Two plus two is four (connect the dots)

Jay Powell has a bland speaking style, but if you listen carefully to the content then his press conferences can be quite interesting. I don’t have a written transcript, so the following is not precisely word for word, but pretty close:

Inflation expectations are quite central in how we think about inflation.
We need them to be anchored at a level consistent with our 2% inflation goal. . . . We need to conduct policy in a way that supports that outcome.

So he wants to set policy at a position where the public expects 2% inflation.  What about level targeting?

We are also as a part of our review  . . . looking at potential innovations, changes to the framework that would be more supportive of achieving inflation on a symmetric 2% basis over time. . . . That’s at the very heart of what we are doing in the review.

Translation:  The Fed is edging closer to level targeting, or average inflation targeting.  Later, he indicated that the policy review would last until the middle of next year.  I doubt they’d change policy right before the election, so look for a late 2020 announcement.

What about real growth?

Our outlook overall is for moderate growth of around 2%, which is pretty close to trend . . . and we feel like our current stance of policy is appropriate as long as that remains the outlook.

Translation:  Policy is currently set at a level expected to produce roughly 2% RGDP growth.  If expected RGDP growth changed then policy would need to be adjusted.

Let’s summarize these “dots”.  Policy is set at a level where the Fed expects 2% RGDP growth.  Policy is set at a level where the public expects 2% inflation.  Hmmm, what sort of expected NGDP growth does that imply?

Powell also indicates that the policy framework needs to change in a direction where the misses are “symmetric”, which is what happens with level targeting.  That change will likely be announced later next year.

More than 10 years ago, I began blogging on the need for stable growth in NGDP, with level targeting.  I argued that policy should be set at a position where the markets expected 5% NGDP growth, later changed to 4% when the Great Stagnation kicked in and the Fed said it wanted to stick with a 2% inflation target.

We do not yet have a policy regime where the Fed sets policy at a position that the market expects will result in 4% NGDP growth, with level targeting.  But we are a heck of a lot closer to that regime than we were in February 2009.

Can I say we are 50% of the way there?  And what about the other 50%?  We need to shift from a focus on the public’s inflation expectations to a focus on the financial market’s inflation expectations.  And we need to shift from a focus on the Fed’s RGDP growth outlook to the market’s RGDP outlook.  And we need to add the two.

Two plus two is four.  That’s not so complicated, is it?

Three more years of steady NGDP growth and America will have its first ever soft landing.  In that case, I’ll declare victory and go home.



34 Responses to “Two plus two is four (connect the dots)”

  1. Gravatar of Todd Kreider Todd Kreider
    30. October 2019 at 16:23


    I’m curious where you got your criteria for a soft landing from. It seems much to stringent.

  2. Gravatar of ssumner ssumner
    30. October 2019 at 16:55

    Todd, I made it up. Three years of growth after unemployment falls to cyclical lows, without an upsurge in inflation. That’s my definition.

  3. Gravatar of Philo Philo
    30. October 2019 at 18:26

    “More than 10 years ago, I began blogging . . . .” Scott, thanks for a great 10+ years!

  4. Gravatar of Benjamin Cole Benjamin Cole
    30. October 2019 at 19:23

    I prefer NGDPLT.

    But some central banks seem to have success with targeting an inflation band, such as 2% to 3%. This may be the “poor man’s” NGDPLT.

    Targeting an inflation band does have the advantage that the inflation rate can be measured fairly accurately and quickly, and also supplemented by online price measures. The band provides the necessary flexibility to the central bank.

    Measuring nominal GDP at any point in time is trickier.

  5. Gravatar of Benjamin Cole Benjamin Cole
    30. October 2019 at 20:42

    Semi-OT but also related:

    Okay, so the Fed cut by a quarter point.

    The Fed has simultaneously fired up its QE program, big time. A couple hundred billion dollars expansion in its balance sheet in a month, and more promised.

    But here is my question: We keep hearing about dollar shortages. I do not understand any of it. Not enough liquidity in the banking system.

    Now, Bloomberg says that far less US petro-dollars are going overseas (due to domestic shale-oil production) and this is another big problem, causing a big dollar shortage.

    Dollars are scarce! (Shouldn’t the dollar then appreciate?)

    So, the Fed prints too many dollars, but there is not enough dollars. A $200 billion immediate boost in the Fed balance sheet is nothing, no one seems to care except to say “the financial system” needs even more dollars.

    Dollars, which are also blips on a computer-chip somewhere.

    I wonder what any of this means. Time to put on the tin-foil hat and indulge in a long think.

  6. Gravatar of P Burgos P Burgos
    30. October 2019 at 23:42

    Where do you get the idea that the money supply is expanding too rapidly? Everything you have written seems consistent with there being a scarcity of dollars (or near equivalents). Banks need more of it, and foreigners need more of it. All seems to be pointing in the same direction. Maybe the question is to ask why the velocity of the dollar is falling?

  7. Gravatar of Todd Ramsey Todd Ramsey
    31. October 2019 at 06:02

    Please don’t give up until a large NGDP futures market is created, with the Fed buying and selling to maintain guardrails!

    Against all odds, you are moving monetary policy towards a better process. Go the distance!

  8. Gravatar of rayward rayward
    31. October 2019 at 06:35

    The dilemma faced by the Fed is that growth without investment in productive capital isn’t growth; it’s pushing on a string. Sumner believes economic growth can be manufactured out of thin air simply by the right monetary policy. Unless and until owners of capital are induced to invest in real economic growth, we are stuck between a rock (low growth) and a hard place (inflation). Sumner’s ideas were developed during an era of business cycles, whereas today we are in an era of bubble cycles.

  9. Gravatar of Michael Rulle Michael Rulle
    31. October 2019 at 07:18

    I know NGDP is not RGDP—–but is there a reason to believe we cannot achieve NGDP of 5 and RGDP of 3?

    Re: Symmetry—-The Fed Chair is going to have to emphasize that consistently and gradually more forcefully if he wants the public to accept it. What’s fascinating is how “psychological” the idea is. We already have “symmetry”—except it is at a lower number–de facto. PCE ex-food and energy seems symmetrical around 1.5 since 2010.

  10. Gravatar of Cove77 Cove77
    31. October 2019 at 07:27

    Bubble cycles..bubble cycles…bubble cycles …yeah now I get it…BUBBLE CYCLES!!!
    Thanks Rayward…apologize for being so slow

  11. Gravatar of ssumner ssumner
    31. October 2019 at 07:49

    Burgos, You said:

    “Where do you get the idea that the money supply is expanding too rapidly?”

    I don’t have that idea. What made you think I did?

    Michael, “We” certainly achieve 5% NGDP growth, if by “we” you mean the Fed. The Fed can’t generate 3% RGDP over a sustained period. “We” can do that with more immigration or policy changes that boost productivity growth, but I don’t see that happening.

  12. Gravatar of bill bill
    31. October 2019 at 08:24

    I think this is a step forward. Main risk is that they achieve the average with pro cyclical inflation.

  13. Gravatar of bill bill
    31. October 2019 at 14:05

    The more I think about it, the more I think this will increase the occurrence of pro cyclical inflation. I just hope that NGDPLT doesn’t get tarnished with that. It shouldn’t; it’s the next logical step and would correct that problem.

  14. Gravatar of Benjamin Cole Benjamin Cole
    31. October 2019 at 17:07

    That is an interesting perspective that Scott Sumner raises, that more immigration will raise US GDP.

    But will more immigration raise US GDP PPP per capita?

    Keep in mind the US builds net 1 million housing units a year and that seems to be the max due to property zoning, and the US no longer builds infrastructure except at preposterous cost and delay. Scott Sumner says the US should no longer even try to build infrastructure, and he may be right.

    Then there is the problem that GDP PPP per capita is a dubious measure in many regards.

    For example, the rent on a one-bedroom apartment in Sapporo Japan is about one-third that of Los Angeles. That’s about another $800 in the pockets of the Sapporo resident every month, compared to the resident of Los Angeles.

    Yet as measured traditionally by GDP PPP per capita, the residents of Sapporo have a lower living standard than the residents of Los Angeles.

    And Hong Kong residents live much better than those of Los Angeles and the US, as measured by GDP PPP per capita.

    It all comes down to hedonics!

    If you like the picture of Hong Kong… then more immigration into the US is a good idea.

  15. Gravatar of dtoh dtoh
    31. October 2019 at 17:26

    So you don’t think that it will occur to people to substitute capital for labor when the labor becomes less available?

  16. Gravatar of Matthias Görgens Matthias Görgens
    31. October 2019 at 22:56

    Benjamin, measuring nominal GDP is actually more straightforward than the price level.

    For the latter, you need to make hard and contentious choices about hedonic adjustments.

    If you do a level targeting approach guided by market forecasts, there’s no need for measuring anything quickly. Neither in price level targeting not GDP level targeting. You just have to measure eventually and pay out your futures contracts. Arbitrage and expectations do the rest.

  17. Gravatar of Benjamin Cole Benjamin Cole
    1. November 2019 at 03:54

    Matthias–Not sure. Nominal GDP—with or without the underground economy? Trade effects?

    There is $8,000 in cash (equivalent) in Japan for every resident. I wonder how much retail is counted.

    OT, from ING:

    “The monetarist era is over

    Central bankers have been the first to recognize that the effectiveness of monetary policy in managing demand and stabilizing economic cycles has reached its limits. The problem is that many politicians and academic economists remain in denial.”


    Who knows if the tsunami-cavalcade of Wall Streeters and central bankers calling for fiscal stimulus, or money-financed fiscal programs, is the right way to go.

    But couple of years ago, when I ventured that helicopter drops were the way to go, I was received as well as a fart on a crowded elevator.

    Now, Stanley Fischer is is calling for the choppers. In the last six months, a big switch in attitude.

  18. Gravatar of Michael Rulle Michael Rulle
    1. November 2019 at 05:52

    Thanks Scott. I appreciate your answer. I wish you did not put scare quotes around We. I tend to think Americans are in some sense an actual nation—-and I think of “We” as a form of expression which implies commonality of identity. I call it politeness.

  19. Gravatar of Matthias Goergens Matthias Goergens
    1. November 2019 at 07:39

    Benjamin, yes, that’s a decision to be made, but doesn’t affect things too much as long as the effect stays of roughly constant proportion. (Eg always about 10% of economy being in the black market or so.)

    For inflation, I don’t think you can get away with such a simple adjustment (or rather non-adjustment)?

    Why wouldn’t retail be counted in Japan? People pay taxes on retail. (Especially Japan is probably quite honest on that retail level. They might have more corruption at higher levels.)

    Of course, with eg free banking, you mostly just need a fixed level of reserves per capita, and the finance system will provide the right amount of money needed.

  20. Gravatar of ssumner ssumner
    1. November 2019 at 11:33

    dtoh, Higher real wages would make people substitute labor for capital. But I don’t think it’s likely that real wage growth will accelerate very much over the pace of recent decades. Could happen, but unlikely.

    A big breakthrough in AI might accelerate productivity growth, but that’s all highly speculative.

    Michael, The scare quotes were not normative, merely an attempt to clarify who the “we” were that might affect NGDP or RGDP.

  21. Gravatar of Benjamin Cole Benjamin Cole
    1. November 2019 at 16:17

    Why wouldn’t retail be counted in Japan? People pay taxes on retail. (Especially Japan is probably quite honest on that retail level. They might have more corruption at higher levels.)—Matthias

    Japan is famous for the extent that cash is still used at retail such as in restaurants, cabbies or stores. Many of these restaurants and retail outlets are mom-and-pop operations. Come now, who reports cash income?

    BTW I was just reading one of the stupidest stories I ever read in my entire life. If you go to Tokyo, you will likely take a cab, and the cab driver will likely be an older Japanese man. This makes sense, as the work is not that physically taxing, and older guys are likely to know the city, and to need some income in their older years. I rather suspect they do not report all of their cash income.

    The author of the story insisted this showed the shortcomings of Japan’s low level of immigration, and that all of these cab drivers should be immigrants.

  22. Gravatar of Benjamin Cole Benjamin Cole
    2. November 2019 at 18:06


    BTW, it appears I wildly underestimated the cost of renting a one- bedroom apartment in Los Angeles.

    “As of April 2019, average rent for an apartment in Los Angeles, CA is $2849 which is a 10.64% increase from last year when the average rent was $2546 , and a 0.21% decrease from last month when the average rent was $2855.

    One bedroom apartments in Los Angeles rent for $2491 a month on average (a 9.63% increase from last year) and two bedroom apartment rents average $3279 (a 7.72% increase from last year).”

    Okay, so $2,491 for a one-bedroom apartment in L.A.

    And for Sapporo Japan, the rent is; “Apartment (1 bedroom) Outside of Centre: 45,000.00 yen” which translates into $417 a month.

    So, someone renting an average apartment in Los Angeles pats another $2,000 a month left over after payin rent compared to someone renting an average apartment in Sapporo. For most middle-class people, obviously, $24,000 a year is serious money.

    Sapporo is by most accounts a pleasant place, but the wider region declining population, resulting in radically lower living costs.

    The international GDP PPP per capita measurements are interesting, but are averages, and overlook taxes, and the hedonics are a wild guess.

    Does a renter get value for the rent, by definition? Do city amenities make rents in LA worth it, compared to Sapporo?

  23. Gravatar of P Burgos P Burgos
    2. November 2019 at 20:49

    I would think that monetary policy that is too tight for long periods of time (say a couple of decades) would lead to higher unemployment, and the higher unemployment to lower real wages, and that the converse would be true as well. What is wrong with this story?

  24. Gravatar of ssumner ssumner
    3. November 2019 at 08:44

    Burgos, Wages and prices adjust to monetary policy after a few years.

  25. Gravatar of Ewan Ewan
    3. November 2019 at 09:07

    I spent many years working in the City. A distant memory now. But I followed central bank, market, and economists’ forecasts if growth and inflation quarter by quarter year after year. And I did a bit of history. My subjective impression is that they were all about as bad as each other. They all talked the same talk. They all forecast turning points only after the event. They clearly none of them had the correct model of how the business cycle works. Why would choosing one be better than either of the others? In the 1970s, 80s, and 90s, Tim Congdon was startlingly accurate about the UK. David Laidler was consistently accurate about Canada. Might it be that it is possible to identify sufficient features of the mythical correct model to do better than the consensus of central bankers, economists, or financial market participants? Plugging in market forecasts is as good as saying that economists are ignorant. With no rudder, let the ocean swell guide us.

  26. Gravatar of Edward Edward
    4. November 2019 at 00:47

    Interested to hear your thoughts Scott. China as the world’s most powerful country would be the stuff of nightmares.

  27. Gravatar of ssumner ssumner
    4. November 2019 at 11:01

    Ewan, You said:

    “Might it be that it is possible to identify sufficient features of the mythical correct model”

    Who should do that identification? You? Me? Jay Powell? The market?

    Edward, The article is full of statements like this:

    “If China were to lead the world, then democracy would be hard-pressed to remain the mainstream form of political regime it has been for the last century.”

    But none of them are explained. Why is this? They don’t say. So what am I to respond to?

    China won’t become a global leader unless its model becomes far more attractive than it is at the present. Right now, hundreds of millions of Chinese wish to migrate to the USA. How many Americans wish to migrate to China?

    This is just a more extreme version of the anti-Japan hysteria that we saw in the 1980s, which turned out to be totally inaccurate.

  28. Gravatar of Benjamin Cole Benjamin Cole
    5. November 2019 at 01:43

    et tu, Brutus?

    BOJ’s Kuroda calls for fiscal, monetary policy mix to spur growth
    Leika Kihara
    3 MIN READ

    NAGOYA, Japan (Reuters) – Bank of Japan Governor Haruhiko Kuroda said a mix of fiscal and monetary stimulus would give a bigger boost to the economy than taking fiscal and monetary steps individually, signalling that the government could play a bigger role in helping spur growth.


    If central bankers do not believe in the powers of central banking….should the public?

  29. Gravatar of Michael Rulle Michael Rulle
    5. November 2019 at 04:58


  30. Gravatar of Ewan Ewan
    5. November 2019 at 15:07

    The track record of the two I mentioned does suggest that it is possible for a central bank to do better than the consensus reflected in the models it shares with market participants. If the central bank can’t do better, it’s not obvious what it is for, other than clearing house and lender of last resort to the banks. How is a monetary policy that merely reflects market prices any policy at all?

  31. Gravatar of ssumner ssumner
    5. November 2019 at 15:46

    Ewan, You said:

    “How is a monetary policy that merely reflects market prices any policy at all?”

    I don’t understand the question. What specifically is wrong with relying on market forecasts?

  32. Gravatar of Ewan Ewan
    7. November 2019 at 04:45

    It is, as always, probably me misunderstanding.

    But does something that controls a system not have to be in some sense separate from it?

    If you feed market prices in you get what the market prices out.

    And in my experience (admittedly ancient) the market more often than not gets it wrong. So it will lead monetary policy up hill and down dale.

    And if it simply mirrors the market, what is monetary policy for? Indeed, what is monetary policy? Supplying liquidity in the quantity the market demands at a price the market sets?

  33. Gravatar of ssumner ssumner
    8. November 2019 at 09:32

    Ewan, You said:

    “And in my experience (admittedly ancient) the market more often than not gets it wrong.”

    I presume you are very rich.

    The purpose of monetary policy is to provide a stable medium of account, as an unstable medium of account causes economic turmoil (due to sticky nominal wages.)

  34. Gravatar of Ewan Ewan
    11. November 2019 at 05:39

    “I presume you are very rich”

    You do know the jibe doesn’t follow.

    If you lived through the inflationary boom in the 1980s and ERM bust in the early 90s in the UK, for example, you might doubt that central bank action consonant with market forecasts will create a stable medium of exchange.

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