So I finally worked up the nerve to talk about the previously unthinkable (well, for most), but I thought it and have been mulling it over ever since I found myself in the habit of watching the DOW sink for seemingly no reason and then looking for which hawk was out flapping his/her gums about the need to tighten monetary policy sooner rather than later; usually, like yesterday.
It occurred to me that people make money off betting markets will go down; and the loose cannons go off, then the market goes down.
Even if there is no unethical behavior going on, and I see the possibility of temptation there, it exposes a problem with the current IT regime that requires a certain amount of flexibility on the part of policymakers, and it requires an ability to communicate intent.
Lately there has been a mixed bag of communication going on between various individuals that make up the FOMC, generally at a time when inflation and employment are both considerably below target. The hawks say productivity is slowing and tightening is needed. But it really isn’t if productivity is considered a longer over time horizon. It is returning to more normal levels after having been elevated in the latter part of the 2000s. Add to this the fact that the LFPR is still pretty low, and what we’re seeing is likely reasonable. Even if policymakers were to rely on that piece of information in the way they interpret it, doing nothing would be a better policy than tightening because inflation would return closer to target over time – especially if it is truly a flexible-IT regime where 2% is a medium-term target. It is not a problem yet, and depending on how well the nominal anchor is pinned to just below 2%, which according to graphs of the various measures of inflation Marcus has posted it is pinned pretty well, productivity may never be a problem.
The real problem is that they want to have it both ways. They want to tighten when productivity is high and they want to tighten when productivity is at a more normal ebb. If productivity is a problem, how in the world would they explain inaction when all measures of inflation were headed in the wrong direction, too low and getting lower? Productivity is just an excuse. Inflation is below target. Inflation is just an excuse.
There must be other reasons than economics for their unseemly public outbursts. The choices here are really very few – they are either behaving rationally or irrationally. If they were truly as irrational as they seem to be from an economics stand point, these individuals would have serious problems in other areas of life and would never get as far as the front door, not end up on the FOMC. I don’t think these are irrational people. I think that if we understood what personal incentives there are to make the choices they do, we’d find that their behavior is entirely rational, just not in the best interests of the public. It’s a big problem because innocent people are financially harmed because of it.
If we really want something like NGDPLT to be put into practice, a way to facilitate it would be for someone to find any one of these hawks acting rationally in an unethical way. It would then be game-over for discretionary policy, and probably IT altogether because there would be no way for policymakers to communicate intent without having the SEC crawling up their rears and those of people close to them. Frankly, I’d prefer that Congress be proactive in taking away perverse personal incentives and ban the flexible-IT regime altogether.