When should we be worried about monetary policy?14th January 2019
During late December, there was a lot of chatter in the press and the blogosphere about monetary policy. Many pundits expressed concern that policy was off course.
Back in September 2010, there was relatively little chatter about monetary policy. Why is there a great deal of discussion at some points in time, but not others? One answer is that people talk about monetary policy when it is not hitting its targets.
Let’s look at the most recent unemployment and (PCE) inflation data that was available as of late September 2010 and late December 2018:
August 2010: 12-month PCE inflation = 1.38%, unemployment = 9.5%
November 2018: 12-month PCE inflation 1.84%, unemployment = 3.7%
Hmmm, which set of data points is closer to hitting the Fed’s dual mandate?
Which set of data points suggest that policy is clearly off course?
It might be argued that the Fed was out of ammunition in September 2010. Actually, that is not the case:
1. Bernanke insisted the Fed had more ammunition.
2. The Fed was paying interest on reserves.
3. The Fed was not doing quantitative easing.
4. The Fed was not doing significant forward guidance.
So why was there a lot of discussion of the Fed being off course in late December of last year, but very little discussion in September 2010?
1. A lack of understanding that if AD is too high or too low it’s always 100% the Fed’s fault.
2. An inability to understand what it means for money to be easy or tight.
Thus most pundits wrongly assumed the Fed was tightening policy in 2018, even as NGDP growth picked up. This so-called tightening was seen as a “concrete step” that threatened the recovery. In 2010, policy was wrongly seen as being “expansionary”, and the Fed was wrongly seen as being not responsible for the fact that AD was currently far too low to achieve the Fed’s dual mandate.
Bottom line: When discussion of monetary policy is at its highest pitch, there is often less cause for concern than when almost no one it talking about it. Consider late 2008, when monetary policy was disastrously off course, and yet there was almost no discussion of that fact in the media.
That’s not to say that policy is not currently off course—it may well be. Rather my point is that any errors in the current policy setting are trivial compared to 2008 or 2010, when people were mostly ignoring the Fed.
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