The Fed “Blithely Declares” We Should Consider Targeting NGDP

Why does stuff like this have to happen when I have no time to blog?  I promise commenters that I will eventually get to comments from recent posts.  Perhaps tomorrow night.  And then there is the backlog of posts I need to do.  But this one can’t wait.  I saw the following comment from someone whose byline is an apparent reference to Keynesian economics (“Obsolete Dogma“):

If it makes you feel any better, the latest FOMC minutes ( show the board considered implementing either a NGDP or price level target instead of targeting the rate of inflation.

The FOMC brings to mind Churchill’s quip about Americans: they always do the right thing — after they have exhausted all other possibilities.

He or she is referring to this comment in the Fed minutes:

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.

Like the hardy band of hobbits who brought the ring to Mordor, our little group of bloggers from schools like Texas State, Bentley, The Citadel, Wayne State University have finally succeeded in bringing NGDP targeting (level targeting no less!) into the formerly impregnable Federal Reserve System.  Kudos to Matt Yglesias as well.  And of course level targeting-advocate Michael Woodford, who in all seriousness does have influence at the Fed.

Here’s Yahoo’s explanation of why stocks turned around after Yellen’s scary statement depressed prices this morning:

WASHINGTON (AP) — The Federal Reserve is leaning toward taking two steps to boost the economy: Buying more Treasury bonds to drive down loan rates, and signaling an openness to higher prices later to encourage more spending now.

And another Yahoo story explained the market reaction:

NEW YORK (AP) — Traders pushed shares higher Tuesday after minutes from the latest Federal Reserve meeting kept hope alive that the central bank would take more action to stimulate the economy.

The Fed had said after its Sept. 21 meeting that it was concerned that inflation was too low, and suggested it could step up its purchases of government bonds and take other action to encourage lending.

Minutes from the September meeting, released Tuesday afternoon, indicated that Fed Chairman Ben Bernanke and his colleagues were nearing a consensus on what steps to take. Traders are hoping for more concrete news from the Fed following its next meeting in early November.  (Emphasis added.)

Yes, I understand that the details will probably be underwhelming, and I shouldn’t get my hopes up.  But the fact that they are thinking along these lines may pay off in the next business cycle.  Imagine if these policies had been adopted in September/October 2008.  Remember, NGDP fell in 2009 at the fastest rate since 1938—level targeting would have made a huuuuuge difference in October 2008.

PS:  The post title is a reference to this Paul Krugman post.  In fairness to Krugman, any price level or NGDP target announced by the Fed is probably going to be too low to make a dramatic difference.  But I think he might underestimate the advantages of level targeting over “memory-less” growth rate targeting.  At least I don’t recall him discussing the topic.

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About Scott Sumner 492 Articles

Affiliation: Bentley University

Scott Sumner has taught economics at Bentley University for the past 27 years.

He earned a BA in economics at Wisconsin and a PhD at University of Chicago.

Professor Sumner's current research topics include monetary policy targets and the Great Depression. His areas of interest are macroeconomics, monetary theory and policy, and history of economic thought.

Professor Sumner has published articles in the Journal of Political Economy, the Journal of Money, Credit and Banking, and the Bulletin of Economic Research.

Visit: TheMoneyIllusion

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