Target the forecast

The Fed is targeting inflation at above 2% in future years, in order to create an average inflation rate of 2%. The Fed is predicting inflation will be at or below 2% in future years. The Fed needs to change policy until the forecast for inflation is equal to the target for inflation.

I’ll probably add some updates later today.

Update: Here’s what reporters should have asked Powell:

“Mr. Chairman. You’ve just said that the Fed is definitely not out of ammo. What would be the downside of boosting asset purchases above the current $120 billion/month with the goal of getting to 2% inflation sooner, and having labor markets recover faster? You’ve said that current policy is appropriate, but what specific bad outcome do you fear would occur with bigger asset purchases that led the Fed to avoid adopting a more expansionary policy today?”



16 Responses to “Target the forecast”

  1. Gravatar of Michael Rulle Michael Rulle
    16. September 2020 at 10:36

    hope so—-they seem more serious this time

  2. Gravatar of Ray Lopez Ray Lopez
    16. September 2020 at 12:08

    Sumner’s statement is logically absurd: “The Fed needs to change policy until the forecast for inflation is equal to the target for inflation.” – if that was the case, then there would be no need for a target. That is, if the Fed forecasts 5% inflation and the target is 5%, the Fed needs to do nothing. (PS–since money is largely neutral the Fed in fact does nothing, but that’s beside the point)

  3. Gravatar of gt gt
    16. September 2020 at 12:28

    Ray, how about instead “I need to change the direction of my steering wheel until the direction my car is heading is equal to the direction I want my car to go”? Does that make it make more sense for you?

  4. Gravatar of Sean Sean
    16. September 2020 at 14:26

    I’m going to assume by forecast he means market forecast.

    Personally I think inflation targeting right now isn’t the right policy. I’m not sure on what sort of supply side effects will occur due to covid which can distort inflation targeting.

  5. Gravatar of macrochap macrochap
    16. September 2020 at 14:31

    Ray, the statement is perfectly logical. Are you saying the Fed should be okay with forecasts deviating from their target?

  6. Gravatar of ssumner ssumner
    16. September 2020 at 16:12

    Ray, LOL. I don’t want to be in the passenger seat while you are driving.

    Sean, I mean the Fed’s own forecast.

  7. Gravatar of Benjamin Cole Benjamin Cole
    16. September 2020 at 16:40

    I agree.

    BTW, there is a probable winner in Joe Biden. Has anyone even asked him about monetary policy?

    This is from NPR:

    “Within its existing mandate of promoting maximum employment and stable prices, the Fed should aggressively enhance its surveillance and targeting of persistent racial gaps in jobs, wages, and wealth,” the Biden plan says.

    I thought that Trump was functionally illiterate, but evidently the Biden Camp is also.

    Biden advocates the targeting of racial gaps in jobs, wealth and wages. Well, if you take their campaign literature literally.

  8. Gravatar of Philo Philo
    16. September 2020 at 19:42

    Reporters did not ask Bernanke searching questions during the last recession, and they will not ask them of Powell. The financial press has disappointed me (but I am getting used to it).

  9. Gravatar of Ray Lopez Ray Lopez
    16. September 2020 at 23:29

    @gt – of course I understand that’s what Sumner is trying to say, but that’s not what he logically is saying. Look at Sumner’s answer to Sean “Sean, I mean the Fed’s own forecast”. Now substitute this into Sumner’s original statement, which reinforces my original point: “The Fed needs to change policy until the (Fed’s own) forecast for inflation is equal to the [Fed] target for inflation.” When does this condition occur? To use the driving analogy, when the car is going in a straight line. Only then does the driver have to do nothing. If Sumner had, as Sean suggested, used the term “market forecast for inflation” then indeed the statement would be logically sensible, but he did not. As it stands, the Fed essentially is spinning their wheels, changing policy (whether or not such policy changes have any market effect) until such time the Fed’s modelers, using their own judgement, conclude that their forecast for inflation equals their target for inflation. It’s like driving a kid’s car where the steering wheel is doing nothing and the parent (the market forces, which by Sumner’s admission play no role in his model) is pushing the kid’s car from behind, unknown to the kid. Like the knobs of a Korean pachinko parlor machine. Ironically, since the Fed reacts to market forces and money is largely short-term neutral, this is exactly how in fact the Fed operates, so while logically nonsense, Sumner’s statement is true.

  10. Gravatar of Postkey Postkey
    17. September 2020 at 00:07

    ” . . . money is largely short-term neutral, . . . ”
    Is ‘this money’, ‘short term neutral’?
    “China initially had a soviet-style
    40:48 economy but in 1978 a new leader came to
    40:53 power in China Deng Xiaoping and he
    40:56 analyzed the situation and he concluded
    40:58 that the Soviet system is doomed to
    41:01 failure and that’s of course dangerous
    41:04 he concluded for you know for the
    41:08 country and it’s better to abandon this
    41:10 system and instead he looked at other
    41:14 countries that had a more successful
    41:16 monetary system such as Japan and
    41:19 Germany and the US and he concluded well
    41:23 we need to decentralize banking and so
    41:26 when he came to power 1978 what what was
    41:28 the key one of the key things he
    41:30 introduced was he found it thousands of
    41:34 banks thousands of new banks local banks
    41:36 small banks regional banks specialized
    41:40 banks all across China and the rest is
    41:43 history that’s how you get high economic
    41:44 growth “

  11. Gravatar of Ray Lopez Ray Lopez
    17. September 2020 at 07:18

    @Postkey – in the long run, money is neutral, even Dr. Sumner will agree on that; the debate is over the short run. One question: how do you get the voice transcription and time stamp on the Youtube videos? Is there a link for that?

  12. Gravatar of ssumner ssumner
    17. September 2020 at 07:27

    Philo, Steve Leisman had a pretty good question, but it needed to be more pointed.

  13. Gravatar of Spencer B Hall Spencer B Hall
    17. September 2020 at 09:07

    re: “in the long run, money is neutral”

    No. An increase in infinite money products (QE-Forever), decreases the real rate of interest (increases the supply of loan funds, either suppressing or compressing nominal rates), and has a negative economic multiplier.

    With any increase in money products (the volume and rate of expenditure in new money), vis-à-vis any relative increase in new products (most bank lending is for existing assets), i.e., more inflation is generated than real output.

  14. Gravatar of Postkey Postkey
    17. September 2020 at 11:09

    At the bottom left of the screen is save … Click on the 3 dots, and for most videos, you will get ‘open transcript’ :-).

    ” . . . even Dr. Sumner will agree on that; the debate is over the short run.” L.O.L.. even!

    Money does not appear to be neutral in the short run. Sum up the short runs and we get?

  15. Gravatar of Postkey Postkey
    17. September 2020 at 13:45

    Sorry, right!!!

  16. Gravatar of Ray Lopez Ray Lopez
    17. September 2020 at 14:19

    @postkey @ Spencer – (“Modern versions of the theory accept that changes in the money supply might affect output or unemployment levels in the short run. However, many of today’s economists still believe that neutrality is assumed in the long run after money circulates throughout the economy. “) – Econ 101. Thanks for the transcript tip.

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