The remainder of the decade

The Fed has given us its inflation forecast for the first 4 years of this decade.

2020: 1.2% inflation
2021: 1.7% inflation
2022: 1.8% inflation
2023: 2.0% inflation

But what does it expect for the remainder of the 2020s?

I’m not sure, but unless it looks a lot like the following, then the AIT policy has no real meaning:

2024: 2.15% inflation
2025: 2.25% inflation
2026: 2.30% inflation
2027: 2.25% inflation
2028: 2.20% inflation
2029: 2.15% inflation
2030 and beyond: 2.0% inflation

That averages 2.0% for the entire 2020s.

Obviously my figures are not a precise description of their current intention, but I’d challenge anyone to convince me that these figures aren’t at least close. My claim is that if this isn’t pretty close to what the Fed means by average inflation targeting, then the policy is essentially meaningless.

After all, they talk about inflation being moderately above 2% for some period of time to make up for the current shortfall, such that inflation averages 2% in the long run. So what else could it mean? The most common sense interpretation is that ‘moderately’ is a few tenths of a percent above, and “some period” is a few years, not a few months, a few decades or a few centuries.

BTW, I favor a more expansionary policy during 2020-23 so that less make-up is needed in the out years. I’m just taking today’s SEP forecast (with its 130 basis point total shortfall) as the Fed’s current intention, and drawing out the long run implications of that forecast.

So why can’t the Fed do what I just did? Probably because FOMC members are not in agreement as to exactly what AIT means. Vagueness implies a lack of consensus.



33 Responses to “The remainder of the decade”

  1. Gravatar of Benjamin Cole Benjamin Cole
    16. September 2020 at 18:13

    “The Federal Reserve Board employs just over 400 Ph.D. economists, who represent an exceptionally diverse range of interests and specific areas of expertise.”–from Fed website.

    That 400 number does not include economists at the 12 regional branches, all 12 of which have felt compelled to bulk up staffs in recent decades, to toot their pet projects or ideological preferences.

    Probably the Fed has more than 1000 economists on payroll. Add on, the Fed and 12 branches hand out contracts to even more economists.

    Yet, what should the Fed do? What are its obligations?

    Answer: Target 2% inflation, with the possibly (but not lately) inconsistent goal of less than 4% unemployment as measured by U3. (Humphrey-Hawkins Full Employment Act).

    Sumner’s idea is even better: Just target NGDPLT.

    My fillip: Target NGDPLT, but constantly test lower bounds for unemployment. The lower the better.

    The Ged’s targets might take a staff of a dozen smart economists to ponder.

    The Fed: A non-profit, independent, self-funding agency. Macroeconomists may prefer the extant arrangement, but scholars of organizational behavior may have reservations….see Fed behavior of last 20 years.

  2. Gravatar of Nick S Nick S
    16. September 2020 at 21:13

    Scott – Although, as you may know by now, I strongly disagree with central bank intervention as a general premise as it relates to bettering society as a whole, however, I concede that central bank intervention is here to stay, and I might as well try to make some money in the meantime, which has led me to be quite the fed watcher….

    To this end, I agree with your sentiment on current situation. The Fed is targeting above 2% inflation. However, 2-30yr breakevens currently range from 1.23-1.75%. Thus, unless the Fed knows something the market does not, their current policy will fail to meet their >2% goal. Therefore, they should make their policy more accommodative until breakevens are reflective of their stated goal. We know they are not doing this… which begs the question… why not? I propose a few conjectures below….

    1.) They know inflation will eventually take hold, but want to assure the mkt that they will not respond by raising rates as a result, and risk popping the financial asset bubble

    2.) They view COVID as a temporary blip and they are buying time via the utilization of “forward guidance” before having to resort to wasting more of what seems like dwindling monetary policy “ammo” (e.g. Corp bond spreads rallied substantially from merely an indication that the fed would step in as a buyer, without the fed buying a single Corp bond for some time)

    3.) They are aware of additional fiscal stimulus, which has not been formally announced to the public, that they will need to ultimately fund. Curious how Powell inferred more fiscal stimulus is required today, and also Pelosi and Trump seemed to make a glimmer of progress on a stimulus plan today as well…#FedIndependence?

  3. Gravatar of Benjamin Cole Benjamin Cole
    16. September 2020 at 23:42

    Stray thought:

    Hand over monetary policy to a profit-seeking business.

    Set a target, be it a 2% to 3% inflation target band, or 4.5% annual NGDPLT.

    Turn over control of the federal funds rate, IOER, and QE to the profit-seeking enterprise.

    The profiteers get $1 billion for every year they hit the target.

    For every 0.1% they miss, they must forfeit the $1 billion, and also pay $100 million. So if inflation is 3.2% the profiteers pay $200 million.

    The profiteers acknowledge Congress is what it is, and there is no crying in baseball.

  4. Gravatar of foosion foosion
    17. September 2020 at 00:25

    “My claim is that if this isn’t pretty close to what the Fed means by average inflation targeting, then the policy is essentially meaningless.”

    The policy is very vague. The main thrust is signaling something which leads to the expectation of inflation around 2% and to low rates for at least a few years.

    Is it clear that they will wait to raise rates until inflation is over 2%? Wednesday sounded closer to waiting until inflation was expected to go over 2%.

    It gives me the chance to quote the Annie Hall line “Right now it’s only a notion, but I think I can get money to make it into a concept … and later turn it into an idea.”

  5. Gravatar of Benjamin Cole Benjamin Cole
    17. September 2020 at 01:27

    Back to my great idea: If the market knows the the private-sector lucre-worshippers running the Fed would get a cool billion if they hit the inflation target–would that not give the market more confidence in Fed policymaking?

  6. Gravatar of Jay Jay
    17. September 2020 at 01:54

    So, what COULD the Fed do to drive inflation break-evens higher?

    When we say that the Fed is “not even close to out of ammo”, they do have the ability to print infinite digital money, and to purchase infinite assets with that money. That’s true.

    But doesn’t money have to make its way into the real economy for inflation to take hold? Doesn’t that largely require fiscal policy to carry the torch from here, given rates are already at 0% and asset prices are already heavily distorted (upwards)?

    It’s easy to criticize the Fed and say they should be doing more. But, what exactly does “doing more” look like? Is upping the monthly purchases of bonds going to do it? (most of those asset-bubble gains are accruing in the accounts of the capitalist class, where the correlation between higher wealth and higher consumption is pretty tenuous) Or does it require something truly non-traditional like sending checks to ordinary Americans and circumventing the legislative branch?


  7. Gravatar of David S David S
    17. September 2020 at 02:28

    What would Judy Shelton recommend?

    More seriously, could the Fed circumvent Congress and start financing EITC payments for the next several decades? The total amount of cash needed to alleviate suffering at the bottom of the income scale is probably around $400 billion a year—and it’s cash that wouldn’t get stuffed in mattresses or bank accounts. It’s less crazy than Tik Tok writing a check to the U.S. Treasury for the privilege of doing business in the U.S.

  8. Gravatar of Spencer B Hall Spencer B Hall
    17. September 2020 at 05:27

    See that the inflation indices, y-o-y, are less than reported based on m-o-m:

    CPI y-o-y measurement:
    Consumer Price Index for All Urban Consumers: All Items in U.S. City Average
    01/1/2019 ,,,,. 0.016
    02/1/2019 ,,,,. 0.015
    03/1/2019 ,,,,. 0.019
    04/1/2019 ,,,,. 0.020
    05/1/2019 ,,,,. 0.018
    06/1/2019 ,,,,. 0.016
    07/1/2019 ,,,,. 0.018
    08/1/2019 ,,,,. 0.017
    09/1/2019 ,,,,. 0.017
    10/1/2019 ,,,,. 0.018
    11/1/2019 ,,,,. 0.021
    12/1/2019 ,,,,. 0.023
    01/1/2020 ,,,,. 0.025
    02/1/2020 ,,,,. 0.023
    03/1/2020 ,,,,. 0.015
    04/1/2020 ,,,,. 0.003
    05/1/2020 ,,,,. 0.001
    06/1/2020 ,,,,. 0.006
    07/1/2020 ,,,,. 0.010
    08/1/2020 ,,,,. 0.013

    I.e., the injection of money sometimes has a sweet spot (where an injection of new money is predictable and robust (not neutral or harmful).

  9. Gravatar of Spencer B Hall Spencer B Hall
    17. September 2020 at 05:46

    There are long-term monetary flows, volume times transactions’ velocity, which are a proxy for inflation. Then there are short-term money flows which are proxies for R-gDp.

    Betwixt and between these two demarcations is a period where there can be a robust expansion of aggregate demand (robust being that R-gDp accelerates much faster than inflation).

    I.e., the distributed lag effect of money flows have been mathematical constants for over 100 years.

    Nobel Laureate Dr. Milton Friedman: “The only relevant test of the validity of a hypothesis is comparison of prediction with experience.”

    Milton Friedman, in the Journal of Political Economy: “The Lag in Effect of Monetary Policy”

    Vol. 69, No. 5 (Oct., 1961), pp. 447-466 said:

    “This would mean that effective monetary action requires an ability to forecast a year ahead, not an easy requirement in the present state of our knowledge.”

    Which lead Friedman to conclude:

    “The central empirical finding in dispute is my conclusion that monetary actions affect economic conditions only after a lag that is both long and variable”

    Not so.

    Monetary Flows { M*Vt } 1921-1996

    And we knew this already:

    In 1931 a commission was established on Member Bank Reserve Requirements. The commission completed their recommendations after a 7 year inquiry on Feb. 5, 1938. The study was entitled “Member Bank Reserve Requirements — Analysis of Committee Proposal”
    its 2nd proposal: “Requirements against debits to deposits”

    After a 45 year hiatus, this research paper was “declassified” on March 23, 1983. By the time this paper was “declassified”, Nobel Laureate Dr. Milton Friedman had declared RRs to be a “tax” [sic].

    To the chagrin of monetarists, in 2020 Jerome Powell discontinued the application of legal reserve requirements.

  10. Gravatar of Spencer B Hall Spencer B Hall
    17. September 2020 at 05:54

    Notice the error:

    “In light of the shift to an ample reserves regime, the Board has reduced reserve requirement ratios to zero percent effective on March 26, the beginning of the next reserve maintenance period. This action eliminates reserve requirements for thousands of depository institutions and will help to support lending to households and businesses.” [sic]

    The only tool 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 (which have been discontinued March 26, 2020).

  11. Gravatar of Matthias Görgens Matthias Görgens
    17. September 2020 at 06:26

    Benjamin, if you are interested in private profit seeking companies doing monetary policy, have a look at George Selgin’s books about free banking.

    You don’t need to set up such artificial prizes. Free banking produced stable NGDP all on its own in the past and also in Selgin’s models.

  12. Gravatar of art andreassen art andreassen
    17. September 2020 at 06:38

    Scott: You have said in the past that the Keynesian multiplier does not apply because the Fed intercedes with tight money before it can be effective. With the Fed foreseeing there to be no inflation in the near future, implying no need to raise interest rates, wouldn’t the multiplier add to the stimulative effects of fiscal policy?

  13. Gravatar of ssumner ssumner
    17. September 2020 at 07:26

    Jay, I certainly hope you are right and there’s nothing the Fed can do. To live in a world where the central bank can create infinite amounts of money without triggering inflation is a sort of paradise. We’d all be fabulously rich.

    Alas, we live in the real world, where money creation is inflationary.

    David, The Fed should stick to bond buying. It has no authority to do EITC, and should not be given that authority.

    Art, Hard to say. It depends how inept the Fed is at doing its job. The recent fiscal cliff seemed to have no effect, FWIW.

  14. Gravatar of Spencer B Hall Spencer B Hall
    17. September 2020 at 08:57

    The “Free Banking Act of 1938” required that bank notes be collateralized 100 percent by United States, New York state or other approved obligations. Furthermore, it required that the banks maintain specie reserves against their notes outstanding above a specified minimum. To further protect the noteholders and depositors the law imposed double-liability on the stockholders. This meant, if it were enforced, that in the event a bank failed, the stockholders of record at the time of failure could be assessed an amount equal to the par value of their shares.

    The New York act proved effect in protecting bank-noteholders, and because of this it served as a pattern for the National Banking Act. Other states imitating New York were not always as successful, largely because of the latitude granted in collateralizing notes. If a bank failed the value of its outstanding notes was almost entirely dependent upon the quality of the collateral pledged against the notes. If the law and its administration permitted the use of questionable bonds and other assets the note holders obviously were little if any better off than they and been when the “collateral” for the notes consisted of real-estate mortgages.

  15. Gravatar of Thomas Hutcheson Thomas Hutcheson
    17. September 2020 at 09:26

    Isn’t this upside down? Shouldn’t inflation be HIGHER in 2020 when there is some supply shock?

  16. Gravatar of Thomas Hutcheson Thomas Hutcheson
    17. September 2020 at 09:36

    @jayThe Fed could keep buying 5 and 10 bonds until the TIPS rate is greater than PCE 2%



  17. Gravatar of Spencer B Hall Spencer B Hall
    17. September 2020 at 09:45

    There’s also a demand shock in 2020.

    But if you take the bottom of GDP in 2009 and the bottom in 2020, then between those periods, you get 14% real output (r-gDp) and 19% inflation (PCE). That’s stagflation, business stagnation accompanied by inflation.

  18. Gravatar of Spencer B Hall Spencer B Hall
    17. September 2020 at 09:46

    The U.S. Golden Era in Capitalism was where 1/3 was financed by new money and 2/3 financed by velocity. Today the exact opposite is being conducted by the FED. 1/4 is being financed by velocity and 3/4 by new money.

  19. Gravatar of Michael Rulle Michael Rulle
    17. September 2020 at 10:18

    What bothers me most, I think, is the assumed precision that they believe is achievable. I do like known objectives—-but 2% was the last 10 years objective too. Further, they also give the appearance that they still would rather err on missing the target from the low side than from the high side—-in other words, same as it ever was. And, putting aside what our methods are for determining inflation—-which one could argue until 2100—–but the actual belief there is no pure measurement error makes precision seem exxagerated. Is there really a difference between measured 2% versus measured 2.25% regardless of method? Still, to repeat, at least we have known target.

  20. Gravatar of Spencer B Hall Spencer B Hall
    17. September 2020 at 14:29

    re: “the assumed precision that they believe is achievable”

    Long-term money flows, proxy for inflation, has been a math constant for > 100 years. The FED’s Ph.Ds. could hit it, i.e., any target, if they knew the difference between money and liquid assets.

  21. Gravatar of Lizard Man Lizard Man
    17. September 2020 at 16:36

    I like Benjamin Cole’s idea of paying the Fed to meet its targets. I think it would work especially well with NGDLT. Maybe Congress could promise each voting member of the Fed a bonus of a billion dollars for every year they meet the the target level of NGDP. The situation in which voting members of the Fed lose absolutely nothing for poor performance has got to stop. But that also means that if they perform to expectations, they need to make bank, and by bank I mean they need to make Jamie Dimon look poor. That certainly seems to me how a rational head of state like Lee Kwan Yew would set up a central bank,

  22. Gravatar of Benjamin Cole Benjamin Cole
    17. September 2020 at 17:59

    Mathias G—

    Perhaps the intelligent George Selgin’s ideas for a non-central bank regulated monetary-financial system would work.

    But the modern world has embraced central banking, western and eastern, China, India, Europe, US.

    OK, we have central banking, and we believe in financial incentives.

    So…incentive-ize the Fed. The Fed has decided to hire 1000 economists yet pays no penalty for missing a simple target year after year.

    Gee, the Fed acts like an independent self-financing non-profit organization. I am shocked, shocked!

  23. Gravatar of Benjamin Cole Benjamin Cole
    17. September 2020 at 23:21

    Lizard Man: Thanks for your reply.

    Why do Western macroeconomists lionize markets and financial incentives…and then also lionize a non-profit, independent, self-financing public agency to operate monetary policy?

  24. Gravatar of Willy2 Willy2
    18. September 2020 at 05:38

    I expect to see falling prices followed by DEFLATION (= contraction of the amount of credit & money) and after that I expect Hyper-Inflation. Only after the Deflation has run its course its possible to have Hyper-Inflation. Will we get Hyper-Inflation here in the US ? Only time will tell.

    FYI: Hyper-Inflation is actually EXTREMELY DEFLATIONARY (credit wise).
    The FED can “print”/”ease” all it wants it’s not going to work. The amount of debt in the system is simply too large.

  25. Gravatar of Randomize Randomize
    18. September 2020 at 09:21

    Sorry to beat a dead horse but they should just peg the TIPS/Treasuries breakeven rate to 2% and declare victory. If they wanted to get fancy and have the treasury start issuing PCE-linked TIPS, that’d be fine too.

  26. Gravatar of Ray Lopez Ray Lopez
    18. September 2020 at 12:39

    @Lizard Man, @ Ben Cole – why give $1B to people for hitting a NGDP if money is largely neutral? It’s like giving $1B to a lottery winner. It’s probably not a good idea ($100M is more than enough incentive).

    Besides that, why not give $1B to each member of a team who invents a cure for cancer, a flying car that’s safe, a fusion reactor that doesn’t leak, or extending human life by a couple of hundred years? It’s not being done today, why not? That way you’re getting real GDP for your money, not just nominal GDP. Remember: Nominal GDP = Real GDP + inflation, with inflation doing nothing special in either the short or long run.

  27. Gravatar of Benjamin Cole Benjamin Cole
    18. September 2020 at 20:06

    Ray Lopez:

    The $1 billion annual X-prize to a privatized central banker for hitting a target may be excessive…but remember, I also propose hefty financial penalties for failure.

    The reason for $1 billion is that it is large enough to attract a pool of very talented candidates. If we have an annual $10 prize…we might get some guys at McDonald’s running the show.

    $100 million may be enough, but really $1 billion is a small price to pay for national financial stability.

    I do not believe money is neutral, at least within current context and within normal human lifespans. I believe a bad monetary policy can deepen recessions, slow recoveries.

    See the Great Depression, the 2008 Global Financial Crisis. Both caused by bad monetary policy.

    There was no reason for real economic output to decline in the 1930 or 2008. The earth was not struck by a meteorite, or even large wars, or bad weather. Those two economic depressions were man-made catastrophes.

    If central banks are paid handsomely to keep the economic ship towards target, maybe we get the results we want. Obviously, independent, non-profit central banks are a dangerous proposition.

  28. Gravatar of Spencer B Hall Spencer B Hall
    19. September 2020 at 10:37

    @Ray Lopex

    Money’s not neutral. To say so is simply to admit your ignorance on the matter. E.g., rates-of-change in short-term money flows, proxy for real output, cannot increase inflation, when the rate of change in long term money flows is falling conterminously.

    This is all precisely mathematical. It is a tautology. If economists knew a debit from a credit, maybe they’d figure it out.

  29. Gravatar of Spencer B Hall Spencer B Hall
    19. September 2020 at 10:38

    re: “paying the Fed to meet its targets”

    Pay me. I can hit any target.

  30. Gravatar of Ricardo Ricardo
    23. September 2020 at 19:40

    Yep, your “most common sense interpretation is that moderately™ is a few tenths of a percent” matches what Jim Bullard said recently.


    Fed’s Bullard defines his own view of AIT: +/- 0.5% over/under 2.0% target.

    From a Bloomberg interview, 2020-09-21, “Fed’s Bullard: U.S. Has Already Delivered Enough Fiscal Aid”
    Specifically starting here:

    Bloomberg-Kathleen Hays: “moderate inflation overshoot” what’s moderate ? … what’s average inflation ?
    Bullard: (paraphrasing): it’s a big [Fed] committee and you need to have “big tent” language. Its going to be a committee judgement about how to define [AIT]. But, personally, [Fed] was willing to go 0.5% below target for “quite a while”, so could go 0.5% above target “for a while” to get it to average out.

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