A Bombshell in the FOMC Minutes

Contrary to what some observers are saying, the FOMC minutes today reveal a big change in terms of policy options being discussed for the Fed. For the first time the FOMC has discussed the possibility of targeting the level of NGDP. Here is the key excerpt (my bold):

With short-term nominal interest rates constrained by the zero bound, a decline in short-term inflation expectations increases short term real interest rates (that is, the difference between nominal interest rates and expected inflation), thereby damping aggregate demand. Conversely, in such circumstances, an increase in inflation expectations lowers short-term real interest rates, stimulating the economy.Participants noted a number of possible strategies for affecting short-term inflation expectations, including providing more detailed information about the rates of inflation the Committee considered consistent with its dual mandate, targeting a path for the price level rather than the rate of inflation, and targeting a path for the level of nominal GDP.

This is huge. The FOMC is now discussing a NGDP level target, a topic that has has been promoted in the economic blogosphere. For those of us who have been advocating this approach for some time (e.g. here and here) this is incredibly refreshing. Maybe they are listening to us after all. Lest you think I am reading too much into the above excerpt from the FOMC minutes, here is what David Pearson, an money manager who follows the FOMC closely, had to say about it:

[T]he Fed is careful in how it chooses its words in both the statements and minutes. Minority views are often referred to in the context of “a few participants noted…” or, “one participant commented that…” Today’s minutes tell us that, “Participants noted a number of possible strategies…” Notice the lack of a qualifier. That this was used to describe the discussion of both price and NGDP level targeting implies a surprising degree of consensus and openness around something never floated before in the minutes. Further, when someone pounds the table and says, “no way”, the minutes usually will say something like, “one participant expressed a concern that adopting such strategies might risk unanchoring expectations…” To do otherwise would be to pretend an strong objection was not raised.

So apparently they all sat around a table discussing that price and NGDP level targeting might be a good thing, and no one blew a gasket. This, I believe, is news.

Unfortunately, we will have to wait until the transcripts are released in six years from now to learn who actually was discussing NGDP level targeting.

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