Monetary Story

2024 08 18

There is so much of “A monetary story of the post pandemic economy”

A monetary story of the post pandemic economy

that I agree with, I’d be overjoyed if President Harris named Marcus Nunes Charman of the Board of Governors of the Fed when Powell’s term is up. (Good job, J.)

Nevertheless, there is one point in the story where I disagree with, Chairman Nunes

" … the stance of monetary policy is not best characterized by either the determination of a monetary aggregate or through a federal funds rate policy, but through the movements in NGDP growth. And to obtain the “natural” rate of unemployment, NGDP growth should remain stable at a sustainable rate"

I really do not see the need to "characterize" a Fed "stance."  The question at every point is, what should the Fed _do_ with its policy instruments?  Which outcome should the Fed be attempting to affect with its actions?

With a normal level of "Brownian Movement" shocks, keeping inflation at a target rate (and in this moving equilibrium one metric of inflation ought to be about as good as another)

https://thomaslhutcheson.substack.com/p/housing-and-inflation-metrics

or keeping NGDP growing at a steady rate would amount to the same thing.  Unemployment would be NAIRU and the policy interest rate (one of a vector of instruments) would be at r*. 

https://thomaslhutcheson.substack.com/p/arrrrr

But, Chairman Nunes, which outcome _should_ the Fed target for a:

1. Negative demand shock? [Like the 2008 financial crisis, like consumers during early COVID]

2. Positive demand shock? [Like the COVID shift from services to goods]

3. Negative supply shock? [Like the COVID “lockdowns”]

4. Positive supply shock? [Like?]

A Flexible Average Inflation Target (FAIT), that I favor, would suggest temporary over-target inflation for all four. [N.B. I do not think the Fed should ever aim for under-target inflation] followed by disinflation until the "average" target rate is reestablished.  (BTW, "Average" in FAIT adds little beyond signaling that over-target inflation is temporary.)  The "Flexible" aims at allowing/facilitating relative prices (not just the relative price of labor and goods as if these were homogeneous![1]) to adjust to the shock and so preserve or restore market-clearing prices. 
https://thomaslhutcheson.substack.com/p/fighting-over-fait

Determining how much over-target inflation -- the trajectory of the deviation of realized inflation from target -- the Fed should engineer, and which instruments should it use is what we pay you and the other Governors for.   And however you do it, my guess is you could do it better if the Treasury gave you more TIPS with intermediate tenors and a tradeable nominal Trillionth and if you and your colleagues were willing to make more frequent, smaller and not necessarily monotonic adjustments in the instruments you are using.

https://thomaslhutcheson.substack.com/p/improving-fed-decisions

Nevertheless, Chairman Nunes, you are on record as favoring NGDP targeting.  At your confirmation hearing you should be prepared to say what NGDP targeting would do with each of the four kinds of shocks and how or if adjustments in policy instruments would be different from FAIT.  What arguments will you use to persuade the other Governors to switch from FAIT to NGDP targeting? 

[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: Confident young man testifying at a Congressional hearing. I trust Marcus will not object to DALL E’s choice of his avatar.  😊

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[1] Modeling the economy as consisting only of homogeneous labor and a single good is the error of the Phillips curve.