What are the Fed’s “other objectives”?

This Joe Gagnon tweet caught my eye:

Gagnon found that to be rather ironic, and so do I.

But that got me thinking about the Fed. Fed policy is also undershooting its inflation target, and the undershoot will grow larger over time. What “other objectives” does the Fed have that suggest actual monetary policy should be more contractionary than the policy stance that would lead to expectations of 2% PCE inflation?

Powell frequently indicates that the Fed has lots more ammunition, and it does. So what’s going on here?

PS. I have a new piece in The Hill, explaining why monetary stimulus is superior to fiscal stimulus.

HT: David Beckworth



20 Responses to “What are the Fed’s “other objectives”?”

  1. Gravatar of Ray Lopez Ray Lopez
    6. May 2020 at 11:57

    Monetary stimulus is superior to fiscal stimulus since money is largely neutral so it doesn’t really do anything. Then this:

    BIS Quarterly Review, March 2015
    Claudio Borio, Magdalena Erdem, Andrew Filardo, Boris Hofmann
    The costs of deflations: a historical perspective1
    Abstract: Concerns about deflation – falling prices of goods and services – are rooted in the view that it is very costly. We test the historical link between output growth and deflation in a sample covering 140 years for up to 38 economies. The evidence suggests that this link is weak and derives largely from the Great Depression. But we find a stronger link between output growth and asset price deflations, particularly during postwar property price deflations. We fail to uncover evidence that high debt has so far raised the cost of goods and services price deflations, in so-called debt deflations. The most damaging interaction appears to be between property price deflations and private debt.

  2. Gravatar of Christian List Christian List
    6. May 2020 at 12:38

    That is not what the German court says. I suppose you know that, don’t you?

    You have to have some background on what most Germans think. The “Scott Sumner way” of looking at monetary policy is completely unknown in Germany, even less so than in the Anglo-Saxon part of the world. Even the “mainstream” American view of monetary policy is rejected in Germany.

    The German court seriously assumes that the ECB directly controls interest rates in the long run and that the monetary policy measures are disproportionate because they say that it harms, for example, the poor German saver, the poor German tenant, etc.

    We know this theory well enough.

    But in the end, the verdict is completely irrelevant. The only consequence of the judgment is that the ECB — especially for the stubborn Germans — should once again explain why its measures are in proportion.

    I think that the ECB should troll the German court and answer truthfully:

    “Sorry, we are not acting proportionately at the moment, we should do so much more. We should at least convey in a credible way that we will do whatever it takes.”

  3. Gravatar of Tom Davies Tom Davies
    6. May 2020 at 15:05

    You’ve probably read this: https://johnquiggin.com/2020/05/06/in-print-today/

  4. Gravatar of ssumner ssumner
    6. May 2020 at 15:41

    Tom, No I had not. Thanks.

  5. Gravatar of Spencer Hall Spencer Hall
    6. May 2020 at 16:37

    re: “there is no magic formula for preventing a fall in real incomes and living standards”

    There is indeed a “magic formula”. It is called putting savings back to work. All 11 trillion in bank-held savings are unused and unspent, lost to both consumption and investment. Why? because banks always create new money when they lend/invest.

    Savings flowing through the nonbanks increases the supply of loanable funds without changing the supply of money, a money velocity relationship. This error is the sole source of secular stagnation, not robotics, not demographics, not globalization.

  6. Gravatar of agrippa postumus agrippa postumus
    6. May 2020 at 16:38

    Oh, Sticky Wages, wherefore art thou not Sticky Wages; a wage not sticky by any other name pays as sweet. With apologies to the Bard

  7. Gravatar of Benjamin Cole Benjamin Cole
    6. May 2020 at 16:47

    I agree with Stanley Fischer and David beckworth, now is the time for helicopter drops.

  8. Gravatar of Philo Philo
    7. May 2020 at 09:31

    One of my puzzles about 2008-09 was that unemployment was ‘way high, inflation was ‘way low, and Bernanke kept saying the Fed had plenty more ammunition, but no one (in any press conference I saw) asked him why they weren’t using more of that ammunition. Is anybody asking Powell now?

  9. Gravatar of David S David S
    7. May 2020 at 13:24


    How to deal with the inflation scolds?

    This may seem like a crazy question in the context of 2-4 quarters of 20% unemployment, but is there a plain language line of reasoning to respond to the inflationistas/deficit scolds/currency debasement/oh god we’re Weimar! types. (I’m betting $10 that Paul Ryan is planning a comeback.)

  10. Gravatar of Vicente Vicente
    7. May 2020 at 15:49

    Scott, if you don’t mind, what do you think of emerging markets currencies? EM central banks seem not to fear to float anymore. What could make a country look like Argentina?

  11. Gravatar of Bob Bob
    7. May 2020 at 17:42

    I understand the preference for monetary stimulus, and the preference for unemployment aid vs $1200 to most people (I don’t qualify, and Scott, I bet you don’t either, and that’s not a bad thing). However, I understand why democrats would push for it: State unemployment systems are set up in such a way that a significant percentage of people that lost their jobs can’t claim unemployment. Did you drive an uber? Work as a hairdresser renting space at a salon? Any kind of hourly work? Heck, I know of quite a few 1099 tech contractors that had their contracts cancelled. Most states will not offer unemployment to those groups of people, although for all intents and purposes, their income today is zero. Democrats would much rather overspend than let those people out to dry.

    I’d much rather have a system that didn’t work that way, letting independent contractors claim unemployment, but given that the system is designed to dissuade people from enrolling in the good times, and most of it is paid by states which are asked to run balanced budgets, it’s not going to change any time soon.

    I also don’t quite get the payroll protection loan setup: We see private schools with large endowments getting, in practice, free money, and so do many small businesses that haven’t lost income at all. There’s plenty of waste, if just because we aren’t planning our programs well in advance.

  12. Gravatar of Postkey Postkey
    8. May 2020 at 01:29

    There is, already,’excessive’ ‘monetary stimulus’?
    “13:07 it’s very clear that in 2020 there’s
    13:11 going to be a fall in nominal GDP so a
    13:15 dramatic fall also in velocity
    13:19 there’s obviously money growing a kind
    13:21 of 15-20 percent and omelet GDP actually
    13:24 going down a bit but then what happens
    13:26 through in 2021 and 2022 when in all the
    13:30 history these things reassert themselves
    13:32 I didn’t know the precise course
    13:34 quarterly course of inflation
    13:36 GDP and so on all I know is that there’s
    13:38 a very difficult adjustment problem
    13:40 coming up out there in the next few
    13:42 quarters of course at the moment there’s
    13:47 the oil price fall it’s going to dampen
    13:49 down inflation that may lead some
    13:51 complacency you may think that it that
    13:55 the worry is deflation not inflation
    13:56 okay each user in my view there’s a lot
    14:01 of analysis a lot of previous history a
    14:05 lot of theory behind the forecast that
    14:08 there’ll be a sharp increase in American
    14:10 inflation in the next two or three years . . . “


    Assuming a ‘V’?

  13. Gravatar of rayward rayward
    8. May 2020 at 04:14

    This is no ordinary contraction, not part of a standard economic cycle, not even an extraordinary contraction triggered by a financial crisis. This contraction is a combination of supply shock and demand shock. I suppose war comes close, but even in the midst of a war workers can work and firms can produce (unless killed by the enemy, something we haven’t experienced since the Civil War). The customary monetary tools can do only so much. Indeed, the “other objectives” must include the consequences of supply shortages not just demand shortages. The Fed’s main objective is to maintain financial asset prices, but how can rising (or at least stable) asset prices alone promote economic recovery and growth at a time when both supply and demand are collapsing? This is not 2008-09, nor is it 1929, this is different, and the customary monetary tools won’t save us from a pandemic like this one.

  14. Gravatar of Michael Rulle Michael Rulle
    8. May 2020 at 06:53

    Re: The Hill essay

    I thought Powell has already said he was targeting symmetrical 2% inflation. That still may happen, and it seems like he is not doing that now, but he hasn’t changed his stated policy, has he?

    When the Treasury borrows, it does not increase money in circulation—-unless the Fed chooses to purchase it, correct?

    It seems unlikely Powell will ever do NGDP targeting—-if he does not do it now, when will he ever do it?

    Do you believe in the Cowen concept of irreversible non-linear economic collapse?

    I looked up the H3N2 flu of 1968-69. While it started in the summer of 1968, it hit America hard by December. There were two waves, the second was the worst, except in US where the first was worse. It lasted 18 months——and also impacted those over 65 the worst.

    It’s total death rate (which we need another year for comparable time frames) was 8 times Covid—-but, as mentioned still need another 12 months. In US, it was 2.5 times Covid (but, still need another 12 months.)

    This happened from my freshman/sophomore year. I was attending a small liberal arts college —-this was the absolute height of the anti-war protests—-and like most colleges at that time it was “protest, sex, drugs and rock and roll”——so maybe that is why I never heard of the HK flu until 3 months ago.

    I still don’t know how we came to shut down our economy ——I mean literally—-I do not know how it happened—-(not saying we should or should not have) but I cannot determine what’s caused it. It is a complex set of somethings

    I am pretty sure this never occurred to anyone before. It is amazing to me.

  15. Gravatar of Michael Rulle Michael Rulle
    8. May 2020 at 09:27

    PS. Saw an interesting link at Marginal Revolution. A study said that both people of Asian and Black origins are much more likely to die “in-hospital” than whites. The Asian group (study NOT done in Asia) is somewhat surprising given how low the death rate in Asia is. Have no idea what this means of course—-just interesting.

  16. Gravatar of Michael Rulle Michael Rulle
    8. May 2020 at 09:45

    PSS——Covid story from NJ

    -My wife’s sister-in law’s uncle, age 87, was feeling flu like symptoms etc. His granddaughter, a lawyer, found him a doctor (he is a citizen of a South America and did not know how to navigate the system). His daughter (the granddaughter’s mother) also was feeling ill. They both were tested positive for Covid. The Doctor advised the granddaughter to hospitalize the grandfather “where he was likely to die, do to his emphysema—-but I would be less painful”. Her instant thought was “you must be kidding” as he seemed not that sick. We all agreed completely. (It just seemed obvious)

    12 days later he was feeling better 5-6 days in a row. He and daughter went back to be tested. He had no Covid-19, nor did his daughter

    My belief is they never had it. This may be a simple story of a random error—-or perhaps not. But we believed if he went to the hospital with “Covid”—-he would have been further exposed. In fact, we had no doubt.

    This was not “rational thinking based on weighing pluses and minuses” more like a “heuristic” or maybe “prior belief” that a hospital visit in NJ was a obviously dangerous.

    Again—just another tale.

  17. Gravatar of ssumner ssumner
    8. May 2020 at 09:59

    Vicente, I haven’t followed them closely.

    Bob, I read that independent contractors were added in the new unemployment bill. Is that wrong?

    And I normally would have qualified for the $1200, except for a one time payment that I delayed to 2019 for “tax reasons” (big mistake.)

    Rayward, Unique is an overused term, but this one really is unique.

    Michael, We don’t need symmetric, we need level targeting.

    You asked:

    “Do you believe in the Cowen concept of irreversible non-linear economic collapse?”

    No. Economies have an amazing ability to bounce back.

    You said:

    “It’s total death rate (which we need another year for comparable time frames) was 8 times Covid—-but, as mentioned still need another 12 months. In US, it was 2.5 times Covid (but, still need another 12 months.)”

    Apples and oranges. Why cite utterly meaningless data?

    I recall 1968, no one was paying much attention to the flu.

  18. Gravatar of What rode the German Constitutional Court on May 5? | Evocatively Ambiguous What rode the German Constitutional Court on May 5? | Evocatively Ambiguous
    8. May 2020 at 22:58

    […] Scott Sumner points to a rather funny tweet. […]

  19. Gravatar of Michael Rulle Michael Rulle
    9. May 2020 at 03:46

    By symmetric I do mean level—-I think—-over a desired time frame you try to hit your target—-so,when you under shoot for x months you try to over shoot for x months so that for 2X months you have your level target for that time frame. If their target were 1.5 since 2010—they would have been almost right on.

    I quote the 1968 data as an example of when we “could have” shut down but did not. As a counterpoint to now—-when we have shut down—-it is the shutting down which is new and meaningful—-and so the question is “why”? We may think we know why—-but I don’t think we do. Health authorities were paying attention in 1968—not the public or politicians.

    Glad you do not believe in TC’s concept.

  20. Gravatar of ssumner ssumner
    9. May 2020 at 08:54

    Michael, It’s silly to bring up 1968, a far milder virus.

    And symmetric does not mean level targeting.

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