The latest graph I’ve been obsessed with in the very short term is (N)GDP growth. In setting the percent change quarterly view to the last decade, I noticed an interesting pattern. From the end of the shaded area marking the recession that ushered in the financial crisis to 3Q15, the data points are quite erratic, whizzing up and down like fireworks at a carnival. Then suddenly, between 1Q16 and 1Q18, the data points are relatively smooth with very little deviation, between 1.25 and 1.05 percent per quarter.


This breakaway pattern of NGDP growth stability that began in 1Q16 is not detectable anywhere in modern history. Even going back to look at the NGDP dataset from the period dubbed “The Great Moderation,” an era that is pointed to by many as an example of stellar economic stability, the quarterly NGDP growth data points are all over the place.


Though it did so at a rate of about 1.08 percent per quarter and we need about 1.25 percent per quarter for a five percent annual rate, it as if the Yellen Fed tried NGDP growth stabilization starting in 1Q16.

But before getting lost in the excitement of what could be an astoundingly historic development at the Fed, my first thought is to do a check to see if I can tell whether I am looking at a phenomenally happy accident or something more purposeful. I then added PCE inflation data, the Fed’s official inflation index, to the NGDP growth dataset, and one of the first things to pop out at me is that there appears to be some degree of correlation between the two as they move together on a quarterly basis for the last decade and over the entire dataset. This makes any determination of what the Fed may or may not have done during the period between 1Q16 and 1Q18 murky, at best, because, if this is true in a generalized sense, then, with a few short-term exceptions, to stabilize PCE is to stabilize NGDP growth.

One way that I might be able to discern the policy intent present in the data is to look for areas where the data points in each set deviate. There are differences in 2Q and 4Q 17, but I think the tale of the Yellen Fed’s policy intent is told in 4Q17. Even though NGDP growth had been relatively stable in previous quarters, PCE spikes up from 0.95 the previous quarter to 1.67. This “spike” is then followed by a decrease in NGDP growth from 1.64 in 4Q17 to 0.73 in 1Q18 bearing a vague fingerprint of a PCE growth rate policy reaction function rather than a NGDP stabilization reaction function.


I am not seeing a shift in policy intent during the waning years of the Yellen Fed except perhaps more focused attention on the official inflation index during a period absent of a lot of supply side noise.

There’s nothing new to see here. Time to move along.