Why 2022 is different

I am currently working on an article for The Hill, discussing all of the reasons why monetary policy became too expansionary in late 2021. One reason I cite is the Fed’s reluctance to move fast. They’ve seen evidence of overheating for several months, but fear another “taper tantrum” if they move too quickly to tighten policy.

In fact, the 2013 taper tantrum is widely misunderstood. The problem was not that the Fed tightened policy unexpectedly, it’s that the Fed tightened policy inappropriately, at a time when unemployment was 7.5%. The markets don’t fear unstable policy instruments, they fear bad macroeconomic outcomes.

Today, a tightening of policy is overdue. A new article in the Financial Times discusses how things are very different from back in 2013. Here’s the headline:

Bond market signals room for Fed to raise rates without stalling economy

This paragraph is the key:

The rising yields, coupled with steady inflation expectations, have pushed returns bond investors can expect to earn after inflation is taken into account sharply higher since the end of last year. Analysts say this increase in so-called real yields indicates traders are expecting the US economy to continue expanding in the years to come even as policymakers withdraw stimulus measures to slow intense price growth.

I am less optimistic than the FT about inflation, but that’s mostly because I don’t view 2.5% inflation over the next 5 years as good news.



22 Responses to “Why 2022 is different”

  1. Gravatar of bill bill
    6. February 2022 at 12:30

    For as long as I can remember, the Fed has put too much weight on the stability of its instruments. I can’t recall a time when they’ve gone back and forth (tightening, then loosening, then tightening (or the opposite)). Being data dependent would mean a Fed funds rate or IOR that looked much more like a random walk.

  2. Gravatar of Lizard Man Lizard Man
    6. February 2022 at 13:03

    I think that ordinary people who don’t pay attention to monetary policy would be alright with 2.5% inflation. My own preference is that inflation be just at the point where it is low enough that people don’t worry about rising prices, but not much lower than that.

  3. Gravatar of Rinat Rinat
    6. February 2022 at 13:19

    “ordinary people”


    Those losers who are just “ordinary”.
    Those “ordinary people” need to be told what to do”.
    Those “ordinary people” just don’t get it.

    I suggest listening to this carefully


    You then might begin to lose the arrogance.

  4. Gravatar of marcus nunes marcus nunes
    6. February 2022 at 13:50

    “monetary policy became too expansionary in late 2021”. That´s right, and was the source of demand side inflation adding to the supply side inflation. The Fed has the power to “neutralize” demand side inflation. On the other hand, the “discomfort” caused by the ongoing inflation was, in my view, a small price to pay to avoid a “deadly” depression that would have occurred if “traditional monetarists” à la Tim Congdon” had prevailed!

  5. Gravatar of ssumner ssumner
    6. February 2022 at 14:40

    Lizard, You said:

    “I think that ordinary people who don’t pay attention to monetary policy would be alright with 2.5% inflation.”

    I’m alright with 2.5% long run inflation. But NOT if the Fed has a 2% inflation target.

  6. Gravatar of stephen stephen
    6. February 2022 at 17:34

    What would your long run inflation target be? I thought I remember you saying you wanted something like 5% NGDP growth with 3% GDP / 2% inflation?

    With the fed reacting as quickly as they did in March 2020, I wish they would use that same speed to curb inflation. Just raise rates now, or as you say, impliment level targeting, but that’s just a wish for awhile I believe.

    Maybe inflation will be showing hot enough by March that they’ll raise rates 50 points.

  7. Gravatar of Timothy Hopper Timothy Hopper
    6. February 2022 at 23:43

    Scott, has there been any earlier undershoot in the Fed’s Average Inflation Targeting regime for it to now make up? Does it mean:
    average over time starting when the policy was formally announced, when IIRC it has always been over 2%; or
    average over some flexibly defined business cycle, which could include the several years prior when inflation was below 2%?

  8. Gravatar of Henry Henry
    7. February 2022 at 04:50

    Notice how he starts with “I’m writing for the Hill”.

    Clearly, that was not relavant to his article. The reason he started with that is because he wants you to praise him. I’m not sure the “Hill” is praisworthy, but nevertheless, at age 66, he still seeks approval and praise from his peers.

    In other words, this is a 65 to 70 year old man that never grew up. He is a child in so many ways. He still lacks confidence. He still seeks approval at all costs. And that seeking of approval – and pseudo confidence (e.g., loud and wrong, or arrogant) – leads to a dangerous group think.

  9. Gravatar of Johannes Johannes
    7. February 2022 at 05:34

    Is this just “politics” as Sumner says, or is it “tyranny”?

    You now want to prosecute me for laughing?


    It seems to me that his definition is not one that most would agree to. One can still participate in a so called democracy while living under a tyrannical regime that oppresses their human rights.

    I have lost all faith in the academy. Too many crazies these days…

  10. Gravatar of Nick Nick
    7. February 2022 at 07:04

    RUSSIAN BOOGEYMAN is coming!!

    Run for your life boomertard. RUN RUN RUN. GO to your bunker, lock the door, AND STAY DOWN THERE FOREVER!


    Morons will never learn.

  11. Gravatar of David S David S
    7. February 2022 at 08:11

    Scott, on the good blog I recall that you mentioned that you thought Yellen would have done a better job than Powell in the final quarter of 2021. Does that imply that she would have helped steer a Fed policy that would have kept PCE a bit lower? Or would she have let things run hot but issued clear statements of intent for 2022 actions?

    I know these are wacky counterfactuals, but I think it will help frame how policy this year is evaluated.

  12. Gravatar of ssumner ssumner
    7. February 2022 at 09:23

    Stephen, It depends on many factors. The optimal inflation rate would be lower with level targeting. It would be higher if the Fed insists on using interest rates as a policy instrument. It would be higher if we abolished taxes on capital income. It would be lower if cash were abolished. It would be higher if RGDP growth were lower.

    That final reason is why we need NGDP level targeting, the optimal inflation rate is less volatile.

    Timothy, It makes a lot of sense to start the clock at the beginning of 2020. That’s a focal point. The economy was in equilibrium at the time. I recall one Fed official suggested the same.

    Henry, LOL. If I’m going to be accused of never growing up (probably true for all of us), can I at least point out that I’ve written for many publications that are far more prestigious? It’s hilarious that you think citing “The Hill” is bragging.

    David, I’m not sure exactly how, but I think she would have tightened a bit sooner.

  13. Gravatar of jayne jayne
    7. February 2022 at 12:14


    Live news from Ottawa contradicts the marxist media’s narrative.

    There is no “seize”. There is no “racism”. Just a loving people fighting for their freedom. Many of them refugees from Poland 30 years ago.

    They recognize marxist thuggery when they see it.

    Don’t let Sumner brainwash you. He thinks the problem is modern day Russia. It’s not. His party is the problem.

  14. Gravatar of Don Don
    7. February 2022 at 12:37

    Are there any good independent measures of the velocity of money? Bank deposits were very high in 2021 and has now returned towards normal. The Fed was pushing a rope in 2021 and now all that “slack” is affecting the price level.

    Are interest rates a true market rate?

  15. Gravatar of Janice Janice
    7. February 2022 at 12:42

    I’m willing to bet my entire life savings that Sumner refuses to write an article about this:


    He’ll ignore the mistreatment of atheletes from around the world, but later this month we’ll all here how amazing the CCP is – especially when it comes to dystopian things like locking everyone in their homes. And in the same post, for the purpose of justapostion, he’ll tell us how Carlson is a secret Russian operative, and how Fox is a racist company.

    His hint to you guys: vote for totalitarianism.

  16. Gravatar of Brian Donohue Brian Donohue
    7. February 2022 at 13:19

    To what extent can the Fed dictate real rates? Not much, methinks, and only indirectly.

  17. Gravatar of Ankh Ankh
    7. February 2022 at 18:00

    The west is going to become much more humble after their shelves are bare to the bone.

    Your legacy media always says horrible things about the working class truckers and farmers. They might regret that when they go to buy their foods.

    The banking class is not the most powerful class. The people who put food on your table are.

    Canada can’t stock their shelves right now. And America and European truckers are next. You think your shelves are bare now? Just wait!

    Lift the mandates or starve!

  18. Gravatar of Harry Harry
    8. February 2022 at 04:28


    I think it’s time for Fauci, Sumner, and all of these other health fascists to apologize. “The risks outweight the benefits” – Reuters.

    Haven’t we been saying that for the last year, only to be ridiculed and mocked, and told we were “anti-science” and “right wingers” by Sumner? Didn’t carlson just a few weeks ago tell us all how Tucker carlson was “killing people”. All nonsense.

    Facts always win in the end.

  19. Gravatar of ssumner ssumner
    8. February 2022 at 10:37

    Don, I’m not sure what you mean by independent measures of V. Velocity is not the speed at which money is being spent, it’s simply NGDP/M. You estimate V by estimating M and NGDP.

    Brian, Only a little bit and only in the short run.

  20. Gravatar of Kester Pembroke Kester Pembroke
    8. February 2022 at 13:31

    In general interest rates and inflation are a hard thing to model?

    They’re not – once you get beyond the silly idea that mathematics is the way to model things – and that interest rates are a relevant discussion.

    The correct way to model an economy is via simulation using agents, because then the emergent behaviour can be seen.

    Less dry formula. More The Sims 4.

    Economics is not physics. It’s not even Hard engineering. There are no ‘natural laws’ waiting to be uncovered. Just a lot of strategically shaved monkeys interacting using a limited processor they carry around in their heads containing a whole load of heuristic shortcuts most of which are badly adapted to the complex technical world we have created.

    But the main reason for avoiding mathematics is that most people don’t understand it and it’s very easy to make a mistake with it.

    Whenever I hear people moaning about the lack of mathematics in MMT, I recall the endless debates about using formal methods in Software Engineering to ‘prove’ that the program would run. That didn’t go anywhere for the same reason mathematics is useless in economics – it’s elitist nonsense that doesn’t get you any further forward in explaining what needs to be done to the punters.

    We don’t need to debate interest rates with the mainstream because that is playing away from home. Interest rates are a very stupid way of managing anything because they are indirectly connected to the wheels. It’s like driving a car by moving your weight around in the vehicle to turn the wheels rather than grabbing and using the perfectly serviceable steering wheel in front of you.

    MMT makes the interest rate argument moot by simply closing it off as a control function and using something better instead. Which then means other economists who wax lyrically about interest end up discussing angels on a pinhead. Relevant to the little world of banking and finance that funds them, but nowhere else.

    Once you have an alternative control structure that doesn’t involve banks and interest, then banks become just another set of firms that can thrive or go bust like any other.

    MMT shows where that control structure lies, and how to operate it.

  21. Gravatar of PG PG
    10. February 2022 at 11:50

    Talking about 2.5% inflation when we’re at 7.5% yoy and QE is still on, hahaha. Twin deficits still have no end in sight, by the way.

    To get to an average of 2% this decade, we need to be at 1.25% for the next 8 years. Yeah right…

  22. Gravatar of ssumner ssumner
    10. February 2022 at 16:11

    PG, Innumeracy is a terrible curse.

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