The latest FOMC minutes contain the overall message of, “Maybe we’ll stop contacting the base over the course of the year,” in a somewhat perplexing machination.
While I can appreciate lack of hubris in the FOMC when it comes to exercising its apparent right to discretion as an overall beneficial improvement, there wasn’t a whole lot in the minutes that can explain the logic behind why, say a year ago, the intent to change what is without changing what is was justified, but may no longer be at this point in time, especially as a mitigation plan is conspicuously absent.
Simply put, if the Committee members feel that more harm than good has been done, a point with which I’d hardly disagree, it should say so, and tells us what it plans to do make it up. Saying we think what we’re doing might be harmful if it continues, and we’re going to keep doing it for the next few quarters until we know more, isn’t the sort of warm fuzzy of being out in front of mishap that I’d expect from an institution that is intellectually disciplined with respect to its own stated targets. If we are on the edge of uncertainty now, then it stands to reason that perhaps too much ‘run off’ has already been done, and there’s a complete lack of substance to demonstrate that point one way or the other or why waiting until the end of the year to cease the beginnings of an unmitigated monetary disaster is a rational plan.
I think I can help them out a bit here. Given the pattern of NGDP growth over the last couple of years, I can guess that the tax cut package had a beneficial impact on economic activity, which allowed for the runoff plan to be carried out through the third quarter of last year without a negative impact. There probably was not enough of a monetary offset through the first half and too much in the second half. But now that the immediate boost to spending from the tax cut package has leveled off, there’s no longer a need for an offset. In fact, 1Q ‘18 to 1Q ‘19 NGDP growth, if level targeted at 5 percent, would come up about 40 basis points shy of target considering that 1Q ’17 to 1Q ’18 was in the area of 4.6 percent, requiring the more recent period to be at 5.4 percent to be considered on target and is forecasted to be around 5 percent instead. Simple math says the FOMC has already done too much if level targeting NGDP growth at 5 percent.
The way I look at it is that the FOMC was handed the happy accident of on-target NGDPLT and squandered it in 3Q ‘18 with nothing more than the argument of the size of the balance sheet making the members uncomfortable to justify the policy stance that it chose.
Right now is the time to stop squandering this gift before the situation becomes one of those infamous discretionary monetary recessions, and the Committee can’t do that without stopping the runoff and committing to level target NGDP at 5 percent – right now – which would mean producing or allowing 5.8 percent NGDP growth this year, and 5 percent next year to make up for the undershooting of the recent past. In short, they can’t get there without doing it. Anything else is just more harm than good added to the already more harm than good.