When should we be worried about monetary policy?

During late December, there was a lot of chatter in the press and the blogosphere about monetary policy.  Many pundits expressed concern that policy was off course.

Back in September 2010, there was relatively little chatter about monetary policy.  Why is there a great deal of discussion at some points in time, but not others?  One answer is that people talk about monetary policy when it is not hitting its targets.

Let’s look at the most recent unemployment and (PCE) inflation data that was available as of late September 2010 and late December 2018:

August 2010:  12-month PCE inflation = 1.38%, unemployment = 9.5%

November 2018:  12-month PCE inflation 1.84%, unemployment = 3.7%

Hmmm, which set of data points is closer to hitting the Fed’s dual mandate?

Which set of data points suggest that policy is clearly off course?

It might be argued that the Fed was out of ammunition in September 2010.  Actually, that is not the case:

1.  Bernanke insisted the Fed had more ammunition.

2.  The Fed was paying interest on reserves.

3.  The Fed was not doing quantitative easing.

4.  The Fed was not doing significant forward guidance.

So why was there a lot of discussion of the Fed being off course in late December of last year, but very little discussion in September 2010?

1.  A lack of understanding that if AD is too high or too low it’s always 100% the Fed’s fault.

2.  An inability to understand what it means for money to be easy or tight.

Thus most pundits wrongly assumed the Fed was tightening policy in 2018, even as NGDP growth picked up.  This so-called tightening was seen as a “concrete step” that threatened the recovery.  In 2010, policy was wrongly seen as being “expansionary”, and the Fed was wrongly seen as being not responsible for the fact that AD was currently far too low to achieve the Fed’s dual mandate.

Bottom line:  When discussion of monetary policy is at its highest pitch, there is often less cause for concern than when almost no one it talking about it.  Consider late 2008, when monetary policy was disastrously off course, and yet there was almost no discussion of that fact in the media.

That’s not to say that policy is not currently off course—it may well be.  Rather my point is that any errors in the current policy setting are trivial compared to 2008 or 2010, when people were mostly ignoring the Fed.


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20 Responses to “When should we be worried about monetary policy?”

  1. Gravatar of Kevin Erdmann Kevin Erdmann
    13. January 2019 at 11:25

    One of the oddest things about the crisis was the intensive public debate in Sept. 2008 about all the unconventional emergency measures that had to be taken, and the whole time the FFR was sitting at 2% and as far as I remember nobody was saying a word about just, you know, dropping the rate to where it would be dropped in 3 months anyway.

  2. Gravatar of Benjamin Cole Benjamin Cole
    13. January 2019 at 22:39

    Well…

    Another way to to look at it is the Fed overtightened in 2008, caused the Great Recession, and has the cinch too tight ever since, though allowing just enough oxygen for the economy to grow slowly.

    Labor participation rates tumbled, wages deadened…for 10 years and counting. The nominal GDP growth rate suddenly went onto a lower trajectory in 2008. and also never regained lost ground.

    Only now, at long last, are we seeing labor participation rates start to rise, in response to a better job market. In fact, we now see rising labor participation rates and rising unemployment rates (as measured).

    Ten years is a long time to wait for the Fed begin to get it right. If they are.

    All along, unit labor costs have been a drag on the Fed’s putative inflation target of 2% on the PCE core. Unit labor costs are up 9.77% in the last 10 years. That’s less than 1% a year.

    https://fred.stlouisfed.org/series/ULCNFB

    You wonder why Bernie Sanders and Donald Trump? Ocasio-Cortez?

    We have a central bank that thinks the only way to fight inflation is wage suppression and to keep labor markets loose. And you know, immigrants (illegal or otherwise) help our economy, as they work for less.

    A couple generations of such policies….

    I prefer free markets. By a stroke of luck, Bernie Sanders has no charisma, and Trump is self-immolating. But we could see a right- or left-wing populist movement dominate politics in the US. The centrist dikes are popping a lot of holes….

  3. Gravatar of Brian Donohue Brian Donohue
    14. January 2019 at 07:03

    Just because conditions were way too tight in 2010 doesn’t mean everything’s great now. Significant cumulative undershoot on inflation over a decade now.

    TIPS yields are a lot higher and TIPS spreads are clearly lower than at the end of 2017.

    Economists have been fooled by the unemployment rate for a couple years now, so they did not expect continued strong growth in employment. LFPR suggests there may be a million or more workers drawing back in yet. Let’s wait for employment growth to slow first eh?

    Monetary conditions tightened during 2018. Obviously.

  4. Gravatar of Brian Donohue Brian Donohue
    14. January 2019 at 08:19

    And any mention of TIPS spreads is now dismissed with “oil prices”.

    Oil prices are volatile. Prices are up 40% compared to two years ago. Yet you’ve only started invoking the “TIPS need to be interpreted in view of oil prices” view quite recently. Odd. Almost like you know where oil prices are going.

  5. Gravatar of mpowell mpowell
    14. January 2019 at 08:48

    This is a great point, but I do have one minor quibble to offer. People will always pay a lot of attention to monetary policy when the economy looks like it is nearing the peak of a cycle and this does make some sense, given the poor track record in the US of achieving a so-called ‘soft landing’. So it appears this is a high leverage point in determining whether we have a recession or not – at least under the current governing model (maybe with NGDP level targeting this would be a much lower stakes moment, but that’s not where we’re at of course).

  6. Gravatar of ssumner ssumner
    14. January 2019 at 08:57

    Brian, You said:

    “Just because conditions were way too tight in 2010 doesn’t mean everything’s great now.”

    That’s stating the obvious, isn’t it?

    “Significant cumulative undershoot on inflation over a decade now.”

    That would be relevant if the Fed were doing level targeting of prices. It isn’t.

    “Let’s wait for employment growth to slow first eh?”

    Wait for what? Why should the Fed be targeting employment growth?

    “Monetary conditions tightened during 2018. Obviously.”

    That’s not obvious to me. NGDP growth sped up during 2018.

    “Yet you’ve only started invoking the “TIPS need to be interpreted in view of oil prices” view quite recently.”

    Actually, I’ve discussed how oil impacts things due to the lag in adjusting TIPS on numerous occasions. I still think TIPS are useful, I just think the actual inflation expectation is a bit higher when oil is plunging, and a bit lower when oil is rising.

    I actually don’t disagree with those who say there is downside risk in inflation—I just don’t see it as a big problem at the moment. Maybe next year it will be.

  7. Gravatar of Brian Donohue Brian Donohue
    14. January 2019 at 10:08

    You ask: “Why should the Fed be targeting employment growth?”

    I answer: because their mandate requires the Fed to “promote effectively the goals of maximum employment”.

    In January 2017, you announced: “But with today’s jobs report, it’s becoming almost impossible to continue arguing for labor market slack.”

    https://www.themoneyillusion.com/almost-no-labor-market-slack/

    That was two short years ago. The economy has added 4.8 million jobs since, and wage growth is still modest.

  8. Gravatar of ssumner ssumner
    14. January 2019 at 17:02

    Brian, Perhaps, but economic models generally predict that wage growth will NOT accelerate when there is economic slack. And it has.

    I do agree that there was a bit more slack in 2016 than I estimated at the time, but I’d argue the Fed should not be in the business of trying to figure that out. In the past we’ve gotten into a lot of trouble when they tried to target full employment. I’d rather not see a repeat.

  9. Gravatar of Brian Donohue Brian Donohue
    15. January 2019 at 06:36

    If the Fed isn’t in the business of trying to figure that out, what was the point of your January 2017 post?

    It’s not clear to me the difference between “trying to target full employment” and “promoting effectively the goals of maximum employment”.

    I gather your hinting at the bad old days of stagflation. I’m old enough to remember, I just see this danger as highly remote in today’s world, but maybe these ghosts are in part responsible for the Fed’s cautious approach over the past several years and consistent undershooting.

  10. Gravatar of Scott Sumner Scott Sumner
    15. January 2019 at 08:56

    Brian, You said:

    “and consistent undershooting.”

    That’s where we disagree. I see no evidence that the Fed undershot in 2018.

  11. Gravatar of Brian Donohue Brian Donohue
    15. January 2019 at 09:55

    Heh. That was the weakest point in my comment, and you sniffed it out.

    Still, December CPI is out, and YOY CPI increased 1.91% in 2018, versus the Fed’s stated 2.0% PCE target. Another miss!

  12. Gravatar of Christian List Christian List
    15. January 2019 at 13:35

    OT (sorry): Chinese regime showing off its very ugly colors. Why am I not surprised?

    Canadian Prime Minister Justin Trudeau on Monday expressed “extreme concern” after a Chinese court sentenced a Canadian man to death in a retrial ordered not long after the arrest in Vancouver of a Chinese technology executive. 

    In his strongest-yet statement on the matter, Trudeau suggested he sees Schellenberg’s new sentence as a political move. “It is of extreme concern to us as a government — as it should be to all our international friends and allies — that China has chosen to begin to arbitrarily apply a death penalty,” he told reporters in Ottawa. 

    https://www.washingtonpost.com/world/asia_pacific/china-sentences-canadian-man-to-death-in-drug-case-linked-to-huawei-row/2019/01/14/058306a0-17fb-11e9-a804-c35766b9f234_story.html

    CNBC writes: „Chinese court sentences Canadian citizen to death for drug charges, as legal tensions escalate over the arrest of Huawei’s CFO.“

    Don’t do (asymmetric) trade with thugs.

    If the penalty for simple drug trafficking is death, then what must be the obvious punishment for spies, according to that logic? I’m sure the Chinese will understand, yes?

    Does the Chinese regime even think? At least they should be logically coherent.

    Or maybe they are by, correctly, assuming that the Western world is weak and will bow down fast.

  13. Gravatar of Benjamin Cole Benjamin Cole
    15. January 2019 at 19:31

    Christian List:

    I do not think Western leadership is weak regarding China, but the globalist community is nearly synonymous with multinationals, and the multinationals have worked themselves into a position in which they must stay in the good graces of the Communist Party of China.

    Apple makes it phones in China, GM makes more cars in China than in the US, BlackRock is heavily invested in China, and Wal-Mart might as well be a retailing arm of the Communist Party of China.

    After a Huawei executive was arrested in Canada at US behest, Apple phone sales in China started to tumble. Suppose Apple components, headed for the Foxconn factories that assemble iPhones, get held up at China ports? Suppose rents are raised on factories that build iPhones? Utilities become iffy. Labor inspections become meticulous? (Huawei is majority owned by China state agencies, that is to say, the Communist Party of China).

    In brief, all Apple can do is pander to the Communist Party of China, and same for BlackRock, GM, Wal-Mart et al—that is, the bulk of the US globalist community is compromised, to put it mildly. Large public companies have fiduciary obligations to shareholders that trump any sort of ethical considerations. If you were an Apple executive, you would probably have a bust of President Xi in your office.

    You know when communism is a horrible evil? When communist leaders keep American capitalists out.

    You know when communism is not a topic? When communist leaders provide a low-cost manufacturing platform for capitalists.

  14. Gravatar of ssumner ssumner
    16. January 2019 at 16:27

    Brian, The Fed came very close on PCE inflation, and got employment figures above their target. You can say the target is wrong, and I’d agree. But I favor NGDP growth, which was also quite strong this year. In my view they are currently on target, or extremely close.

    Christian, Unlike the USA, where we give people life in prison for drug crimes.

  15. Gravatar of Christian List Christian List
    16. January 2019 at 17:25

    Christian, Unlike the USA, where we give people life in prison for drug crimes.

    Scott,

    bravo, you missed all relevant points again. The example was about things like:

    The regime in China proves again, that they have no separation of powers at all, judges are just the puppets of Xi Jinping.

    They made a re-trial for political reasons.

    The regime in China really seems to think that this behavior helps in the conflict, which raises the questions like: How mad and detached from reality are they?

    They really seem to think that Trudeau would influence his judges like they do; not to mention that he can’t really do that, even if he wanted. This concept must be hard to grasp for a Chinese communist okay, but what do all their spies and experts tell the regime about Canada? They do have briefings, yes???

    In brief, all Apple can do is pander to the Communist Party of China, and same for BlackRock, GM, Wal-Mart et al—that is, the bulk of the US globalist community is compromised, to put it mildly.

    Benjamin,

    what I find even more interesting here is that this seems to go both ways.

    Everyone knows that the US is behind the arrest of the Huawei executive but the regime in China did not target any US citizens so far. They did target 13 (!) Canadian citizens though, and their targets are not business men and managers but simple people, and their main target so far is a little drug dealer. Why not arresting a manager that is similar to the Huawei executive??? How afraid are these clowns of all their business deals? It’s very funny to look at.

  16. Gravatar of LK Beland LK Beland
    17. January 2019 at 08:33

    Another good indicator are total weekly wages (i.e. number_of_hours x hourly_wage x number_of_employees)(private sector):

    https://fred.stlouisfed.org/graph/?g=mGyC

    There are absolutely no deviations from the post-2010 trend. The Fed is maintaining a very, very, stable nominal environment w.r.t. the labor market.

  17. Gravatar of James Alexander James Alexander
    18. January 2019 at 14:26

    I loved the bottom line. I credit you for making people care about monetary policy. Powell got crucified for his QT in autopilot comment, and quickly rowed back.

  18. Gravatar of ssumner ssumner
    18. January 2019 at 18:16

    Christian, China is an authoritarian dictatorship? Who knew?

    LK, Excellent indicator

    Thanks James.

  19. Gravatar of James Alexander James Alexander
    18. January 2019 at 23:23

    LK Beland. That chart is NGDP (Labor portion, ie most of it). Less stable when shown as a %YoY change – but picked up of late. Finally. Question remains, levels are important too, aren’t they?

  20. Gravatar of LK LK
    21. January 2019 at 09:23

    James Alexander

    “That chart is NGDP (Labor portion, ie most of it). Less stable when shown as a %YoY change – but picked up of late. Finally.”

    Yes, that’s right.

    My interpretation is that the Fed did not fully offset the 2018 GOP/Trump fiscal stimulus. But it was fairly close. For reference, here’s a similar number (for nonsupervisory employees) that dates back to 1965:

    https://fred.stlouisfed.org/graph/?g=mJie

    The current fluctuations are much, much smaller than those observed in the past decades. The post-2010 Fed is doing a stellar job.

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