Scott Sumner presses his crusade:
The Fed has picked such a bizarre and convoluted strategy that it is difficult for markets to predict which way the economy will go.
And the reference to Ryan Avent quoting Tyler Cowen was good, too:
Those looking for a positive, pro-inflation sign in the statement could point to the three dissenters, he noted; clearly enough changed in the report to drive the more hawkish members (whatever the merits of their view) to find the shift objectionable. However, he noted that its ambiguity was suggestive of a Fed facing intense pressure from two sides, and wishing to put itself in a position to avoid blame for failure but take credit for success.
Totally confusing. You know we’re in a crisis when the markets go nuts with every fed statement.
Technocrats look at the fed as the holiest of technocratic institutions. It’s a kind of mount Olympus for economists who believe economists deserve a seat at the policy making table.
Unfortunately we’re zero for two in massive crises that have been (or will eventually be) seen as preventable with monetary policy. The fed is a reactionary institution. Like all political institutions.
But what would the fed to do correct/prevent crises? The best framework I’ve come across for figuring this out is Scott Sumner’s holy focus on NGDP.
It makes sense: NGDP is revenue. It’s the most easily measured (and understood) economic variable.
The point is that even though ultimately inflation is the only variable under the mechanical control of the fed, the expectations for inflation are incredibly important in the real economy. In practice, therefore, the fed affects the real economy today by signalling the path of prices tomorrow.
If this path changes for some reason, the economy is thrown into disarray. “Disarray” means investment plummets, unemployment spikes and recession strikes.
Obviously everyone knows about when the path of prices is shifted upwards (70s-80s). But problems are perhaps more serious when it shifts downwards.
That’s what happened in the 30s. And that’s what’s happening today.