Way Too Tight
Scott Sumner
1.12K Followers
Summary
- The Fed's new inflation and unemployment projections show that monetary policy is currently way too tight.
- Unemployment is projected to remain high through 2022.
- Again, unemployment may be beyond the Fed's control at the moment, but at a minimum they need to target the inflation forecast. I can't even comprehend the 1.7% PCE inflation forecast for 2022.
The Fed's new inflation and unemployment projections show that monetary policy is currently way too tight. Unemployment is projected to remain high through 2022. That may be excused by the Covid-19 pandemic, but there is no excuse for the low inflation, especially low core inflation:
The Fed had the option of switching to level targeting, and blinked. That error will be quite costly in terms of both inflation and growth.
Again, unemployment may be beyond the Fed's control at the moment, but at a minimum, they need to target the inflation forecast. I can't even comprehend the 1.7% PCE inflation forecast for 2022. Does the Fed plan to acquiesce to this sort of policy failure for two whole years, without even attempting level targeting?
PS. The implied 2019-2021 NGDP growth forecast seems to be about 0.9% (total). By comparison, the total NGDP growth from 2008:Q2 to 2010:Q2 was 0.8%. And unemployment was over 9% throughout 2010. Perhaps they are assuming a greater degree of wage flexibility today.
PPS. Is there anything more annoying than talking heads on Wall Street TV shows saying the Fed has already done too much because stocks are recovering?
PPPS. Powell was asked about inflation forecasts being under target, but sort of dodged the question.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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Bio
My name is Scott Sumner and I have taught economics at Bentley University for the past 27 years. I earned a BA in economics at Wisconsin and a PhD at Chicago. My research has been in the field of monetary economics, particularly the role of the gold standard in the Great Depression. I had just begun research on the relationship between cultural values and neoliberal reforms, when I got pulled back into monetary economics by the current crisis.
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Comments (49)
@Paddy1234 "why does the world need inflation?"Good question. It sure doesn't help the average Joe middle class (or lower) whose annual salary raises don't keep up with the inflation so his standard of living keeps going down.
Hello @sugi , @Paddy1234 , and @John008 ,Currently, the Untied States, and indeed the world, faces very intense deflationary pressures. Left unopposed, these pressures could create a deflationary spiral. The Federal Reserve Bank (FRB) was created in no small part to combat deflationary spirals. Throughout the 19th and early 20th centuries the economy of the United States was plagued by a long series of deflationary spirals. Since the 1930's they have not occurred. This is because, in part, the FRB took policy steps to prevent deflation. By increasing the supply of narrow money, main bank reserves, inflationary pressures have been created. The FRB hopes that they will be enough to counterbalance the intense deflationary pressures present in the economy of the United States right now. Many consumer prices are
already falling, especially non-food commodities. Creating inflationary pressures by increasing the supply of narrow money is an important step to prevent a deflationary spiral.
already falling, especially non-food commodities. Creating inflationary pressures by increasing the supply of narrow money is an important step to prevent a deflationary spiral.
Hello @JohnP ,I would suggest that that is not quite correct. It is true that they are unlikely to generate any outright inflation, i.e. steady increases in prices. However they may be able to generate sufficient inflationary pressures to prevent outright deflation.
Its too tight?
Wtf are you talking about 😂
They literally created trillions out of thin air?
What would a policy look that's not "too tight"
Go full speed Venezuela or drop 10K on each and every person to see inflation skyrocket?
You CAN NOT create an economy, jobs or wealth by just printing up money
Let the free market work for gods sake
Wtf are you talking about 😂
They literally created trillions out of thin air?
What would a policy look that's not "too tight"
Go full speed Venezuela or drop 10K on each and every person to see inflation skyrocket?
You CAN NOT create an economy, jobs or wealth by just printing up money
Let the free market work for gods sake
I would prefer to own gold instead of tulips.
But, to each their own ........
But, to each their own ........
You want higher inflation? Give everyone $2k a month and watch the inflation skyrocket.
How can it be too tight when we have 0% rate and the Fed is printing unlimited amounts of money to support the economy?The real inflation will be a lot higher than Fed's estimates but the Fed would like to underestimate it so that it gives them more excuse to pump money into the system. If they said that they expect 5-10% inflation rate, there would be backlash about them printing unlimited amounts of money.
I noticed the author is a professor. I think his ultra liberal college-bred leanings are swaying his judgment.
Prof. Sumner calls this "arguing from a price change." The zero rates don't necessarily mean easy money. You can have high rates and easy money or low rates and tight money. Low rates over long periods of time can actually cause tighter money. Ironically, the Fed's mistake has been never being willing to lower rates sooner because of the political pressure from just about everyone, since basically no one understands how monetary policy actually works.
Recently I read a report, specifically by Goehring & Rozencwajg, that stated that the current Fed's balance (of about 7 trillion if I'm not mistaken) at a 1:1 ratio with its gold reserves (of 262 mm oz) would imply a price of 20.000$/oz of gold. They say that in the past there were a couple of occasions that the FED's reserves of gold value in dollars was 1.7X the FED's balance sheet (late 30s and the second time in January 1980). That tells a story about the trajectory of the FED's monetary policy.
<<< Robots are going to get the place of the human workers and so the technology. I forecast millions of unemployed within the next 10 years. >>>Robots have already been replacing humans in many jobs such as farming, mining, manufacturing for the last 30-40 years and we didn't have massive unemployment. People simply moved on to other jobs such as tech jobs.
Majority of future workers will not be living in USA, they will be in foreign and emerging countries: India, China, SE Asia, Africa, So America, ME, these are where future worker growth will occur. Having little to do with robots, but simply to do with global economic growth, eg capitalism, and peoples inherent desire for a better life.
Dr. Sumner,1) You wrote: "The Fed's new inflation and unemployment projections show that monetary policy is currently way too tight."In what sense is it too tight? Are well qualified borrowers being turned away by lenders? In late 2008 General Electric (GE) was unable to obtain short term loans because no one would lend to them. GE was in such a tight spot that they ended up borrowing 16 BUSD from the Federal Reserve Bank (FRB) [1]. The FRB purchased commercial paper from GE (at a discount) to provide the badly needed liquidity. The FRB actually lent vast quantities of money to member banks through to the Discount Window in October of 2008 [2], a staggering 404 BUSD in just one month to FRB member banks. That was a very tight credit market and a very loose monetary policy stance by the FRB. How is it tighter now?How easy or tight the credit market is really a function not of the volume of money available for lending nor the interest rate at which money might be leant but the *willingness* of the lenders to actually lend it. There does not appear to be particularly tight credit market conditions or monetary policy.
2) You wrote: "The Fed had the option of switching to level targeting, and blinked. That error will be quite costly in terms of both inflation and growth."In what functional way would that change how the FRB operates? How many more or fewer United States Treasury securities or Agency Mortgage Backed Securities would the FRB buy? How would that influence the credit market and thus influence unemployment rates or growth?[1] www.nytimes.com/...[2] http://bit.ly/2rGsunY
2) You wrote: "The Fed had the option of switching to level targeting, and blinked. That error will be quite costly in terms of both inflation and growth."In what functional way would that change how the FRB operates? How many more or fewer United States Treasury securities or Agency Mortgage Backed Securities would the FRB buy? How would that influence the credit market and thus influence unemployment rates or growth?[1] www.nytimes.com/...[2] http://bit.ly/2rGsunY
dougkitchen,
"We’ve reached the end of the road and it will take leadership from somewhere to devalue or enact a debt jubilee."Like the ast election… I don't see a viable candidate.
"We’ve reached the end of the road and it will take leadership from somewhere to devalue or enact a debt jubilee."Like the ast election… I don't see a viable candidate.
re: "monetary policy is currently way too tight"The $'s exchange rate says that the FED is too loose. But that's due to a policy error. The FED isn't responsible for the E-$ market.
What's the FED's target for DXY?97.19 up 0.46 or 0.47%
Hello @Harvey Cotton ,You wrote: "We have a Fed printing money for corporations and banks hoarding cash and worried about deflation, and we have human people who are unemployed and desperate for cash."When the Federal Reserve Bank (FRB) "prints money", it does so by purchasing United States Treasury securities and Agency Mortgage Backed Securities from banks and then gives those banks "cash" (actually bank reserves) in exchange. The banks make a slight profit in the deal and their assets become more liquid but the total size of their assets remain about the same. The money in question begins as the property of the banks and end as the property of the banks. The FRB literally cannot give that money away it does not belong to the FRB.
Hello @edwardsmith ,I would note that none of that is necessary. The United States Congress already authorized trillions of dollars to be given to companies and individuals and President Trump already signed various bills into law to execute that effort. The "Helicopter Drop" began a while ago. The Federal Reserve Bank played little if any role. The FRB can print money but it cannot spend money.
The markets are forever screwed, change my mind.
"...DC are the non actors. in March, instead of a lock down they could have quarantined the few covid sick in 1 wing of a clean room hospital...."Would you suppose that a few weeks of planning for a pandemic in process in Europe and parts of the Middle East rather than planning for a "Hoax" might have made a difference?
The normalized cost of a mobile phone has gone down, the cost of a gallon of milk has gone up some, and the cost of real estate or a University degree has gone up dramatically (by your very useful metric of hours worked). Markets are bifurcated into those which are strongly affected by the massive credit expansion and those which are weakly affected. Milk and mid range phones are weakly affected, but the exponential nature of Moore's dominates the price of phones and obscures the inflationary effects. Financial asset prices have been inflated into bubble after bubble, with CBs scrambling to fight the debt deflation each time there is a shock.
LongTermAmateur,
"At the moment it is hard to see past the illusion. Everyone always tells us inflation is normal. We forget to notice that the number of hours worked to obtain a product of a given quality (which is what I consider deflation) keeps going down because technology keeps improving."In 1955 I had my first job at a grocery after school. Bread was $0.11 per loaf, gasoline was $0.30 per gallon. I was paid $0.70 per our. Not really a lot different in time worked/product cost.The job killers lately are US manufacturing auctioned to cheapest foreign labor… Mexico, then China. A generation who at 50 to 65 would have been at their earnings peak were suddenly out on the street competing for jobs at Walmart. Their kids were college age; parents cashed in 401(K) plans at 10% penalty to pay tuition and mortgages.Those service jobs which Al Gore said were better than "old fashion" mfg. are now going online and the waitress jobs got cut to less than 30 hours by Obamacare. Robotic technology may bring back manufacturing, but not many jobs.Corporations got rid of employee benefits, unions and more recently a 40% Trump tax cut.To those who got the short end "de" or "in"+ "flation" is of little concern.Any wonder on why we are a two level economy?
"At the moment it is hard to see past the illusion. Everyone always tells us inflation is normal. We forget to notice that the number of hours worked to obtain a product of a given quality (which is what I consider deflation) keeps going down because technology keeps improving."In 1955 I had my first job at a grocery after school. Bread was $0.11 per loaf, gasoline was $0.30 per gallon. I was paid $0.70 per our. Not really a lot different in time worked/product cost.The job killers lately are US manufacturing auctioned to cheapest foreign labor… Mexico, then China. A generation who at 50 to 65 would have been at their earnings peak were suddenly out on the street competing for jobs at Walmart. Their kids were college age; parents cashed in 401(K) plans at 10% penalty to pay tuition and mortgages.Those service jobs which Al Gore said were better than "old fashion" mfg. are now going online and the waitress jobs got cut to less than 30 hours by Obamacare. Robotic technology may bring back manufacturing, but not many jobs.Corporations got rid of employee benefits, unions and more recently a 40% Trump tax cut.To those who got the short end "de" or "in"+ "flation" is of little concern.Any wonder on why we are a two level economy?
Care to elaborate on the "Stimulus #4" thing ?
(is it a done deal already cashed in, or when will it be ?)
(is it a done deal already cashed in, or when will it be ?)
Frogmaier, a simple like is not enoughright,RIGHT, R I G H T !!!!!
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