"Monetary Policy Was Even Worse Than We Thought" ???

2024 09 27

Scott Sumner says, “Monetary Policy Was Even Worse Than We Thought.

This is a puzzling comment.  We learn from the revision that real GDP was larger for the same policy, same inflation, same employment.  That’s just plain unalloyed good news!          

Sumner seems to mean that the revised NGDP outcome is a larger departure (11.5%) from his 4% p.a. NGDP rule than he had previously thought (10%), but I would say that just means the rule is not as good as he thought.  Likewise, he points out that, “PCE inflation over the past 5 years has exceeded the Fed’s 2% target by a total of nearly 8%.” But the Fed does not _have_ a simple 2% target.  It has a _Flexible_ Average Inflation Target, meaning that it is willing temporarily to crank up “over-target” when that will facilitate adjustment of the economy to shocks like COVID/Putin.

Now I agree partially with the substance of Sumner’s complaint.  The Fed probably was in error to wait from September 2021 (when TIPS expectations first rose significantly over 2% PCE equivalent) until March 2022 to start raising the EFFR.  Inflation therefor probably rose more than it needed to in order to maximize real incomes.  OTOH the Fed was also probably in error in not starting to ease of disinflation sooner [https://thomaslhutcheson.substack.com/p/improving-fed-decisions], but the revised overall real GDP was greater meaning that the disinflation was less damaging than thought.

In sum, monetary policy, pace Sumner, was _better_ than we thought.

[Standard bleg:  Although my style is know-it-all-ism, I do sometime entertain the thought that, here and there, I might be mistaken on some minor detail.  I would welcome comments on these views.]

Image prompt: Grumpy man shaking his fist at a growing cornstalk labeled “GDP.”