Chairman Powell. Testimony to Congress. WOW!
I was blown away by Powell’s answer to questioning about the usefulness of the Philips curve for monetary policy, referring to it as not as reliable in the present as at other times, and on other occasions characterizing it as having a very faint heartbeat.
The recently popular “too many jobs” characterization of the economy apparently is no longer politically correct. Or at least, it isn’t as far as Powell is concerned.
I’ve been blogging about the Fed and monetary policy for the greater part of a decade, the content of which could be characterized more as complaints about the opacity of monetary policy and the rather embarrassing episodes of the Chairperson’s testimony to Congressional Oversight committees that had more to do with interest rate policy based on faulty assumption that short nominal interest rate levels are monetary policy, while developments in monetary policy and its various possible states and relative economic impacts, such as perennially tight, never seem to make it to the agenda.
Powell’s testimony last week was a huge step in the direction of assuaging my concerns. I truly never thought I’d see any sort of admission to Congress or anyone else that, at times, policy has been tighter than what might appear to be required under the Fed’s mandates. And that wasn’t all. Powell went farther to quantify the damage in the form of estimated counts of how many people were unnecessarily unemployed as a result.
Powell’s estimate of nearly 24 million extra unemployed workers at any given time, apparently based on current LFPR, was somewhat optimistic. It would have been better for conversational purposes if it had been accompanied by an estimate of opportunity cost per unit of lost productivity so that the damage of the inflation fearmongering of the past decade could be realized and appropriate remediation actions can commence.
But I am completely elated with the baby step taken here as questions about the reliability of Phillips curve forecasts already being ‘out there’ makes it much harder for future official conversations about monetary policy conduct to omit the welfare costs and trade off of simple inflation rate targeting, oversight conversations that up to now have been very near to intellectually dishonest (not to rehash the complaints, of course. That would only upset me all over again.)
The next step would be for this sort of talk to have a real impact on the conduct of monetary policy as to preempt and moot any legislative remedy.
Now, I appear to be somewhat alone with the idea that policy since perhaps June 2018, and certainly since September 2018 has been too tight. Though, when looking at quarterly NGDP levels over the last couple of years, this idea holds at least some water against a backdrop of the market monetarist definition of tight money compared to a 5% growth level target. I have not done the extra homework of creating a gap-to-trend analysis, the eyeball test makes the point that overcompensation for the higher level of growth in Q1 2018 occurred and bent the trend down too far rather obvious.
So, even though Powell appears to be aware there is a problem with the models used to guide policy actions, this awareness doesn’t appear to have translated into meaningful reform yet. How long does the trend have to remain in the bent-down state to make up for the perceived overshooting in 1Q 2018? That is the question we are all asking now and waiting with bated breath to see what the answer is.