The Fed’s new triple mandate

I see that Ryan Avent is also appalled by the revelations in the recent Hilsenrath story:

THE Wall Street Journal‘s Jon Hilsenrath has written a nice piece on the Fed’s internal battle over when and how to taper, and it’s filled with one groan-inducing moment after another.

Purchases, the Fed said then, would continue until there was substantial improvement in labour markets and so long as price stability was not at risk. By early 2013 the unemployment rate had fallen a bit but remained well above the Fed’s estimate of “normal”. Inflation, meanwhile, was if anything too low. And what, at that moment, were our Fed governors worrying about?

By April more officials, including the governors, were getting worried about terms like “QE-ternity” and “QE-infinity” floating around financial markets, which suggested some investors thought the program was boundless, according to people familiar with Fed discussions. The Fed officials thought the job market had made enough progress to warrant discussing an exit.

“We’re in this box because we’ve got an open-ended program, and we didn’t figure out how we were going to end it when we started,” Richmond Fed President Jeffrey Lacker , an opponent of the program, said in an interview.

Who cares about the economic fundamentals, the dual mandate, when Wall Street is coining terms?

The Fed now has a triple mandate:

1.  Low inflation.

2.  High employment.

3.  Minimizing the number of sarcastic comments from Wall Street that might make their lives more embarrassing at cocktail parties with rich people.

Back in 2009 I tried to convince people that Obama was partly to blame for the mess, as he wasn’t taking monetary policy at all seriously.  Now that is becoming the conventional wisdom.  Once again, here is Ryan Avent:

It comes as no surprise that Jeremy Stein, a member of the tightening troika, would be anxious to pare down purchases; since beginning his term last year he has spoken repeatedly about the threat of financial instability. But one can’t help but notice that two of the three governors leading the charge to taper were appointed by Barack Obama. Who also left seats on the Board of Governors unfilled for an extended period of time despite the rickety state of the economy. And who has also completely misplayed the process of nominating a successor to Ben Bernanke as chair of the Board of Governors.

One is tempted to conclude that Mr Obama simply doesn’t care much about monetary policy, and when he does turn his attention in that direction is mainly concerned with bubble prevention. This is an egregious error, especially given the state of fiscal policy over the past two years (and the cost of economic weakness to his popularity and agenda, for that matter). He obviously had his opponents on Capitol Hill to deal with; Senator Richard Shelby opposed economics Nobelist and Obama nominee Peter Diamond for the board on the grounds that the man wasn’t qualified. Yet the administration’s failure to take monetary policy seriously looks increasingly culpable in America’s lousy recovery.



28 Responses to “The Fed’s new triple mandate”

  1. Gravatar of Shaun Shaun
    8. October 2013 at 05:47

    I agree with the statement that he doesn’t get monetary policy. Most people really don’t, though. That’s not a defense of Obama, but I think the fiscalist argument is much more clear and tidy, which is why most people seem to support it. That doesn’t mean it’s correct, but it’s a tidier argument. Monetary policy on the other hand isn’t so clear cut and at times can be very abstract. At least that’s how it was for me when I was first learning about it. I don’t know. I think that’s why it’s had such a tought time during the crisis.

  2. Gravatar of LK Beland LK Beland
    8. October 2013 at 05:56

    It’s very tough to convince (smart) people that low interest rates and Fed bond-buying/swapping do not create destructive bubbles. People just do not buy that 2% Fed rates in 2008 were economy-wrecking “tight-money”. To most people, 2% rates are “low”. This seems to be conventional wisdom. According to that framework, 2008 was a financial crisis (bubbles and nasty financial instruments), not something that had to do with economics (say tight money/insufficient demand or a supply shock).

    And the NK model centered around interest rates doesn’t help thinking outside that framework.

  3. Gravatar of ssumner ssumner
    8. October 2013 at 06:06

    Shaun, I think that’s right. I’d say this both is and isn’t a defense of Obama:

    1. It’s not in the sense that officials need to be held accountable for their mistakes, even if it’s a very tough job.

    2. it is in the sense that it indicates the failure does not necessarily mean Obama is incompetent in some sort of overall sense. Unlike my fellow libertarians, I view Obama as a fairly average President—not more incompetent than average. That might surprise people who have seen me criticize him harshly on monetary policy, but it’s a really difficult topic as you say.

    (Of course in the case of Presidents, average is a really low bar.) 🙂

    LK, Both very good points.

  4. Gravatar of LK Beland LK Beland
    8. October 2013 at 06:12

    Prof Sumner, I have a question concerning swaps by the Fed of (nearly) high-powered money for long-term bonds (or any other publicly negotiated asset, such as commodities or stock).

    I understand that diminishing the stock of bonds and other long-term asset and increasing the stock of currency will cause reshuffling of portfolios, investment and consumption that increase NGDP expectations. For the economy as a whole, it does not really matter which asset the Fed choses to swap. There is more money in circulation and less stuff to buy, so there must be either more production or inflation. This is what I understood from your blog.

    But what happens to the targeted asset class? If the Fed targets all possible assets classes at the same time, there would be little unbalance between asset classes (except currency vs everything else). Wouldn’t diminishing the stock of only one or two classes of assets (say T-Bonds and MBS) create more imbalances(currency vs T-Bonds vs MBS vs everything else)? Are those other effects really negligible? Why?

  5. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    8. October 2013 at 06:31

    ‘…the failure does not necessarily mean Obama is incompetent in some sort of overall sense.’

    Where is the evidence that Obama understands anything with regards to economics? He expressed astonishment to find that his auto insurance company hadn’t sold him collision coverage on his $1,100 beater car. He said that ‘profits eat up overhead’. Didn’t understand that Apple had incentives facing them, to fix their glitches, that are completely absent for Obamacare.

    Would, say, Sarah Palin have made any of those blunders?

  6. Gravatar of MikeDC MikeDC
    8. October 2013 at 07:08

    What is the Fed identified new normal unemployment rate in light of the various structural changes to the economy (higher min wage, endless UI, Obamacare)?

    I’d guess about 7%, which is about where we’re at. Hence, the Fed has (very belatedly) done its job.

  7. Gravatar of Philo Philo
    8. October 2013 at 08:13

    & Patrick R. Sullivan
    The mind boggles, trying to imagine the economic blunders that Sarah Palindrome would have made!

  8. Gravatar of gofx gofx
    8. October 2013 at 09:12

    Philo, your comment about Palin reflects the typical smugness of “smart” people. You don’t have to use your imagination because you can examine her record as a governor and mayor to look for her blunders. I doubt you will find many as serious as the smooth talking statist in the White House. I will take an inarticulate person with an instinct for liberty over an allededly “smart” statist. How smart was it to force a high cost top down health care program on an economy in a deep recession. How smart is it to raise the cost of employing people just when chronic unemployment is at its worst? Genius.

  9. Gravatar of Mario Mario
    8. October 2013 at 09:53

    I know Avent only included the Shelby remark to provide a false sense of balance and to reassure his readers that Republicans remain the enemy even when Democrats are causing the problems, but it shouldn’t go unchallenged. Peter Diamond may have a sterling (micro) reputatoon, but based on his comments after losing his bid, we were lucky to avoid his nomination. There was every indication that he shared the Obama/Summers monetary philosophy.

  10. Gravatar of Bill Ellis Bill Ellis
    8. October 2013 at 11:54

    Scott Love this post….

    “The Fed now has a triple mandate:

    1. Low inflation.

    2. High employment.

    3. Minimizing the number of sarcastic comments from Wall Street that might make their lives more embarrassing at cocktail parties with rich people.”

    My version…

    “The Fed now has a triple mandate:

    1. Low inflation.

    2. High employment.

    3. Fighting Mr. Bubble.

  11. Gravatar of ssumner ssumner
    8. October 2013 at 12:52

    LK, They are negligible during normal times, but may have a modest impact when at the zero bound. During normal times open market purchases are quite small.

    Patrick, I agree that he’s weak in economics, and have said so many times. On the other hand I’d greatly prefer him to Palin or Bush on foreign policy. As I said, “average” is actually pretty bad. They are many more bad Presidents than OK ones. Clinton and Reagan were the only two decent presidents in the past 50 years.

    MikeDC, They estimate the natural rate as about 5.6%. There would be no reason to raise that estimate, given the falling inflation rate.

    gofx, I should probably stay out of this debate, but what makes you think she has an instinct for liberty? I don’t get that impression when I hear her speak.

    Mario, You may well be right.

  12. Gravatar of Arriero Arriero
    8. October 2013 at 13:24

    I have a question about Europe, and particularly about Spain: Would you recommend Spain to return to its national currency and impose a NGDPLT policy? Would it be – in your opinion – eventually succesful a deep supply-side fiscal reform plus fiscal consolidation with the help of a NGDPLP policy (or does Spain need anything completely different)?
    I find very interesting your blog. Would be great if you or someone could arrive to convince the ECB to do something more. Otherwise, I don’t see a bright future for the EZ.

  13. Gravatar of MikeDC MikeDC
    8. October 2013 at 13:49

    As someone who works closely with the federal government, I would argue pretty strongly that Obama is incompetent because of the general breakdown I’ve seen in the ability of the executive branch to do its mundane tasks.

    Under Clinton and Bush the administration at least seemed to make a good-faith effort, and received a good faith effort back from the agencies when it came to getting a budget together. Under these guys, not the case at all, and that seems to go back to the President. They don’t concern themselves with details, from the top down. And that might be fine for a President; he doesn’t need to do all the details, but he does need to be aware that there are details, and hire people who can take care of them. These guys think they can wave a magic wand and everything will work out, but in reality, not so much.

  14. Gravatar of Steve Steve
    8. October 2013 at 15:01

    Patrick Sullivan,
    “Would, say, Sarah Palin have made any of those blunders?”

    Ironically, Palin was the only person who was *right* about economic policy in 2008. Drill, baby, drill. Without shale, US RGDP would be lower today than in 2008. It will be a cold day in hell before any liberals admit this.

    I am NOT saying that is a good policy in the long-run, only that Obama’s limited economic success came from the unlikeliest and most ironic of sources: Palinomics.

  15. Gravatar of Steve Steve
    8. October 2013 at 15:03

    In the land of the blind, the best orator gets elected president.

    The one-eyed man? He blogs, this isn’t a monarchy you know.

  16. Gravatar of Dustin Dustin
    8. October 2013 at 15:53

    “What happens if the Fed targets all asset classes?”

    I believe the theory is something along these lines: the increase in asset prices (across the board) due to the Fed targeting Treasuries and MBS isn’t strictly due to portfolio imbalanced, rather it is due to an increased demand (Fed’s new demand) for a finite set of assets.

    As new Fed demand draws down available assets (regardless which the Fed targets), supply x demand maxims apply. Aggregate investment asset demand increases while aggregate investment asset supply is constant => asset inflation.

    I also believe that this effect is more pronounced with assets that are closer substitutes for those targeted by the Fed. In other words, if the Fed targeted all assets one would expect the effect to be more pronounced as there are a greater number of asset classes that make fine substitutes.

    Of course, I caution that I don’t claim this to be the way of it, just a non-economist’s rudimentary understanding. Critiques would be welcome.

  17. Gravatar of ssumner ssumner
    8. October 2013 at 17:58

    Arriero, I’m not sure, as there are huge risks either way. The one no-brainer policy is economic reforms on the supply-side.

  18. Gravatar of gofx gofx
    8. October 2013 at 19:06


    Actually, just being opposed to the Affordable Healthcare Act is evidence enough for having some instinct about freedom, relative to the President’s. Actually realizing there is a supply curve (energy, tax policy) would also be indicative. Many of us on this blog are “intellectuals”, and yes, it can be torture to listen to a Palin or Bush speak. I get that. And obviously Palin is no libertarian, but this is a comparison to the current president and his DECISIONS. This is kind of a version of Buckley’s “”I would rather be governed by the first 2000 people in the Manhattan phone book than the entire faculty of Harvard.”

  19. Gravatar of Full Employment Hawk Full Employment Hawk
    9. October 2013 at 01:10

    The reason that Obama does not get monetary policy is that he is saddled with ecnomic advisors that do not get monetary policy and he has been getting very bad advice from them. Since he has chosen these advisors, he is ultimately to blame, but the point is that this is not due to any inherent disablity on his part and with better economic advice he would do a lot better in this area.

    In any case the good news is that Yellen is getting the chairmanship, so the people giving him the bad economic advice were not able to convince him not to nominate her. Perhaps he is beginning to do some independent thinking in this area. What he should now do is to bring Christina Romer back as Chair of the Council of Economic Advisors, give her ready access to him without having to go through the economic council, and listen to her advice.

  20. Gravatar of Full Employment Hawk Full Employment Hawk
    9. October 2013 at 01:19

    “some instinct about freedom, relative to the President’s”

    Yes it is very important that that about 30 million people be free of health insurance because they cannot afford it or had preexisting conditions. And it is very important that thousands of people are free to die needlessly of treatable diseases because they cannot pay for the treatment that would cure them.

    That concept of freedom works for the priviledged, but not for all too many others. And I doubt that the people of Massachussetts feel that they are not free because of Romneycare. And this plan is actually a free market alternative to near universal medical care developed by the Heritage Foundation.

  21. Gravatar of Full Employment Hawk Full Employment Hawk
    9. October 2013 at 01:26

    Clearly the Obama adminstration and the Democrats went about getting near universal health insurance the wrong way by making many too many concessions at the start. They should have started with a plan for single payer insurance and then let the Republicans force them to settle for a lot less by accepting a free market alternative based on Romneycare. As a result, the Republicans would feel happy that they won and defeated Obama and would see no need to try to kill the free market solution they imposed.

  22. Gravatar of Full Employment Hawk Full Employment Hawk
    9. October 2013 at 01:39

    “I view Obama as a fairly average President””not more incompetent than average.”

    Obama’s chief problem has been lack of experience. He would have been much better off if he had spent 8 years as Hillary’s Vice President and got the experience needed to be an excellent President, after Hillary’s term had ended.

  23. Gravatar of Full Employment Hawk Full Employment Hawk
    9. October 2013 at 01:43

    “Minimizing the number of sarcastic comments from Wall Street that might make their lives more embarrassing at cocktail parties with rich people.”

    Anybody qualified for this position should have enough self-conficence and even arrogance to believe that they know more about monetary policy than the people making the sarcastic commnets and felt the need to educate the people making the sarcastic comment about how to properly conduct monetary policy.

  24. Gravatar of Michael Michael
    9. October 2013 at 02:44

    Steve Randy Waldman:

    “Why Scott Sumner Should Love the Debt Ceiling”

  25. Gravatar of Morgan Warstler Morgan Warstler
    9. October 2013 at 06:32

    Waldman is doing leg work here for MM.

    It isn’t enough for Yellen to get the nod.

    We got everyone from Judge Napolitano to Ambrose doing this:

    Had a quick chat with @fullcarry yesterday on twitter arouns what happens to 5yr now that Yellen gets nod.

    Right answer is that rates go up compared to status quo.

    GUYS, Kudlow isn’t enough. There’s a giant swath of conservative / libertarian support for NGDPLT that isn’t being told what it does and who it is for.

  26. Gravatar of Morgan Warstler Morgan Warstler
    9. October 2013 at 06:33

    Waldman gets it, the left is going to get it. We’ve got to OWN WHAT WE ARE DOING straight to judges, ALL OF THEM.

    It only goes one way:

  27. Gravatar of TravisV TravisV
    9. October 2013 at 07:30

    Morgan Warstler,

    That article by Ambrose Evans-Pritchard is AWESOME!!!

  28. Gravatar of ssumner ssumner
    9. October 2013 at 11:02

    gofx, Yes, I understand all that, but . . .

    She comes across as a bit of a phony to me. Someone who enjoys playing the role of populist conservative demagogue. Maybe it’s all sincere, but that’s not the impression I get. There’s a role for people like her, just not as President.

    Michael, Thanks, Nice post by Steve.

Leave a Reply