As a general point, I'd like to see the word "discussion" used when serious people try to hash out a solution to a problem. The word "debate" has acquired too many negative connotations.
I think fiscal policy should take into account the 1.5 multiplier. Fiscal conservatives won the argument in 2010 and restricted Fed's available instruments and ability to act. Looking back I think their fiscal policy was incorrect.
I’m not going to guess so I will not be accused of bias for or against our host. 😊
1. Probably not. We need skillful pilots who can discern when and how to adjust the instruments to sometimes produce more inflation sometimes less.
2. Yes, but “narrow” does not mean simple-minded. “Stable prices” needs to mean an income-maximizing trajectory of inflation. And maximum employment should include all resources, not just labor. And since in effect the only instruments the Fed has for affecting employment is adjustment to the inflation rate, the two objectives reduce to one. THAT is narrow.
3. Yes, but not for its effect on inflation (null if the fed is doing its job) but because borrowing probably reduces investment more thn it reduces consumption and therefore reduces future growth.
4. Yes and no, depending on the when and how long we are talking about. Does this mean that the Fed should have begun raising ST interest rates somewhat earlier than March 2022? Then yes. Does it mean during 2008-2020? Then no. And even if we agree, THAT does not mean that it’s now OK to keep them too high for too long
5. No. Macroeconomic outcomes in other countries can inform the Fed about shocks the US economy is subject to (and even more speculatively seeing the relation of polity instruments to outcomes in another country might affect how the Fed models the US economy) but that just part of the days work at the Fed. Global? Shmobile!
6. If it means FAIT with a forward looking average, tentatively yes, although a more careful optimization exercise could throw up a better average target, depending on the sizes of expected shocks and the degree of stickiness of prices.
7. “The Fed should successfully manage inflation expectations” by among other things, prevailing upon the Treasury to issue some 1-, 2-, and 3-year TIPS.
8. Lower and longer than what? Than January 2021 yes. Than March 2022, no. But the Fed itself should be doing these backward-looking analyses. When does their current model say would have been the right time to start a different trajectory for the EFFR?
9. WTF? Yellen should just keep saying that the Administration has full confidence that the Fed will manage inflation and employment in accordance with its Congressional mandate.
A follow up query: The 2008-2020 drop in GDP can be calculated and is considered by modern economists to be lost money. Can the sub target inflation rate for the same period be calculated in dollar terms, and how do the two values compare?
I think ZLB is real. I think Empirical data suggests fiscal policy contributed to low inflation of the post 2010 period, and also to the loss of GDP. A question I still have is there latency in inflation which will show up if a period of low inflation was due to zero growth in minimum wage and contractionary fiscal policy which will cause a period of high rebound inflation once contraction is relieved?
If fiscal policy does not follow an NPV rule that implies more spending when prices <MC (unemployed resources) and borrowing costs are low (Fed has reduce ST interest rates), this has implications for what other policy instruments the Fed might use.
I can't get over how "vibey" people are measuring the Fed's credibility. I would think that the credibility would be hurt more by the Fed causing bank failures (a real harm in the industry it oversees) than not moving at the perfect time with the perfect rate shock to combat inflation more stubborn than data suggests.
It's just manager brain rot in another form. "This person/group didn't follow process when Metric_X crossed Threshold_A, so how can we really trust them to do the right thing?" It requires qualitatively looking at the outcome, recognizing the reality and how it's reflected in the data, and judging the actions subjectively. Many of us do this instinctively, some appear to have turned that ability off.
Still leaves a lack of real criticism when a reactionary institution is accused of not acting quickly enough to pull its Rube Goldberg machine of economic intervention. They're not oracles and their tools work through multiple channels that each change in efficacy decade-by-decade, so there are going to be timing and magnitude mistakes. As Brad states, weighing the pros and cons of being on either side of those is a wise way to adjust for this reality.
Where you and I do agree is that too much responsibility is put on the Fed for the tools it is given, simply because it is one of the few professional technocratic institutions we have left.
My reason for not wanting the Fed to do prudential supervision is that I do not want to tempt it to deviate from optimal inflation-employment policy to save individual banks from their folly.
As a general point, I'd like to see the word "discussion" used when serious people try to hash out a solution to a problem. The word "debate" has acquired too many negative connotations.
I think fiscal policy should take into account the 1.5 multiplier. Fiscal conservatives won the argument in 2010 and restricted Fed's available instruments and ability to act. Looking back I think their fiscal policy was incorrect.
I’m not going to guess so I will not be accused of bias for or against our host. 😊
1. Probably not. We need skillful pilots who can discern when and how to adjust the instruments to sometimes produce more inflation sometimes less.
2. Yes, but “narrow” does not mean simple-minded. “Stable prices” needs to mean an income-maximizing trajectory of inflation. And maximum employment should include all resources, not just labor. And since in effect the only instruments the Fed has for affecting employment is adjustment to the inflation rate, the two objectives reduce to one. THAT is narrow.
3. Yes, but not for its effect on inflation (null if the fed is doing its job) but because borrowing probably reduces investment more thn it reduces consumption and therefore reduces future growth.
4. Yes and no, depending on the when and how long we are talking about. Does this mean that the Fed should have begun raising ST interest rates somewhat earlier than March 2022? Then yes. Does it mean during 2008-2020? Then no. And even if we agree, THAT does not mean that it’s now OK to keep them too high for too long
5. No. Macroeconomic outcomes in other countries can inform the Fed about shocks the US economy is subject to (and even more speculatively seeing the relation of polity instruments to outcomes in another country might affect how the Fed models the US economy) but that just part of the days work at the Fed. Global? Shmobile!
6. If it means FAIT with a forward looking average, tentatively yes, although a more careful optimization exercise could throw up a better average target, depending on the sizes of expected shocks and the degree of stickiness of prices.
7. “The Fed should successfully manage inflation expectations” by among other things, prevailing upon the Treasury to issue some 1-, 2-, and 3-year TIPS.
8. Lower and longer than what? Than January 2021 yes. Than March 2022, no. But the Fed itself should be doing these backward-looking analyses. When does their current model say would have been the right time to start a different trajectory for the EFFR?
9. WTF? Yellen should just keep saying that the Administration has full confidence that the Fed will manage inflation and employment in accordance with its Congressional mandate.
A follow up query: The 2008-2020 drop in GDP can be calculated and is considered by modern economists to be lost money. Can the sub target inflation rate for the same period be calculated in dollar terms, and how do the two values compare?
I think ZLB is real. I think Empirical data suggests fiscal policy contributed to low inflation of the post 2010 period, and also to the loss of GDP. A question I still have is there latency in inflation which will show up if a period of low inflation was due to zero growth in minimum wage and contractionary fiscal policy which will cause a period of high rebound inflation once contraction is relieved?
If fiscal policy does not follow an NPV rule that implies more spending when prices <MC (unemployed resources) and borrowing costs are low (Fed has reduce ST interest rates), this has implications for what other policy instruments the Fed might use.
I can't get over how "vibey" people are measuring the Fed's credibility. I would think that the credibility would be hurt more by the Fed causing bank failures (a real harm in the industry it oversees) than not moving at the perfect time with the perfect rate shock to combat inflation more stubborn than data suggests.
It's just manager brain rot in another form. "This person/group didn't follow process when Metric_X crossed Threshold_A, so how can we really trust them to do the right thing?" It requires qualitatively looking at the outcome, recognizing the reality and how it's reflected in the data, and judging the actions subjectively. Many of us do this instinctively, some appear to have turned that ability off.
I give the Fed a pass on prudential bank supervision failures, a job it should not have.
Still leaves a lack of real criticism when a reactionary institution is accused of not acting quickly enough to pull its Rube Goldberg machine of economic intervention. They're not oracles and their tools work through multiple channels that each change in efficacy decade-by-decade, so there are going to be timing and magnitude mistakes. As Brad states, weighing the pros and cons of being on either side of those is a wise way to adjust for this reality.
Where you and I do agree is that too much responsibility is put on the Fed for the tools it is given, simply because it is one of the few professional technocratic institutions we have left.
My reason for not wanting the Fed to do prudential supervision is that I do not want to tempt it to deviate from optimal inflation-employment policy to save individual banks from their folly.