What if I were on the FOMC?

Of course it would never happen, but it’s worth thinking about.  I might say something like this:

But current monetary policy is typically thought to affect the macroeconomy with a one- to two-year lag. This means that we should always judge the appropriateness of current monetary policy in terms of what it implies for the future evolution of inflation and employment. Along those lines, after its most recent meeting, the FOMC announced that it expects that inflation will remain below 2 percent over the medium term and that unemployment will decline only gradually. These forecasts imply that the Committee is failing to provide sufficient stimulus to the economy.

To achieve its goals, the FOMC has taken some historically unprecedented monetary policy actions in recent years. But the U.S. economy is recovering from the largest adverse shock in 80 years””and a historically unprecedented shock should lead to a historically unprecedented monetary policy response. Indeed, the FOMC’s own forecasts suggest that it should be providing more stimulus to the economy, not less.

Or I might present a set of PowerPoint slides that suggest the Fed should target private sector forecasts of the goal variables.  Or I might say this:

.  .  .  the data show that over the past few years inflation has been below the FOMC’s target of 2 percent. It’s expected to remain below desirable levels for years to come. These low levels of inflation show that the FOMC has a lot of room to provide much needed stimulus to the labor market.

.  .  .

With goal-oriented policy, communications and actions work together in a powerful fashion. Communications tell the public where the FOMC is taking the economy. Then, every subsequent action gives the public confidence that the Committee is willing and able to take the economy in that direction. Actions and communications operate together to destroy the dangerous perception of monetary policy ineffectiveness.

.  .  . 

Under a goal-oriented approach to policy, the FOMC would view a “gradual decline” in the unemployment rate as being undesirably slow, given that the medium-term outlook for inflation is so low. Hence, the Committee’s outlook would trigger a decision to provide more monetary stimulus.

And let’s not forget about the need to cut the IOR:

The central bank, he said, should do whatever it takes to drive U.S. unemployment lower, although not necessarily by buying even more bonds. For instance, it could lower the interest rate it charges banks to keep their excess reserves at the Fed, he said.

What matters is not the specific “tactic,” he said, but the overall strategy.

“What the committee chose to do in September was fully consistent with everything that had been communicated,” Kocherlakota told reporters after his talk. But what has been communicated, he said, is insufficient, as is the level of stimulus the Fed is providing the economy.

Yes, I’ll never be on the FOMC.  But at least my views are now represented.  That was not true in February 2009, when I began blogging.

HT  Vaidas Urba, Saturos.



17 Responses to “What if I were on the FOMC?”

  1. Gravatar of Saturos Saturos
    27. September 2013 at 06:29

    Hell yes.

  2. Gravatar of TravisV TravisV
    27. September 2013 at 06:36

    David Laidler talks to Russ Roberts:


  3. Gravatar of Some people change for the better | Historinhas Some people change for the better | Historinhas
    27. September 2013 at 06:37

    […] Scott Sumner turned Kochelakota into his ‘alter ego at the […]

  4. Gravatar of TravisV TravisV
    27. September 2013 at 06:38

    “The Fed appears to want to shift away from asset purchases in favor of forward guidance and is looking for the right time to begin that process……I am a little concerned that forward guidance is being used only in reaction to disappointing outcomes and not proactively to accelerate the pace of improvement.”


  5. Gravatar of Michael Michael
    27. September 2013 at 06:52

    The best part of that Laidler interview was his thorough rebuttal of the “Fed is out of ammo” argument. I especially liked his response to the oft-made argument that the Fed is “pushing on a string” with monetary policy. (He said the Fed was pushing on a SPRING.)

    The worst part was his abrupt and unoriginal dismissal of an NGDP target.

    Kocherlakota seems 90% of the way to favoring NGDPLT. If not Yellen, Obama should nominate him for Chair.

  6. Gravatar of Doug M Doug M
    27. September 2013 at 07:40

    Where did 2% inflation get its special status? Why not 1%?

    I seem to remember a Greenspan moment in the early 90s where after finally getting to 2% with decades above, Greenspan seemed committed to continuing to try to bring the inflation rate lower. The part that I remember, was a complaint that at even 2% inflation capital gains tax distorts investment decisions.

  7. Gravatar of Scott Sumner Scott Sumner
    27. September 2013 at 08:57

    Travis, Thanks for the links.

    Micahel, Good points.

    Doug, That’s their target.

  8. Gravatar of ChargerCarl ChargerCarl
    27. September 2013 at 12:25

    Doug M, interesting about Greenspan. I’ve seen it argued (I think by Scott) that the reason for the jobless recoveries of the 90’s and early 2000’s was the FED trying to push the inflation rate ever lower.

  9. Gravatar of James in london James in london
    27. September 2013 at 12:32

    Even the quote from macro-prudential obsessive Stein seemed to have the grain of a good idea: “cumulative payroll growth”. Does he mean monetary payrolls or numbers of people on the payroll? I suppose the latte. But at least it is a rule.

    ‘Stein, who has talked about the risk of Fed bond buying leading to asset bubbles, said that one way to reduce uncertainty and accompanying market volatility would be to link cuts in bond buying directly to economic data.

    “My personal preference would be to make future step-downs a completely deterministic function of a labor market indicator, such as the unemployment rate or cumulative payroll growth over some period,” Stein said. “For example, one could cut monthly purchases by a set amount for each further 10 basis point decline in the unemployment rate.” ‘

  10. Gravatar of benjamin cole benjamin cole
    27. September 2013 at 16:19

    Scott Sumner should not be on the FOMC. Sumner sbould Fed Chairman.

  11. Gravatar of Michael Michael
    28. September 2013 at 03:45

    Steven Williamson is no so thrilled by Kocherlakota:


    “When Kocherlakota was appointed President of the Minneapolis Fed in October 2009, I think we all had high hopes… In October, 2009, I think the consensus opinion was that the Minneapolis Fed under Narayana Kocherlakota was in good hands… As for the contributions of Kocherlakota to monetary policy, I think it’s fair to say that he has set us back rather than pushing us forward.”

  12. Gravatar of Geoff Geoff
    28. September 2013 at 06:55

    “But what has been communicated, he said, is insufficient, as is the level of stimulus the Fed is providing the economy.”

    I wonder how long it will take Kocherlakota to realize that the data he is observing is fully consistent with the theory that economic growth and employment are sluggish because of the communication and inflation that exists, rather than the communication and inflation that do not exist (i.e. “insufficient” communication and inflation).

    Does it strike anyone as absurd to believe that even after the greatest intervention in history, that the economy is sluggish because of insufficient intervention?

    If a person proposes the theory that central bank and governmental intervention since 2008 is the main cause for economic sluggishness, than the data completely confirms that theory. The economy is indeed sluggish, and the interventions are indeed present.

    This of course means that the great debates in economics cannot be settled by recourse to history. They can only be settled by recourse to a non-historical foundation, that is, to a trans-historical standard grounded on ourselves in some respect. We have to find truths about ourselves in order to reveal which competing theory of economics is the correct one.

    In terms of economic theory, i.e. self-reflection, this blog is extremely weak.

  13. Gravatar of ssumner ssumner
    28. September 2013 at 08:16

    James, Yes, it’s good to have a rule, but that’s not an effective one. Too weak.

    Michael, Who is “we?” 🙂

  14. Gravatar of Michael Michael
    28. September 2013 at 08:59


    I have no idea, you would have to ask Williamson, I guess. Perhaps it’s the “royal we”. By the way, here is the odd end to Willaimson’s post:

    “But now, as I argued in this post, the policy error in 2013 may be that the Fed creates too little inflation rather than too much.”

    After all of that diatribe about Kocherlakota… he’s concerned that inflation is too *low*.

  15. Gravatar of CA CA
    28. September 2013 at 13:50

    Stephen Williamson doesn’t like Kocherlakota’s speech.


  16. Gravatar of CA CA
    28. September 2013 at 13:51

    Crap. I see others beat me to this. Apologies…

  17. Gravatar of ssumner ssumner
    29. September 2013 at 05:40

    Michael, Maybe he thinks Kocherlakota arrives at the right answer for the wrong reason.

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