The future course of the economy always involves a bit of guesswork. But it seems to me that the following two claims are pretty likely to be true:1. Over the past three years, monetary policy has been far too expansionary.2. It is likely that monetary policy is still a bit too expansionary, although I have less confidence in that claim.
He goes onto to discuss how nominal economic growth is reaccelerating and TIPS spreads widening while counseling the Fed to remain more restrictive while also expressing his belief that the whole way of doing monetary policy is wrong.
This is the point where economists discuss “what the Fed should do”, by which they mean where should they set the fed funds target. In my view, interest rates are not the right way to think about monetary policy, so I won’t recommend a particular rate setting. Instead, I’ll recommend making the policy regime more effective......1...The Fed should adjust their fed funds target daily, to the closest basis point (say using the median vote of FOMC members.) The Fed funds target should look like other market prices, like a random walk. New information should not make people expect a different level of NGDP in 2025, rather new information should show up as the adjustment in the fed funds rate required to keep expected 2025 NGDP on target.....2....The Fed thinks in terms of growth rates, not levels. That radically increases uncertainty about the future path of NGDP, and largely explains the wild swings in the financial markets in response to seemingly trivial adjustments in Fed policy.
The Fed is not reacting to unexpected swings in aggregate demand, the Fed is creating unexpected swings in aggregate demand, through its clumsy interest rate targeting system and lack of level targeting.
But if you want a different view, just hop on over over to Claudia Sahm who argues that inflation has largely been a supply side phenomenon all along (to her credit she does mention pent up demand and Covid-stimulus as factors).
Identifying shelter and motor vehicle insurance as two primary sources of inflation now is not meant to ‘explain away’ inflation. Inflation is too high; understanding why helps identify the best policy response. Herein lies a bigger problem.
We are down to a few enemies in the fight against inflation. Unfortunately, the Fed’s ‘weapons’ are unsuited to address supply-driven inflation. Sustainability requires getting the excess inflation out of all the spending components. The Fed holding rates or raising them further would eventually put the economy in a recession. That might reduce the demand for other types of spending and bring down their inflation further, achieving the topline inflation of 2%. However, that does not necessarily solve the current problem, and it creates new ones.
Inflation is narrowing down to a few challenging areas. That narrowing reflects several victories in the fight against inflation, but what’s left has a big lesson. It’s time for policymakers outside the Fed to accept responsibility for inflation and, most importantly, do something. The Fed is in the mix, but it can’t fix this alone.
It's unclear to me what policies she proposes to fix inflation in car insurance, as that inflation seems to be driven by the fact that (1) cars cost more due to both size and inflation, (2) cars are now computers which also are expensive - inflation in many components and (3) natural disasters have lead to rising claims. I would assume lowering the cost of actual cars and their component parts would lead to lower car insurance, but maybe I'm wrong. I'm not sure the policy that prevents bad weather events....I have so much left to learn.
With all this focus on the Fed and inflation, is it wrong to think that this will all be funny to look back on when some "shock" hits the real economy down the line?
No comments:
Post a Comment