On January 5th, Reuters published an article that speculates on the road ahead for the new Fed Chairman Powell when he takes over the Fed next month. What is really interesting about it is that out of the norm for Reuters, which generally takes the tone of the extreme hardcore inflation targeting, it bring up discussion about revision of the nominal target at the Fed, and outlines some of the possibilities that include NGDPLT; though it doesn’t get either idea of PLT or NGDPLT quite right:
The Fed currently has a simple inflation target, setting policy to keep annual inflation at 2 percent regardless of past performance. After years of falling short of this goal, the regional Fed bank heads are arguing that the time is right to consider more dynamic strategies.
One alternative, price-level targeting, would attempt to make up for years in which inflation is below or above two percent by over- or under-shooting that goal for a time. A related method targets gross domestic product at its overall or “nominal” level, before it is adjusted for inflation, and also promises to make up for lost ground with higher, inflation-fueled growth, in the future.
In the current situation, the recent years of missing inflation would be offset by lower-than-expected interest rates and higher-than-normal inflation until the overall price level is back where it would have been if annual inflation had averaged two percent annually.
The method in theory keeps output on a steady course over the long run, but carries risks as the Fed tries to convince investors and the public that higher inflation is only temporary, and under the central bank’s control.
Neither method has anything to do with interest rates and only an incidental relationship to inflation. It would be a grave mistake to try to apply the standard way of thinking about the current framework on top of what would be a massive improvement. And this description makes no sense when the current framework consists mainly of a complex way to manipulate interest rates that hasn’t worked because interest rates are not a cause in and of themselves, and their levels may be indicative of something entirely different than the conventional wisdom interpretation would predict – low rates likely do not equal easy money that magically translates to “inflation-fueled” growth.
Outside of the Reuters journalist missing the whole point of replacing the inflation rate targeting framework, this is probably the best news I’ve heard in a very long time. Equally surprising is where all this is coming from because I would have never suspected movement toward change such as this would be driven by regional bank presidents.
I was pretty tough on Kaskari in the beginning. But I suspect that I owe him quite an apology because there he is, leading this groundswell of change with Evans. Kashkari has shown that he is an individual of incredible character, and I wouldn’t want him any other way.
It isn’t all as rosy as I’d like, however. We still have the usual suspect attempting a veto while trying to appear engaged:
“We are not ready to snap our fingers and do it,” St. Louis Fed President James Bullard, who has often written about such level-targeting regimes in the past, said in an interview on Thursday in which he joined the growing call for a broad review. “It would take quite a few years (but) at a minimum you should ask” if the benefits are worth it.
Sure, Mr. Bullard. We want to keep broken monetary policy that looks like it will continue to be broken in the future, complete with the wrong sorts of credibility on a too-low inflation target that lends itself to another financial crisis and bout with the ZLB being a matter of when rather than if. It’s time for the idea of hardcore inflation rate targeting that is a relic of the closed-economy, dinosaur industrial age to give up the ghost. It no longer works, and if the last 10 years, much of it spent at the ZLB and undershooting the target, and it taking nearly that long for the employment market to recover have not been enough proof of that, I am not sure what else would be persuasive enough of the benefits of any sort of level targeting. Get over yourself and move on, please!