Wake me when the tight money starts


The US labor market burned red-hot in January as hiring unexpectedly surged and unemployment fell to a 53-year low, defying recession forecasts and adding pressure on the Federal Reserve to keep raising interest rates.

Nonfarm payrolls increased 517,000 last month after an upwardly revised 260,000 gain in December, a Labor Department report showed Friday. The unemployment rate dropped to 3.4%, the lowest since May 1969 and average hourly earnings grew at steady clip.

May 1969? Ah yes, I recall eighth grade.

“bUt 2 neGAtiVe GDP qUArtErs Mean rECesSioN”

Please wake me up when the tight money starts.



24 Responses to “Wake me when the tight money starts”

  1. Gravatar of Rafael Rafael
    3. February 2023 at 08:38

    This was an insane report, and hard to believe it won’t be heavily revised.

    Beyond the headline employment number, monthly aggregate spending on payrolls increased by 20% annualized (https://fred.stlouisfed.org/series/CES0500000017)

    Highest in their dataset (for some reason only goes back to 2006) by far outside of the few post-lockdown recovery months.

    Either inflation is about to pick back up with a vengeance or corporate earnings are going to get absolutely destroyed.

  2. Gravatar of ssumner ssumner
    3. February 2023 at 08:49

    Rafael, Agreed, it will get revised. But this has been going on for a year. It’s not all statistical noise. We really do not have tight money; we have easy money.

  3. Gravatar of Bori Bori
    3. February 2023 at 09:22

    Or, soft landing?

    Resilient economic data and payrolls combined with slowing wage growth and PCE/CPI is kind of the perfect recipe. You can lower inflation without hitting real activity in the classical model portion of the supply curve.

    Is your view that NGDP level needs to go back down to previous trend? Or can we just stabilize NGDP growth from here on out?

  4. Gravatar of William Peden William Peden
    3. February 2023 at 09:58

    NGDP growth is slowing, though still too fast:


  5. Gravatar of ssumner ssumner
    3. February 2023 at 11:41

    Bori, Yes, that’s still possible.

    William, Yup.

  6. Gravatar of Jeff Jeff
    3. February 2023 at 14:12

    I don’t understand why they aren’t dumping the assets they bought a lot faster. Seems like they are trying to stop a tidal wave of money with a tiny little moat of sandbags in the form of short-term interest rate increases. If the mechanism for stimulating the economy went 1) rates to zero then, if necessary, 2) asset purchases, why doesn’t the mechanism for unwinding it go 1) asset purchases sold then, if necessary, 2) rate increases. It doesn’t make much sense and feels like they aren’t serious or are trying to play some kind of game.

  7. Gravatar of Ricardo Ricardo
    3. February 2023 at 22:48

    The issue here is one of logic.

    When you purport to be practicing “science” but cannot define what a recession is, then you are practicing pseudoscience. For years upon years economists used two quarters of negative growth. But now, lo and behold, you claim otherwise. Well, what precisely is it? Is it three quarters. Is it whenever Sumner feels like it? Does whose sitting in office play a role in that determination.

    Science has precisely defined terms; we know what gravity is; we know if you drop a ball from a building it will ALWAYS FALL!

    Not sometimes. Not when I feel like it. ALWAYS. You are just proving that monetary economics, as it currently exists, is a pseudoscience which is what we’ve been telling you for a long time.

  8. Gravatar of Sara Sara
    4. February 2023 at 01:42

    Things don’t look so rosy in the housing market.

    You just spent another two trillion; you put a ton of money into the market over the last month when your establishment thugs passed the unread omnibus bill so it doesn’t surprise me that some of this credit would go to paying for salaries and new investments.

    I don’t trust the radical left’s statistically manipulated numbers, spoon-fed to the general public from a state controlled agency, and like Musk I expect a deep depression once the credit dries up and the debt turns over a higher rate of interest. There is a reason that banks and tech are laying off workers, and it’s not because the future looks wonderful.

  9. Gravatar of Spencer Spencer
    4. February 2023 at 08:41

    AD = M*Vt

    M is now tightening.

  10. Gravatar of Spencer Spencer
    4. February 2023 at 10:19

    The FED’s correct response to stagflation is the 1966 Interest Rate Adjustment Act.

    Waller, Williams, and Logan seem to agree. They “believe the Fed can keep unloading bonds even when officials cut interest rates at some future date.”

    Lending/investing by the banks is inflationary. Lending by the nonbanks is noninflationary (other things equal). Bank-held savings are frozen, as Dr. Philip George (“The Riddle of Money Finally Solved”), and Dr. Leland Pritchard demonstrated (“Should Commercial banks accept savings deposits?” Conference on Savings and Residential Financing 1961 Proceedings, United States Savings and loan league, Chicago, 1961, 42, 43).

    To avoid a recession/stagflation, you drive the banks out of the savings business while tightening bank credit. That’s the GOSPEL.

  11. Gravatar of Michael Rulle Michael Rulle
    4. February 2023 at 12:29

    I never understood why 4% NGDP/GDP is considered an optimal annual growth number (compounded quarterly). It has been about 6.25% since 1950. It has been about 6.25% since 2021. It has been lower and higher for short periods——Just because it’s always been that does not mean 4 is not better. But we have never had 4 for any length of time. What is the logic or argument that says 4%NGDP is better than 6—or 2?

    I don’t know of money is still easy post Covid illusion. But if I were to lean one way or another, I will always lean easy versus tight. Of course “leaning” neither is best. But why is 2% inflation “best”? Or 4% GDP?

    I am sure there are “reasonable” reasons why——but not scientific or empirical reasons why.

  12. Gravatar of Michael Rulle Michael Rulle
    4. February 2023 at 12:32

    6.25% since 2020, not 2021.

  13. Gravatar of Sean Sean
    4. February 2023 at 15:39

    I think we are pass easy money and monetary policy is acting with long and variable lags. Tips spreads indicate very high real rates compared to last decade. Real time inflation is negative now. Tough to describe this environment.

    Do you really think we can have easy money with 100-200 bps real yields when last decade we mostly spent it negative? I have trouble believing equilibrium rates have risen this amount.

  14. Gravatar of Michael Sandifer Michael Sandifer
    5. February 2023 at 08:30

    While Scott makes a good case that monetary policy is still too loose, based on relative NGDP growth, for example, there’s the implicit assumption that if policy isn’t further tightened, we’ll have a recession when wages catch up. We shouldn’t forget that this is an assumption.

    To some degree, tight money not only drains AD, but drains even TFP growth. I think there’s a good chance that much of the low TFP growth we’ve seen since the early 2000s has been due to tight money.

    Scott has previously pointed out that productivity growth was relatively strong during the Great Depression. That was true, relative to today, but the pattern of the drop in TFP growth ebfore and during the Depression was very similar to that of the Great Recession and the depressed aftermath. See figure 1 below:


    There are lots of a priori reasons to think low aggregate demand can negatively affect productivity growth. I enumerate some here:

    1. Lower GDP growth leads to lower capital investment.

    2. Lower wage growth may reduce the rate substitution of capital for labor.

    3. Lower employment can mean smaller gains from comparative advantage , as lower productivity workers sit out. This one seems counter-intuitive, I realize.

    4. Lowered growth rates of economies of scale.

    This could be an interesting experiment. TFP soared after the start of WW2. Could we see the same happen soon, albeit at a lower level?

  15. Gravatar of ssumner ssumner
    5. February 2023 at 10:12

    Michael Rulle, After a decade of reading my blog, you’re still asking questions like that?

    Michael Sandifer, You said:

    “While Scott makes a good case that monetary policy is still too loose”

    I’m not saying that money is currently too easy, I’m saying it has been too easy in the recent past.

  16. Gravatar of Michael Sandifer Michael Sandifer
    5. February 2023 at 10:50


    I stand corrected on your view about the current state of monetary policy.

    As far as I’m concerned, with 5 year inflation breakeven at a bit less than 2% in core PCE terms, to the degree one should take that seriously, the Fed’s tightened enough. That doesn’t mean they shouldn’t tighten more from an NGDP level targeting perspective.

    Though I favor NGDP level targeting, I take much more seriously the question of what the target should be, to avoid considerable, though ultimately temporary unnecessary pain. I think it more likely than not that RGDP growth potential is higher than commonly thought, despite deteriorating demographics. Some more support for this view includes the more consistent, albeit brief spurt in TFP growth at the end of the Great Recession recovery cycle, and the recent interesting behavior of various dollar indexes. It is interesting to me that the dollar was growing rather rapidly in relative strength during a period of looser money, until September 24, which was just about the precise date when the 5 year inflation breakeven fell below 2% in core PCE terms. And by the way, the beginning of the strengthening of the dollar overseas was not long after the 5 year inflation breakeven began to exceed 2% in core PCE terms. The latter was near mid-2021.



    This is very obviously very incomplete, circumstantial evidence at best, but taken everything I’ve said together, it might be at least a bit of food for thought.

  17. Gravatar of Rodrigo Rodrigo
    5. February 2023 at 10:57


    It looks like markets and fed are looking for a sort of immaculate disinflation at this point. Albeit at slightly different terminal rates. Job numbers on friday might change this but at the latest press conference Powell sounded a lot less hawkish than he has in the past. Its obvious the economy is running full steam ahead but inflation looks to be subsiding, it feels like either inflation should reignite or the economy will slow in the near future (although no signs currently). What is your take on this discrepancy? Given up on looking at fed fund futures as they have been consistently wrong throughout this whole cycle.

  18. Gravatar of David S David S
    6. February 2023 at 03:29

    Scott, do you have any comments on Cochrane’s new book? The Economist skewered it gently in its Free Exchange column. Based on his blog posts, I think he indulges in too much reasoning from price changes; although his approach is probably applicable to countries like Argentina, Egypt, and Turkey.

  19. Gravatar of Michael Sandifer Michael Sandifer
    6. February 2023 at 05:27

    Michael Rulle,

    4% is just below the mean pre-pandemic, post-Great Recession NGDP growth rate. The whole point of NGDP level targeting is to keep future-expected NGDP growth on a consistent path.

    Scott thinks RGDP growth will be below 2% for the foreseeable future, due to demographics and other factors. Hence, he’s also expressed openness to a somewhat lower target growth path.

    Theoretically, the precise NGDP growth path doesn’t matter that much in the long-run, if the difference in inflation is low.

    My argument has long been that the short-run is longer than most seem to recognize. I think we were still approaching the cusp of full-employment in 2018 when the Fed was actively tightening policy to deal with what was not demonstrably more than a blip in inflation, though inflation expectations remained low. Real GDP growth was touching 3% on an annual basis.

    I think we should be very careful to avoid assuming that sustained real growth rates above 2% are not possible.

  20. Gravatar of ssumner ssumner
    6. February 2023 at 08:26

    Rodrigo, You said:

    “it feels like either inflation should reignite or the economy will slow in the near future (although no signs currently).”

    Yes, I think one of those two is likely, although in macro one never knows for certain.

    I’m praying for a softish landing, with unemployment staying below 5% and inflation slowing to 2%. Unemployment staying below 4.5% would be a highly successful landing in my view. But economists cannot predict the business cycle.

    David, I haven’t read it, but I’d probably agree with The Economist.

  21. Gravatar of Spencer Spencer
    6. February 2023 at 12:02

    re: “1. Lower GDP growth leads to lower capital investment.”

    Secular stagnation is not going to be due to a shrinking labor force even if it is a factor of production. That’s like saying banks losing consumer deposits to fintech.

    The error in macro is the Keynesian macro-economic persuasion that maintains a commercial bank is a financial intermediary.

    Counterintuitively, to increase real output you drive the banks out of the savings business (which doesn’t reduce the size of the payment’s system). Banks shouldn’t be allowed to buy their liquidity, to become TBTF. Any loss of deposits due to non-insured deposits represents a gain for other banks in the system.

    As Dr. Philip George posits: “When interest rates go up, flows into savings and time deposits increase” ( the ratio of M1 to the sum of 12 months savings ). The paradox of thrift slows the economy because banks don’t lend deposits. Deposits are the result of lending. Get religion.



  22. Gravatar of Andrew C Andrew C
    6. February 2023 at 20:39

    I apologize if this is something you’ve seen before and I missed it, but if not Jason Furman has been using this 2×2 table as a guide to the chances of different macro outcomes in the near future. I’d find your ratings of each quadrant useful, especially with the frequent releases of data coming out from the BEA and BLS. https://twitter.com/jasonfurman/status/1598819099185975297?s=46&t=rF-UOXRDTA0pHn3yWaO9Ig

  23. Gravatar of ssumner ssumner
    7. February 2023 at 08:52

    Andrew, A few comments:

    1. I’d probably put soft landing a bit higher than 9%, given how poorly we understand macro. Labor market strength keeps surprising us, and TIPS spreads show moderating inflation.

    2. I’d say 4.5% is a pretty low threshold for “hard” landing. If we get inflation down with no more than 4.6% unemployment at the peak, would that not be success?

    Overall, I don’t strongly disagree, all four possibilities are in play.

  24. Gravatar of Michael Rulle Michael Rulle
    11. February 2023 at 09:53

    Michael Sandler— good comments.

    Scott. I think I know why you think 4 and 2 is good. (GDP-4, RGDP-2, inflation 2). And I am not saying it’s not. It’s just that we have rarely reached that target for any extended period of time for 75 years. So would we have had less real economic volatility if we kept gdp target at 4?

    It feels like a prediction of what is optimal. 4 gdp is constant but rgdp is floating and it averages out to 2-unless we are indifferent to inflation?

    But I believe productivity, as hard as it is to measure (except if we believe the premise is the proof—or circular thinking) has a potential large impact on nominal and real measurements.

    I know less and less the more I think about these issues. There is too much confusion, I can’t get no relief.

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