I laugh at a metaphor from Joe Weisenthal. Legal independence is no shield against political winds—but so far this is one of the very few things Trump is doing that is still benign...
I remember the "stagflation" of the 1970s and especially the hardship caused by high interest rates in the early-mid 1980s. It's hard to imagine how Trump's chaotic tariffs could do anything other than simultaneously drive GDP down and prices up. We will be lucky indeed if Trump chickens out on the worst of his tariffs and we *only* have decade or so of high inflation and stagnate growth...
"And now that real growth is likely to fall off, we need to stay above 2% per year inflation more than ever."
An NGDP target of 5% would do the trick in practice, 4% if the Fed were doing _Flexible_ NGDPL targeting.
We REALLY DO need the Treasury to start issuing that Trillionth and more intermediate TIPS so the Fed cal fly less in the dark about market expectations.
> Thomas L. Hutcheson: "And now that real growth is likely to fall off, we need to stay above 2% per year inflation more than ever." An NGDP target of 5% would do the trick in practice, 4% if the Fed were doing _Flexible_ NGDPL targeting. We REALLY DO need the Treasury to start issuing that Trillionth and more intermediate TIPS so the Fed cal fly less in the dark about market expectations...
My theory is that standard macro theory is is one good one input one relative price. That never made any sense for developing countries which what I worked on so my intuitions are always built around two goods, tradeable and nontradables.
In a one good macro model you have to work really hard to deal with supply shocks and to make the one relative price sticky enough to cause unemployment.
"Mind you, I think this is a good thing. I have long thought that the 2%/year target was too low, and that the “credibility” you gained by sticking to it was a reputation for being unwilling to do the clearly right thing out of some combination of stubbornness and pride."
I think 2% is OK provided the Fed is willing to do _Flexible_ Average Interest Rate Targeting (and it does not obsess over the last few basis points). But with the uninformed criticism of the Fed's over-target inflation during COVID and the suspicion that in the future all the pressure will be for unneeded, detrimental over target-inflation, one can see the rationale for tying policy to and inflexible mast at Jackson Hole.
I agree with Binder, but it is necessary to point out that central banks also get pressure (OK, not formal government pressure in the US, but on the ECB from Germany, yes) not to inflate enough.
I'm concerned that the Fed may be delaying an increase in inflation needed to deal with tariffs and "chaos monkey" uncertainty to demonstrate its independence.
I remember the "stagflation" of the 1970s and especially the hardship caused by high interest rates in the early-mid 1980s. It's hard to imagine how Trump's chaotic tariffs could do anything other than simultaneously drive GDP down and prices up. We will be lucky indeed if Trump chickens out on the worst of his tariffs and we *only* have decade or so of high inflation and stagnate growth...
"And now that real growth is likely to fall off, we need to stay above 2% per year inflation more than ever."
An NGDP target of 5% would do the trick in practice, 4% if the Fed were doing _Flexible_ NGDPL targeting.
We REALLY DO need the Treasury to start issuing that Trillionth and more intermediate TIPS so the Fed cal fly less in the dark about market expectations.
+ 100:
> Thomas L. Hutcheson: "And now that real growth is likely to fall off, we need to stay above 2% per year inflation more than ever." An NGDP target of 5% would do the trick in practice, 4% if the Fed were doing _Flexible_ NGDPL targeting. We REALLY DO need the Treasury to start issuing that Trillionth and more intermediate TIPS so the Fed cal fly less in the dark about market expectations...
I had only one macro course 57 years ago. So why?
My theory is that standard macro theory is is one good one input one relative price. That never made any sense for developing countries which what I worked on so my intuitions are always built around two goods, tradeable and nontradables.
In a one good macro model you have to work really hard to deal with supply shocks and to make the one relative price sticky enough to cause unemployment.
"Mind you, I think this is a good thing. I have long thought that the 2%/year target was too low, and that the “credibility” you gained by sticking to it was a reputation for being unwilling to do the clearly right thing out of some combination of stubbornness and pride."
I think 2% is OK provided the Fed is willing to do _Flexible_ Average Interest Rate Targeting (and it does not obsess over the last few basis points). But with the uninformed criticism of the Fed's over-target inflation during COVID and the suspicion that in the future all the pressure will be for unneeded, detrimental over target-inflation, one can see the rationale for tying policy to and inflexible mast at Jackson Hole.
I agree with Binder, but it is necessary to point out that central banks also get pressure (OK, not formal government pressure in the US, but on the ECB from Germany, yes) not to inflate enough.
I'm concerned that the Fed may be delaying an increase in inflation needed to deal with tariffs and "chaos monkey" uncertainty to demonstrate its independence.