What should the Fed do now?

Question: What should the Fed do now?

Answer: Hit its target.

Question: But what does that mean?

Answer: That’s the problem.

There’s an ongoing debate about whether the Fed should bring inflation down gradually or quickly. THIS DEBATE SHOULD NOT EXIST. The Fed should have decided on a policy regime in 2020, and then stuck to it. A policy regime includes instructions on what to do next if you miss the target. NGDPLT anyone?

Here are some fun facts:

Average inflation rate during the 30 years before the Fed adopted its 2% average inflation target in August 2020: 1.9%

Average inflation rate during the 20 months since the Fed adopted its 2% average inflation target in August 2020: 5.2%


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5 Responses to “What should the Fed do now?”

  1. Gravatar of agrippa postumus agrippa postumus
    28. June 2022 at 17:20

    they need to sop up the gargantuan wave of money in the hands of the non poor, placed there by the gov in deranged stimmie checks vomited out w no needs testing. there are lines at luxury stores, you can’t get a seat at a restaurant, etc. etc. start offering the near 10% available on series i savings bonds (but capped at 10k per cal year) up to 250,000 for all individual taxpayers.

  2. Gravatar of Jeff Jeff
    29. June 2022 at 00:19

    agrippa, I am with you on your first sentence but not on your last. I find Cochrane more convincing on this point—hard to see how doling out more money helps if the core issue is too much money and a collapse of confidence that the US will ever get its fiscal house in order.

  3. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    29. June 2022 at 07:49

    All deposit taking, money creating financial institutions, should have uniform legal reserve requirements, for all deposits, in all banks, irrespective of size, both as to types of assets eligible for reserves, as well as the level of reserve ratios. There is no reason for differential reserve requirements in the first place (something Nobel Laureate Dr. Milton Friedman advocated, December 16, 1959).

    FED: “The regulatory limit in Regulation D was the basis for distinguishing between reservable “transaction accounts” and non-reservable “savings deposits.” The Board’s recent action reducing all reserve requirement ratios to zero has rendered this regulatory distinction unnecessary.”

    #1 The FED should re-establish legal reserves against their new definition of transaction accounts.
    #2 The FED should cap interest rates on savings accounts (reinstitute Reg. Q ceilings).

    The 1966 Interest Rate Adjustment Act is prima facie evidence.

    Contrary to professional economists, banks are credit creators, not credit transmitters. The banks could continue to lend even if the nonbank public ceased to save altogether.

  4. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    30. June 2022 at 07:39

    According to Michael Hudson, the composition of the bank’s assets has changed considerably: “Some 80 percent of bank loans are real estate mortgages, and most of the remainder loans are collateralized by stocks and bonds” So, housing suffers a double whammy.

  5. Gravatar of Matthias Matthias
    1. July 2022 at 17:07

    Spencer, and the uniform reswrve requirement should be 0.

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