NOW)”

  1. Gravatar of Shyam Vasudevan Shyam Vasudevan
    10. March 2020 at 11:11

    How would the Fed control the FFR with its large balance sheet without paying IOER?

  2. Gravatar of bill bill
    10. March 2020 at 11:14

    If the Fed or Congress didn’t want the Fed to buy other assets, would it be easier for the Fed to hit a level target if the Treasury shifted its borrowing to longer terms?

  3. Gravatar of bill bill
    10. March 2020 at 11:15

    Shyam, the Fed did not pay IOR for its first 95 years. It used OMO to hit its FFR target.

  4. Gravatar of Brian Donohue Brian Donohue
    10. March 2020 at 11:20


    One quibble: “Notice that I didn’t even mention cutting interest rates.”

    Your #1 point was ending IOER NOW. Call it what you like, that’s an interest rate cut.

  5. Gravatar of Stefan Spong Stefan Spong
    10. March 2020 at 11:52

    Thank you for continuing to fight this fight.

  6. Gravatar of Anonymous Anonymous
    10. March 2020 at 12:01

    Scott, I completely follow your argument until “hit to employment should be relatively mild”. If we have large scale social distancing for months where people don’t go to large events, eat at restaurants, travel, etc. wouldn’t that be a far more significant impact on employment no matter what?

  7. Gravatar of SG SG
    10. March 2020 at 12:09


    Keep it coming, Scott.

  8. Gravatar of Ralph Musgrave Ralph Musgrave
    10. March 2020 at 12:47

    “I much prefer the Fed asking Congress for the right to buy a much wider range of assets.”

    The first flaw in that idea is that it involves the Fed then being the owner of a range of assets which are not normally regarded as being suitable for being in the hands of the central bank.

    Second, while that policy would doubtless raise the price of some assets, e.g. housing, and result in more houses being built and more people employed on such building work, it does not make sense, given a recession, for an increase in employment to be skewed towards the production of a narrow range of assets, or indeed skewed towards asset production at all.

    In contrast, if households are simply given more money (e.g. via tax cuts) and government spending is increased (funded by money printing), then the range of new jobs will pretty much match the range and type of jobs which already exist, which is presumably the optimum distribution.

  9. Gravatar of jj jj
    10. March 2020 at 13:02

    IOER was contractionary when it was introduced, but was it not a one-time step change in the monetary base which has long since been compensated for?

    Or am I wrong, Scott, and you’re saying it’s an infinite sponge which will soak up the effect of #4, buying Treasuries and MBS’s?

  10. Gravatar of Justin Justin
    10. March 2020 at 13:14

    I always liked the idea of the Fed buying metals futures, probably copper. The advantage of this would be to distract the lower ability commentators with the specifics of the copper futures market. If the Fed buys treasuries, then the Fed is “monetizing the deficit” if they buy stocks then they are “blowing a bubble”, copper? Whatever story they manage to tell it won’t be so dramatic, and it still offers a broad scope for big dollar-sign “concrete steppes” while also allowing for expectations to be managed.

  11. Gravatar of ssumner ssumner
    10. March 2020 at 13:17

    Shyam, I don’t see a need to control the ffr. But if they insist on doing so, then they can use the same procedure as in the pre-2008 period. They may need to reduce the balance sheet, although right now I see no reason to do so.

    bill, Maybe, but I doubt the Treasury would do that.

    Brian, Whether it’s an interest rate cut depends on what they do to the balance sheet. There was no IOR in 2006 and rates were 5%.

    Stefan, You’re welcome.

    Anonymous, Perhaps, I’m not really sure what to expect. I still feel that stable NGDP expectation for 2021 would prevent any big reduction in employment this year. We are in uncharted waters, however, so I could easily be wrong.

    Ralph, That’s not at all what I’m proposing. I oppose any Fed purchases targeted at specific sectors, and indeed Congress should not allow that.

    jj, I’m saying that it’s contractionary, considered in isolation. The fact that the Fed has done other expansionary things doesn’t change that fact.

  12. Gravatar of ssumner ssumner
    10. March 2020 at 13:18

    Justin, i strongly oppose having the Fed buy metals futures. Stick to stocks and bonds.

    If they are private sector assets, they should be index funds.

  13. Gravatar of Thaomas Thaomas
    10. March 2020 at 16:12

    Why not 2% 1 year from now? Why not 1% six months from now?

    Regardless of the time horizon, would there not be continuous buying and selling every month or week or day to keep the PL on target?

  14. Gravatar of Benjamin Cole Benjamin Cole
    10. March 2020 at 16:22

    PS. David Beckworth has a very good post that makes some similar points. The biggest difference is that David suggests a fallback provision where the Fed would also be able to use a fiscal facility in a crisis. That would probably work, but I believe it would be much easier to get Congress to give the Fed the option to buy a wider range of assets than to get them to allow the Fed to operate a fiscal facility. Congress jealously guards its control over the distribution of fiscal largesse. Also, Dems and the GOP would not agree on the appropriate level of progressivity.—Scott Sumner

    Yes, David Beckworth’s idea is similar to that of Stanley Fisher’s from August of last year, that the Federal Reserve Board have the tool of money-financed fiscal programs, aka helicopter drops, within its portfolio. I am glad to see the Orthodox macroeconomics profession move (glacially) into this correct policy analysis.

    President Trump, by using his executive power to change federal withholding tables on income taxes, can perhaps execute a helicopter drop. If President Trump does lower taxes on wages, and if the Federal Reserve buys Treasury bonds, that could be similar to a helicopter drop.

    Does the addition to the balance sheet of the Federal Reserve have to be explicitly considered as permanent to be stimulative? Perhaps. Everyone knows that the Federal Reserve never reduced its balance sheet back to the minimal levels of pre-2008. The public will assume that the additions to the Federal Reserve are largely permanent. I am not sure that is important anyway.

    The important thing is that the payroll tax cut under consideration by President Trump would increase demand within the United States immediately. The first President Bush executed just such a payroll tax cut in 1992.

    For those with a sense of humor:

    Will Scott Sumner be “out-macroed” by President Trump? Stay tuned!

  15. Gravatar of Thaomas Thaomas
    10. March 2020 at 16:24


    If I am wrong I hope Scott will tell us, but conducting level policy with IOR will require larger purchases of whatever assets as interest rates will fall less, leaving the disincentive to hold cash to the portfolio effect.

    And I’d add a Fed announcement of the new policy and invite observation of how successful it is.

  16. Gravatar of Benjamin Cole Benjamin Cole
    10. March 2020 at 16:49

    Trump pitched 0% payroll tax rate for the rest of the year, White House official says
    PUBLISHED TUE, MAR 10 2020 3:30 PM EDT
    Eamon Javers
    Mike Calia
    President Donald Trump, in a meeting with Republican lawmakers on Capitol Hill Tuesday, pitched a 0% payroll tax rate that would last through the rest of this year, a White House official told CNB


    Well, Trump is Trump and he will overplay even a good idea.

    And just to prove that US politics has become completely craven, crapulent and hypocritical, Nancy Pelosi appears opposed to the idea of a payroll tax cut, a cut that would help working Americans the most, and lower-income working Americans the most, and would help the economy the most.

  17. Gravatar of Todd Ramsey Todd Ramsey
    10. March 2020 at 18:12

    Yes! Focused and forceful. You’re on your game.

  18. Gravatar of Christian List Christian List
    10. March 2020 at 18:14

    @Benjamin Cole

    In Germany it is much worse. Yesterday, the Social Democrats (!) called for a major tax cut as soon as possible. The conservatives around Merkel were against it. No tax cuts, and if yes, then 2021 at the earliest. The reasoning was exceptional as well: “because of the ongoing corona crisis, there is no room for financial experiments!” — You can’t make this stuff up.

  19. Gravatar of Benjamin Cole Benjamin Cole
    10. March 2020 at 18:29

    Christian List: A bad novel-writer would have a more-believable plot.

    See this, from WSJ:

    By Andrew Restuccia, Andrew Duehren and Richard Rubin

    Updated March 10, 2020 8:24 pm ET
    WASHINGTON—President Trump’s push to suspend the payroll tax to boost the economy during the coronavirus outbreak fell flat on Capitol Hill, as lawmakers of both parties said they preferred targeted measures to assist hourly workers and the battered travel industry.


    A payroll tax cut, that is a FICA tax cut, would apply to workers who make $137,000 a year or less. That is, FICA taxes are only applied to the first $137,000 in wages. That is middle-class and below. (Oh sure, someone making $137,000 in, say St. Louis, might be considered upper middle-class. So a small portion of the payroll tax cut might go the upper middle class. Big deal.)

    Trump’s payroll tax cut would immediately boost spending in the US. It would not require complicated and ineffective federal spending programs.

    It is unclear if Trump’s payroll tax cut would be for both employers (who kick in half) and employees. I would recommend both.

    If the tax cut is effected immediately, it would result in about a $750 billion tax cut on employees and employers in 2020. A tax cut only for productive people.

    This tax cut would be far more effective in boosting demand in the US than trillions of quantitative easing.. The Fed could offset lost tax receipts by buying Treasuries and placing them into the Social Security tax fund.

    Deontology is the worship of rules over results.

    Deontology often defines orthodox macroeconomics and policy-making. As well as sniveling partisan politics.

  20. Gravatar of ChrisA ChrisA
    10. March 2020 at 20:09

    Please Fed listen to Scott.

    On a slightly OT point, we seem to be heading for a recession as predicted this year by many because of the age pf the expansion, despite no predictions of the proximate cause. Could this be a law: an expansion will eventually slow for unpredictable reasons.

  21. Gravatar of Benjamin Cole Benjamin Cole
    11. March 2020 at 01:38

    From Japan Times (NIID) is a Japan government health agency)

    “In the meantime, NIID on Friday recognized cases in which the asthma drug Ciclesonide has been found effective in treating COVID-19 patients.

    Based on data at NIID showing the drug worked on patients with Middle East respiratory syndrome, a hospital in Kanagawa Prefecture administered it to three elderly pneumonia patients from the virus-hit Diamond Princess cruise ship.

    Afterward, their symptoms, which included fever and respiratory distress, reportedly improved in a few days.”


    So, we have an infection that hits the elderly almost exclusively, and which can be treated.

    Danger, Will Robinson, Danger!

  22. Gravatar of Ralph Musgrave Ralph Musgrave
    11. March 2020 at 03:53

    Scott, The fact that you don’t advocate concentrating on “specific sectors” does not alter the fact that the resulting stimulus will be skewed. E.g. in the case of shares, it will be skewed towards shares that are easy for the Fed to buy, that is stock exchange quoted shares. In contrast, it would be an administrative nightmare for the Fed to try to buy shares in every firm employing five or ten people.

    Plus there will be a skew towards spending money in ASSETS rather than current consumption (both public and private).

  23. Gravatar of Michael Rulle Michael Rulle
    11. March 2020 at 04:07

    Way to go——Saying it loud. Every economist you know should be encouraged to say it too. Get a guest opinion piece somewhere—-I am glad you are in action mode!

  24. Gravatar of Capt. J Parker Capt. J Parker
    11. March 2020 at 06:46

    With IOR Bank reserves are a perfectly liquid asset that also produces and income stream. So reserves can be valued at the face value of the reserve dollars PLUS the net present value of the income stream from IOR. Eliminating IOR wipes NPV value of IOR off the banks balance sheets. Reducing bank asset value isn’t usually expansionary. I understand the argument that eliminating IOR makes it more costly for banks to hold cash but it isn’t clear to me that that is enough to make up for the loss of asset value. Can anyone help me understand this better?

  25. Gravatar of BoomerHarvest BoomerHarvest
    11. March 2020 at 08:11

    Look at these boomers begging the state to buy their bags.

  26. Gravatar of Alvaro Alvaro
    11. March 2020 at 08:59

    Hi scott, why are interest rates not monetary policy? Is this conventional view or more you disagreeing with conventional FED policy? Thanks

  27. Gravatar of Christian List Christian List
    11. March 2020 at 09:19

    Danger, Will Robinson, Danger!


    Didn’t you write just 1-2 days ago that covid-19 was developed by the Chinese as a weapon, including built-in mutations that are supposed to make the virus worse and worse? So which way is it?

    Actually, it’s not about any of those things. It’s about the fact that we now have solid information from italy. Lombardy is one of the economically strongest regions of Italy. The health system there is comparable to the US or Germany.

    The case number curves in countries like the USA, France, Germany look exactly like Italy at the moment, only shifted by about 8-14 days.

    You could get a little more information and for example read the reports of desperate doctors from Lombardy. They sound as if they were written from a war zone. The pictures are equally impressive.

    From Lombardy we know that the hospitals work at the absolute limit and beyond. There is rationing, there is triage. There is a lack of nurses, intensive care units, medical ventilators and the necessary specialized doctors who can operate the equipment.

    So there’s really no reason why you should write every few hours that this is all so over the top and what a fearless hero you are. First of all you are not a hero, it’s not even about you, and secondly it is not exaggerated.

  28. Gravatar of sd0000 sd0000
    11. March 2020 at 09:49

    I posted this in the previous thread, but there is precedence for a central bank buying equities – the Swiss National Bank consistently buys foreign equities, in some circles it’s known as the “world’s biggest hedge fund”. It dividends out the profits to the national and regional governments in Switzerland. I’ll reiterate the puzzling aspect of this though: it still hasn’t helped increase inflation.

    Having said that, if you have the ability to buy up the rest of the world and dividend it’s profits to your citizens without causing any inflation, why would you not do that? Scott has argued it’s what the BoJ should do, but as far as I’m aware, they stubbornly stick to domestic equities (which – in my opinion – is a terrible idea that could lead to a cycle of disaster if the Japanese economy gets in trouble).

  29. Gravatar of Benjamin Cole Benjamin Cole
    11. March 2020 at 10:20

    Danger, Will Robinson, Danger!


    Didn’t you write just 1-2 days ago that covid-19 was developed by the Chinese as a weapon, including built-in mutations that are supposed to make the virus worse and worse? So which way is it?—Christian List.

    My earlier post, regarding the artificially created virus, was satire.

    By the way, new cases are dropping dramatically in China.

    From what I read this new virus is tremendously infectious, meaning that almost everybody within contact is infected. Of course the vast majority have no symptooms are only minor illness. That’s why 1,100 crewmen aboard the Diamond Princess were exposed to the virus without a single death. Children are nearly immune to the coronavirus.

    The public health agencies are reacting in the same way that national security agencies react. Any threat or perceived crisis is to be exploited.

  30. Gravatar of Ray Lopez Ray Lopez
    11. March 2020 at 10:53

    Ssumner borrows a phrase from Krugman’s “End This Recession Now!” with an absurd plea for printing more money. An economist named Sam Hammond makes the same point, citing Bernanke’s 2017 NGDPLT proposal, today, see:

    I say money is largely always neutral so much ado over nothing.

    One quibble: (Sumner) “Only buy other assets when you run out of conventional ammunition (which is not likely to happen.)” – b.s. Japan’s central bank ended up ‘running out of conventional ammunition’ after buying enough debt to equal, nominally, 200% of GDP and has since ended up buying half the JP stock market (via index funds). And it hasn’t helped the JP economy one iota. Money is always and everywhere neutral.

  31. Gravatar of ssumner ssumner
    11. March 2020 at 11:13

    Ralph, How many times do I have to say this; I’m not recommending that the Fed buy shares. I want them to have the right to do so, SO THAT THEY DON’T HAVE TO DO SO.

    Parker, If you are worried about bank profits (I’m not) then increase IOR on required reserves enough to offset the loss of IOER.

    Alvaro, Read my short course on monetary economics, in the right margin of this blog.

    sd2000, I favor a more expansionary policy precisely so that we don’t end up like Switzerland and Japan, buying stocks.

    Ben, You said:

    “My earlier post, regarding the artificially created virus, was satire.”

    I hope they are all satire, as you are a fountain of misinformation.

  32. Gravatar of Christian List Christian List
    11. March 2020 at 11:47

    the vast majority have no symptooms are only minor illness.


    you are so resistant to advice, it blows my mind. I was just explaining to you why this part of the story isn’t really relevant right now, yet you just keep repeating it over and over again like a broken vinyl record.

    The public health agencies are reacting in the same way that national security agencies react

    By sitting on their hands? The German health authorities sat on their hands for two months instead of doing something relevant. The American authorities reacted similarly, they even obstructed the preparations, for example the test kits.

    China bought the West a little time, but this time was not used wisely.

  33. Gravatar of Carl Carl
    11. March 2020 at 13:32

    I am keeping my fingers crossed that one of these vaccines will work and that antibody serums can scale to help. In the meantime, the Achilles heel of our medical response seems to be ventilators. I read that hospitals can use surge tents and other means to scale their bed capacity, but I don’t hear anyone saying they can scale ventilator capacity or the expertise needed to run the ventilators.

  34. Gravatar of ssumner ssumner
    11. March 2020 at 15:02

    Christian, It’s hopeless. He doesn’t listen.

    Carl, Yes, we spend $100 billion or more on fighter jets that are useless against terrorist threats, and then forget to stockpile ventilators. We don’t even stockpile enough surgical masks. 🙁

  35. Gravatar of Christian List Christian List
    11. March 2020 at 15:07


    a few days ago you were talking about certain virostatics as if they were vaccines. They’re not vaccines. Vaccinations won’t come until 2021, maybe even as long as 2022. For a vaccination you have to understand the virus first, but so far there is even lack of basic research on corona viruses.

    I assume you are right about the ventilator capacity, you can’t pull the necessary experts out of a hat. They will cancel all elective surgeries, there will be holiday bans, they will create a few extra beds, but a lot more is not possible if you don’t have a magic hat for new staff.

  36. Gravatar of Benjamin Cole Benjamin Cole
    11. March 2020 at 15:42

    Trump urged Mnuchin to pressure Fed’s Powell on economic stimulus in explosive tirade about coronavirus— Washington Post 3/11/2020


  37. Gravatar of Benjamin Cole Benjamin Cole
    11. March 2020 at 16:14

    Christian List—

    I enjoyed your reference to broken vinyl records.

    Okay, from that groove one more time: I stand by my statement that coronavirus is a threat to the very elderly and a few other compromised individuals.

    COVID-19 does not appear to be a threat to anybody else.

    If I am spouting misinformation, so be it.

    Evidently the coronavirus is highly infectious, which means everybody exposed to it gets it, but only only a fraction become ill, and of that fraction a minute portion die. The elderly.

    Seems to me a reasonable course is to let nature take its course. Expressions like “herd immunity” are entering the language. We can’t live on lockdown forever and when we stop lockdown the virus will get out again.

    Some predict this will happen in China, as China returns to work, infections will rise again.

    So what is the purpose of a lockdown? You cower in your houses for a few weeks, destroy the travel, hospitality and convention industries, maybe sporting events too, and then come out and get a coronavirus cold anyway.

    If a vaccine was imminent, lockdowns might make sense.

  38. Gravatar of Benjamin Cole Benjamin Cole
    11. March 2020 at 16:30

    For those of you who enjoy being scared, here is a thriller from John Cochrane:

    Weaponized viruses!

    This is not satire.

    It is a curiosity that the Wuhan Coronavirus emanates from the very place in China that maintains a lab capable of weaponizing viruses. COVID-19 is extremely infectious and the onset of (usually mild or no) symptoms is delayed. It perfectly fits what would be a test. A relatively harmless virus but with the characteristics of spreading quickly with delayed onset of symptons.

    But the Communist Party of China would never do that, right?

    The next time around, when used in earnest, one could insert much greater lethality into the virus. Millions of people become infected, do not realize they are infected, spread the virus, and then everybody starts to die.

    Hey, read John Cochrane’s blog if you think I am being sensational.

    PS expect this storyline to get a lot of ink in some circles in coming years. Bigger budgets for the Pentagon!

  39. Gravatar of Carl Carl
    11. March 2020 at 16:33

    @Christian List
    You’re right. I wrongly referred to virostatics and antibody therapies as vaccines. I am a virology neophyte. Your estimates for the time to develop a vaccine sound, if anything, conservative based on what I am now reading about the R&D lifecycle for vaccines.

    That said, I will keep my fingers crossed that the virostatics such as remdesevir work and antibody therapies work. And, I will even keep them crossed that the Migal Galilee Research Institute’s IBV vaccine proves out in tests and then can be deployed on a rapid timetable. And, having no ventilator manufacturing capabilities in my backyard I will hope that someone does figure out a way to mass produce ventilators quickly.

    Other than that, all I can do is tell my contact circle to take the proper precautions and take those precautions myself.

  40. Gravatar of Can Sar Can Sar
    11. March 2020 at 17:11

    Benjamin, The virus is currently deadly mainly for the old, but the severe and critical cases seem to include lots of younger people as well though I haven’t been able to find much reliable data on details. Also the 80% of other cases aren’t necessarily a walk in the park – it’s just that they don’t require hospitalization. Some proportion have few or very mild symptoms but a good chunk of those 80% get various forms of pneumonia that are significantly worse than any flu you’re likely to have experienced. And while we don’t yet have a lot of data on how well the severe and critical patients fare afterwards many are likely to sustain some serious longterm damage.

  41. Gravatar of Steve Steve
    11. March 2020 at 18:20

    Does inflation expectations not being 2% mean the Fed is full of hacks?

  42. Gravatar of LGS LGS
    11. March 2020 at 18:22

    Scott, maybe you’ve blogged about it before but I can’t find it – why do you hate interest on reserves? Sure, maybe the central bank can solve all problems without it, but why prioritize getting rid of IOER as point (1)? How does IOER cause harm?

  43. Gravatar of Benjamin Cole Benjamin Cole
    11. March 2020 at 18:27

    Can Sar:

    The experience of the 1,100 crew on the Diamond Princess, that is a large sample of middling range non-elderly adults who slept and ate in commons areas, is indicative. Nearly all must have been infected. Not one died, and only a few (less than a handful) required hospitalization.

    COVID-19 is said to be highly infectious, and everyone exposed gets it. We have no immunity, as it is a novel virus.

    I see no point in lockdowns. The virus will just emerge later, and kill off old people. On the other hand, if younger people go out and get infected, they will build up “herd immunity” that will limit COVID-19 outbreaks in the future, perhaps even within a few weeks.

    Can Sar, if you are young, act normally. You might get a mild cold. From a few weeks past that point, you will not be a carrier. You can then volunteer to help people in old age homes who might be at risk. You will not then be a carrier.

    The alternative appears to be economy-destroying lockdowns of limited usefulness, and rank panic.

    Danger, Will Robinson, Danger!

  44. Gravatar of Michael Sandifer Michael Sandifer
    11. March 2020 at 19:36


    What about fiscal support? The boost to stock prices Tuesday, assuming we attribute it all to the very uncertain prospects of the payroll tax cut, reflected a roughly .2% increase in GDP growth expectations. That would presumably be higher if the tax cut became a reality, but it would cost nearly 6% of annutal GDP, so doesn’t suggest much bang for the buck.

    It’s perhaps better to have more targeted support that is not intended as stimulus, such as special UI benefits for those furloughed or laid off due to the pandemic, or those in quarantine. Also, we need to make sure everyone can easily afford medical treatment, though with shortages of supply, that might not make a huge difference in some cases, if Italy is any indication.

  45. Gravatar of Tuharsky Tuharsky
    11. March 2020 at 19:54

    Although I disagree with Ssumner on several points, if there is one thing I have learned from his blog it is that the idea of the fed needing to conserve its “ammunition” is absurd, if ammunition is meant to refer to rate cuts. Even if one assumes that the zero lower bound is actually binding, if rates are not currently at that bound, easing policy now raises the equilibrium nominal interest rate by raising inflation expectations (and possibly also by raising RGDP growth expectations) thereby giving the central bank more ammo, not less.

    However, I do think that the metaphor of ammunition is more appropriate when applied to balance sheet size. Surely Scott, despite your faith that, in theory, a central bank can inflate its currency by buying the whole world, you acknowledge that there are costs associated with expanding the central banks balance sheet and/or buying private sector assets. The most obvious is the politicization of the central bank, but once private sector assets move onto central bank balance sheets there are corporate governance issues which I believe may be underappreciated. I’m not saying it doesn’t make sense for the Fed to ask for authorization to purchase such assets, especially since signaling its ability to purchase them may lessen the need for it to actually buy any. What I am saying is that there are significant costs associated with a large central bank balance sheet which you rarely acknowledge.

    Given that fact, I believe the central bank should measure its remaining ammunition not in terms of the number of rate cuts it can make before reaching the zero lower bound, but in terms of the assets it can reasonably afford to buy without damaging political incentives and corporate governance. This is precisely why, in my view, the Fed should abandon interest on reserves – it basically is a financing tool allowing the Fed’s balance sheet to be bigger than it otherwise would be. For any normal financial institution we would recognize that, all else equal, raising the rate it pays to depositors would allow it to have a larger balance sheet. For some reason, in the case of the Fed few acknowledge this fact. But I am also open to other strategies that allow the Fed to conserve its ammunition, such as regulatory changes, and am open to the possibility that the timing of asset purchases may affect things.

  46. Gravatar of Ray Lopez Ray Lopez
    12. March 2020 at 01:57

    @Tuharsky – you enjoy talking to us readers or yourself? Because Ssumner is not going to reply in any substantive way to your good points. He might come back with a one-liner that’s off topic. He’s as ideological and hide bound as Benjamin Cole. I don’t blame him, he’s made his name in assuming money is strongly non-neutral (despite the evidence to the contrary) and is riding that horse into the ground. In economics, name recognition and fashion are important, and our host is the ‘strong money non-neutrality guy. You might as well get a Ptolemaic believer to concede the earth moves round the sun (HT: Brian Donohue in a slightly different context).

  47. Gravatar of Benjamin Cole Benjamin Cole
    12. March 2020 at 04:52

    “He’s as ideological and hide bound as Benjamin Cole.”–Ray Lopez.

    I heard that.

    I wonder, what is the ideology to which I subscribe? You seem a bit stuck in the “money is neutral” groove yourself.

    Have you examined Japan in the Great Depression, the only developed nation to side-step that idiotic, man-made caused event? Sure, over the centuries, money might be neutral.

    But men measure their lives, and earning years, in mere decades. Nations can go to ruin in a couple decades. Such fleeting temporal events are beneath your Olympian perspective, but for us little people, a few decades here or there counts.

    An interesting question is how long the Great Depression would have lasted had not WWII intervened.

    If money is neutral, then how to explain Greece, in perma-recession, with the noose of the Euro around its neck?

  48. Gravatar of derek derek
    12. March 2020 at 05:44

    I think people here are misunderstanding liberal criticism of the payroll tax holiday. While it is true that the payroll tax cut would impact only the portion of earnings that make one middle to (let’s get real) solidly upper middle class, the criticism is that the payroll tax cut would benefit salaried workers rather than hourly. Since many salaried workers, especially white collar ones, will shift to telecommuting, have access to more robust sick leave, etc., these workers will continue to get paid their normal salary.

    As a salaried worker myself, I would welcome the extra money! However, it is important to recognize that hourly workers, who probably make far less than salaried workers to begin with and have a smaller savings pool, would see their income flow shut down in a major coronavirus outbreak. These are the workers that probably need the support most, and a payroll tax holiday, while relatively easy for the government to implement, does not really target these workers very well and instead targets the workers who are just telecommuting or whatever.

  49. Gravatar of ssumner ssumner
    12. March 2020 at 09:06

    Steve, No.

    LGS, It may not be the most important policy I recommend, but it’s low hanging fruit. Why have a contractionary policy in place at a time like this? Just get rid of it. That will make QE more effective. I listed it first because it’s least controversial.

    Ben, You said:

    “Nearly all must have been infected.”

    More lies from Ben. Most were not infected.

    Tuharsky, We agree more than you assume:

    1. I agree there are costs to a huge balance sheet, that goes beyond Treasuries.

    2. I agree that this is a good reason to get rid of IOR.

    I also think the costs of a big balance sheet are far lower than the costs of fiscal stimulus, or the costs of a deep recession. But by all means let’s have a policy regime that doesn’t require huge balance sheets, a regime that keeps nominal rates above zero.

  50. Gravatar of msgkings msgkings
    12. March 2020 at 09:29

    @ssumner: The Fed just injected $500B into the system and the daily stock market decline was cut in half. What do you think of the moves they just made?

  51. Gravatar of Tom Brown Tom Brown
    12. March 2020 at 09:51

    msgkings, it went up, and then back down… and the day’s not over.

  52. Gravatar of msgkings msgkings
    12. March 2020 at 10:08

    @Tom yes I see that I was just curious what he thought of their specific actions.

  53. Gravatar of Ralph Musgrave Ralph Musgrave
    12. March 2020 at 11:26

    Scott, So you’re saying the mere threat by the Fed to buy shares will raise or stabilize share prices? I suspect that if a threat is never carried thru, then sooner or later everyone tumbles to what’s going on, and the threat will no longer work.

    Moreover, there is still a skew there. If in a genuine free market share prices would fall, then the new lower price of shares is presumably the REALISTIC price. It’s not the job of governments or central banks to interfere with relative price of different items or assets unless there are clear social reasons for interfereing with the free market. Ergo a general all round increase in spending makes more sense than having the central bank buy or threaten to buy one particular narrow range of assets.

  54. Gravatar of LGS LGS
    12. March 2020 at 11:53

    Scott, if you’re saying interest on reserves should be reduced to zero at the moment, I understand the recommendation. If you’re saying it should be permanently eliminated, I don’t understand the recommendation but would love to read a blog post about it.

  55. Gravatar of Christian List Christian List
    12. March 2020 at 12:12

    German media writes Lagarde was really “Rooseveltian” today:

    “I didn’t realize that the ECB’s most important mandate was to plunge the bond markets into a crisis,” Peter Chatwell, chief bond strategist of Mizuho International, told the Bloomberg news agency.

    Some observers were also annoyed by the fact that the ECB chief does not see her institution at the forefront of the fight against the crisis this time. “Fiscal policy must first and foremost make things right. No one should expect the central bank to be on the front line this time,” Lagarde said loud and clear.

    Where are the alleged improvements that the central banks are said to have made in recent years?

    I see regression.

    Non-experts, jurists, bureaucrats, politicians at the top, who have no idea about monetary policy and believe that monetary policy is useless.

    Why is this useless person head of a monetary policy institution when all she can do is crying for fiscal policy all day and sending stock marketes into the abyss???

    I was fearing it in 2019 already: 2020 recession while Powell and Lagarde do not act convincing. But even I didn’t think it would be that bad. Lagarde is a joke.

  56. Gravatar of Ray Lopez Ray Lopez
    12. March 2020 at 12:30

    @Benjamin Cole – we’ve gone over Japan before, Mr. Hide Bound. You refuse to acknowledge that slave labor in Manchuria (i.e., fiscal policy) gave Japan in pre-WWII a boost. You refuse to acknowledge, contrary to the work by economists Robert Fogel and Stanley L. Engerman and others, that slavery is economically beneficial to the slave owners (here, the Japanese, enslaving and working the Manchurian Chinese and thus helping lift the JP economy out of the Great Depression despite JP printing money).

    Re Greece, and in your mind, the tight Euro: Greece led the EU in GDP growth last year, so no, Greece is not hurting from a strong euro.

    Re money neutrality, you say: “Sure, over the centuries, money might be neutral. But men measure their lives, and earning years, in mere decades.” – no. Money non-neutrality says that over a course of a few months, at best a year (Sumner can fill us in with more details) that money is not neutral. But mainstream fiscalists–like Sumner, yes, he’s mainstream IMO–say that money is neutral ‘in the long run’. Most textbooks define the ‘long run’ as more than 12 months. Even Sumner, if he were to be pressed on this, would admit that money is neutral after say 12 months of a Fed policy shock. The short term is measured in weeks and months, not “decades” as you claim.

    I’ve never asked you Ben, have you gone to college and have you ever taken a course in Economics 101? You don’t have to answer, I understand.

  57. Gravatar of Ray Lopez Ray Lopez
    12. March 2020 at 12:33

    @myself – mainstream monetarists like Sumner, not fiscalists.

    Professor Sumner: we readers would appreciate it if you clarified for how long is money non-neutral? Is it measured in days, weeks or months? What is the short-run and what is the long-run in your mind? Thanks in advance.

  58. Gravatar of W. Peden W. Peden
    12. March 2020 at 13:40

    Ray Lopez,

    In economics, “long-run” and “short-run” refer (or should refer) to periods of equilibriation, not set periods of time. It depends on the structure of the economy in question: how quickly will it respond to the consequences of a change in the level of the money stock?

    Asking “How long is the long-run?” is like asking “How long is a piece of string?” The correct answer is “It depends.”

  59. Gravatar of Christian List Christian List
    12. March 2020 at 13:50


    after a 100 years of odd trolling, when do you understand that Scott’s views on money (non-)neutrality in terms of short-run and long-run are mainstream and not exceptional? You are the outlier and even worse: you don’t have any good arguments. From that point of view, you are even more dense than Benjamin Cole.

  60. Gravatar of ssumner ssumner
    12. March 2020 at 15:05

    Ralph, You said:

    So you’re saying the mere threat by the Fed to buy shares will raise or stabilize share prices?”

    No, I have no interest in using monetary policy to raise or stabilize share prices. The goal should be adequate growth in NGDP. And yes, the ability to buy shares will raise NGDP expectations, at least if the central bank commits to do whatever it takes.

    LGS, I have quite a few such blog posts, but I have trouble finding them among my 1000s of old posts. My main worry is that IOR moves the framing of monetary policy away from the supply and demand for money and toward interest rates. The interest rate framing is where policy errors are more likely to occur, as policymakers tend to misjudge the stance of monetary policy when focusing on rates. IOR allows a divorce between monetary policy and the quantity of money, a Woodford approach.

    You might respond that it’s perfectly possible to do an IOR monetary policy effectively, at least when equilibrium rates are positive, and I agree. However I think it more likely that errors will occur in a world with IOR. For instance, in 2009-15 people often said “IOR can’t be much of a problem because the rate is only 0.25%.” But that’s bad analysis, neither the level nor the change in interest rates tell us anything about the stance of policy. A quarter point change can have massive effects, depending on the location of the equilibrium rate of interest. Indeed a contractionary policy error with IOR will depress the equilibrium rate, by reducing inflation and real growth expectations.

  61. Gravatar of Federal Reserve Promises a Trillion-Plus in Short Term Loans to Banks. – iftttwall Federal Reserve Promises a Trillion-Plus in Short Term Loans to Banks. – iftttwall
    12. March 2020 at 15:59

    […] his blog, Sumner suggests bold moves for the Fed such as an instant end to paying interest on bank reserves, […]

  62. Gravatar of Ray Lopez Ray Lopez
    12. March 2020 at 16:17

    @W. Peden – thanks but most Econ 101 textbooks disagree with your metaphysical answer. In fact they say the short run is about two to four quarters (several textbooks).

    @Christian List – you are clearly somebody who has learned English from textbooks and has difficulty reading English. Sorry my fiend there’s no substitute for learning English via immersion, and that means leaving your home country. Re-read what I said, it’s not what you assumed, but the opposite. In fact, I specifically said Sumner’s views are mainstream. Or did you mean to write ‘not mainstream’? Actually I don’t care since it’s unlikely you are anybody of any substance; a putative doctor pretending to have an interest in economics, yeah right (I doubt you know what I just wrote since I’m using English idioms). Auf vederswang or whatever you people say… and you owe me money for starting WWII and invading Crete. Pay up. No, the 1960s agreement is invalid.

  63. Gravatar of Benjamin Cole Benjamin Cole
    12. March 2020 at 16:25

    Ray Lopez:

    I dont see wut is so importent about a college edukashun.

    Scott Sumner: unfortunately, we cannot test the blood streams of the 1100 crew members of The Diamond Princess to find out if exposure was 100%, as I contend. I would bet that the appearance of antibodies to COVID-19 is nearly 100% in those crew member bloodstreams.

    Remember, you can become infected but your immune system immediately suppresses the virus, not just a COVID-19 virus but any virus. The vast majority of people suppress the COVID-19 virus immediately or within a few days.

    This is from Harvard:

    “In fact, a recent New England Journal of Medicine report states that the fatality rate of the new coronavirus infection “may be considerably less than 1%.”

    Danger, Will Robinson, Danger!

  64. Gravatar of Federal Reserve Promises a Trillion-Plus in Short Term Loans to Banks. – Federal Reserve Promises a Trillion-Plus in Short Term Loans to Banks. –
    12. March 2020 at 16:28

    […] his blog, Sumner suggests bold moves for the Fed such as an instant end to paying interest on bank reserves, […]

  65. Gravatar of Benjamin Cole Benjamin Cole
    12. March 2020 at 16:56

    Note to Ray Lopez: I have a friend with a PhD in econ from Stanford, Princeton, Harvard, University of Chicago, Yale.

    He has informed me that, “There is absolutely no doubt in my mind, without question, that inflation and interest rates of the past 40 years should have been far higher.”

  66. Gravatar of Christian List Christian List
    12. March 2020 at 17:37

    I specifically said Sumner’s views are mainstream.

    I didn’t even read that because I’m just going through your posts superficially. Why is that? Because it’s a waste of time, that’s why. And the fact that you’ve made this concession makes my point just more correct: You are the outlier. Don’t you think, as you being the outlier, the super-weirdo with the new absurd theory in town, that you should be the one making the case??? So where in the world is your case. You have zero arguments. Zero.

    And this is how you try to convince people? Ray, the outlier-weirdo has a gut feeling, and that’s why we should deny the obivious and instead believe you. You are such a weirdo-creep-fraud, it’s unbelievable.

  67. Gravatar of Ray Lopez Ray Lopez
    12. March 2020 at 22:45

    @Christian List – Bist du verrückt, Bruder? Atmen Sie tief durch und entspannen Sie sich. Deutschland ist eine schwindende Macht. Der Maschinenbau, ihre Stärke, ist eine Pleite. Ich habe meinen BMW vor Jahren verkauft (Reparaturen waren zu teuer). Und das Geld ist neutral, “Herr Doktor” Christian.

    @Benjamin Cole – maybe so, but has your PhD friend read the provocative paper which argues interest rates are on a secular downward trend for the last 800 years, and QE or otherwise won’t stop them? :Eight centuries of global real interest rates, R-G, and the ‘suprasecular’ decline, 1311–2018″ by Paul Schmelzing, January 2020

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