I applaud your efforts to salvage the make-up baby, and press for NGDPLT generally, but what about the statutory mandate? "Stable prices" seem to stand squarely in your way. If they mean the CPI or PCE index, as the "I" in FAIT, some mushy version of the latter is the best we can ever get. But Skandia Amaranth was on the mark in your recent musing with him: "The inflation is ultimately tied to the nominal size of the economy, nominal income growth, nominal spending. Again, if you anchor that one part, you’ve done your job and you allow inflation to temporarily go up, go down. It will, over the medium run, be anchored."
How then to "anchor that one part" if you must at all times be pursuing "stable prices"? The answer, in Skandia's phrasing, is to tie "inflation" to the nominal size of the economy, most easily PCE itself (the aggregate, not the index). Stabilizing total spending stabilizes the dollar value as a share thereof, the only sensible definition of stability in a world of ceaselessly changing real consumption, which must and should "destabilize" individual prices. You and other proponents of NGDPLT have argued for it in those terms but never to my knowledge taken the essential, conceptual step, which is to focus on the dollar value as the essence of "stable prices". It was to be that of a gold quantum under the FRA as enacted in 1913. Share of stabilized total spending is the logical modern successor and would untie the mandate's Gordian knot, which is currently tying it up pretty well. If of interest, the following makes the case a little more fully - and topically.
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Heads are currently being scratched over what the Federal Reserve should do if faced with a recession brought on by a trade war. How, under its statutory “dual mandate”, can it loosen credit to maximize employment, as threatened by the tariffs, and also tighten it to maintain “stable prices”, as forced up by them? The answer lies in a common sense reconsideration of the latter term.
The Fed’s preferred measure of “stable prices” is the Personal Consumption Expenditures (PCE) price index, but to forestall recession the need is to stabilize aggregate demand, the sum of prices paid, not an index of them. A growing number of economists advocate targeting a certain level of GDP, but the better solution, compliant with the statute, would be to stabilize total consumer spending, i.e., PCE itself.
Doing so would be much the same thing, more easily done. PCE represents 68% of GDP and moves in tight correlation to it. It can be and is reported monthly by the government, well ahead of the more complex, quarterly GDP, the other components of which (investment, government spending and net exports) are less relevant to consumer prices. A recent proof of PCE’s utility as monetary tool is offered by the inflation explosion of 2021-2022. Consumer spending began accelerating in early 2021. For various reasons (still debated) the Fed did not even begin to react until March of 2022. By that time PCE had risen by 17%, driving the CPI up by 10%. Meanwhile credit card debt, being short term, continuously observable, and a primary fuel for consumer spending, could easily have been restrained by the Fed.
As for the mandate, stabilized consumer spending has its own strong claim to price stability.
The “real” value of what consumers buy is not directly observable, if only because it is subjective. Over time, however, it must logically equal nominal spending deflated by a price index. The PCE index will serve for that purpose, at least over time periods long enough to balance its flaws, up and down. Real U.S. consumption growth as so measured, from 1970 to the present, has averaged about 3% per annum, suggesting that the stabilization of PCE growth at 5% would produce long-term average inflation of about 2% – the very thing the Fed now seeks using the complex tools that instead produced the 2021-2022 fiasco.
The inflation component of the 5% would of course be an average only, as real consumption changed, but the spent dollar, as a constant share of a stabilized total, would be “stable” in a way that individual prices never can be, or should, in perpetually changing conditions.
When gold was “money” it worked in much this way. The world’s total stock of it grew at roughly the rate of human economic activity, so that the total amount of it spent (and not worn or hoarded) did too, a given amount representing a roughly constant share of the total. Borrowers’ debts were not made unpayable in hard times, as they might be if equated (as by an index) to a basket of things that were unexpectedly scarce. Gold was pretty constantly so. Lenders were protected but also shared in unexpected real growth. We don’t know which it will now be, feast or famine, but stabilized total spending would work similarly in a recession. Fewer businesses would fail and consumers, the special wards of the mandate, would see their credit card rates fall, driven down by the Fed to maintain the total spending level.
The Fed was set up in 1913 to stabilize the banking system and provide an “elastic” currency that could expand and contract, but around a stable value, that of gold at the time. The task is newly-critical in the face of uncontrolled government spending. As to what that value should be, what better successor to gold than a share of consumption in the world’s largest economy? As to the mandate, Congress could hardly have meant to freeze the Fed in its headlights just as a recession loomed in the road up ahead.
FAIT certainly allows a period of over target inflation that moves the PL trajectory above a previous trajectory if that is what is required to restore full employment after a shock -- that is guess is the "overshoot," but where is the "promise?"
"So how can the Fed implement a FIT that (1) responds to persistent, demand-driven deviations of inflation from target while ignoring supply shocks and (2) keeps long-term inflation expectations firmly anchored? A straightforward way to achieve this vision is to anchor the FIT regime to a stable growth path of total dollar spending."
Hypothetically. But how does a stable growth path of NGDP "respond persistent, demand-driven deviations of inflation from target? Does that not imply downward deviations in real GDP growth? And to inflation expectations remained anchored during FAIT with forward looking inflation (TIPS falling substantially below target only briefly). Why gamble on an untried policy?
Putting these two desires together implies that what FOMC really wants is a FIT framework that is “capable of correcting persistent demand-driven deviations of inflation from either side”
Does this imply that the Fed sees demand-side shocks (budget deficit shocks, what else?) as different, as not causing shifts in sectoral relative prices that need over target inflation to facilitate adjustment? Is that the inherent nature of demand-side shocks?
Deviations "from either side" would imply that the Fed would sometimes reduce inflation to less than 2% PCE.
How could this be optimal if 2% had been correctly chosen as the minimum inflation needed to allow relative prices to continuously adjust to "Brownian Movement" micro shocks? Why would this rate decline just because in some previous period inflation needed to be greater than 2%? What is the Fed trying to optimize with its inflation management? [As before, there is always a translation of any inflation targeting statement into an NGDP targeting statement.]
"The inflation target, in short, isn’t purely forward-looking, it retains a shadow of its recent history. That is remarkable!"
Remarkable, but under what kind of model would that maximize real income growth?
The 2025 statement quoted seems totally off base. "Flexible" ought to mean flexible to inflate enough restore full employment and then return to a forward looking 2% whether this is more or less than enough to restore the PL trajectory,
I’ve had two main objectives: (1) to urge the FOMC to adopt NGDP as a cross-check on their traditional economic indicators, and (2) to help ensure they don’t throw out the makeup policy baby with the FAIT bathwater.
It would have been better to urge retaining FIAT*, although Flexible NGDPLT could be the equivalent if the Fed cannot bring itself to say publicly that sometimes more than just "catch up" inflation is needed to allow full adjustment to economic shocks.
*The "A" of "FAIT" can be problematic if interpreted as a backward looking average.
I applaud your efforts to salvage the make-up baby, and press for NGDPLT generally, but what about the statutory mandate? "Stable prices" seem to stand squarely in your way. If they mean the CPI or PCE index, as the "I" in FAIT, some mushy version of the latter is the best we can ever get. But Skandia Amaranth was on the mark in your recent musing with him: "The inflation is ultimately tied to the nominal size of the economy, nominal income growth, nominal spending. Again, if you anchor that one part, you’ve done your job and you allow inflation to temporarily go up, go down. It will, over the medium run, be anchored."
How then to "anchor that one part" if you must at all times be pursuing "stable prices"? The answer, in Skandia's phrasing, is to tie "inflation" to the nominal size of the economy, most easily PCE itself (the aggregate, not the index). Stabilizing total spending stabilizes the dollar value as a share thereof, the only sensible definition of stability in a world of ceaselessly changing real consumption, which must and should "destabilize" individual prices. You and other proponents of NGDPLT have argued for it in those terms but never to my knowledge taken the essential, conceptual step, which is to focus on the dollar value as the essence of "stable prices". It was to be that of a gold quantum under the FRA as enacted in 1913. Share of stabilized total spending is the logical modern successor and would untie the mandate's Gordian knot, which is currently tying it up pretty well. If of interest, the following makes the case a little more fully - and topically.
-----
Heads are currently being scratched over what the Federal Reserve should do if faced with a recession brought on by a trade war. How, under its statutory “dual mandate”, can it loosen credit to maximize employment, as threatened by the tariffs, and also tighten it to maintain “stable prices”, as forced up by them? The answer lies in a common sense reconsideration of the latter term.
The Fed’s preferred measure of “stable prices” is the Personal Consumption Expenditures (PCE) price index, but to forestall recession the need is to stabilize aggregate demand, the sum of prices paid, not an index of them. A growing number of economists advocate targeting a certain level of GDP, but the better solution, compliant with the statute, would be to stabilize total consumer spending, i.e., PCE itself.
Doing so would be much the same thing, more easily done. PCE represents 68% of GDP and moves in tight correlation to it. It can be and is reported monthly by the government, well ahead of the more complex, quarterly GDP, the other components of which (investment, government spending and net exports) are less relevant to consumer prices. A recent proof of PCE’s utility as monetary tool is offered by the inflation explosion of 2021-2022. Consumer spending began accelerating in early 2021. For various reasons (still debated) the Fed did not even begin to react until March of 2022. By that time PCE had risen by 17%, driving the CPI up by 10%. Meanwhile credit card debt, being short term, continuously observable, and a primary fuel for consumer spending, could easily have been restrained by the Fed.
As for the mandate, stabilized consumer spending has its own strong claim to price stability.
The “real” value of what consumers buy is not directly observable, if only because it is subjective. Over time, however, it must logically equal nominal spending deflated by a price index. The PCE index will serve for that purpose, at least over time periods long enough to balance its flaws, up and down. Real U.S. consumption growth as so measured, from 1970 to the present, has averaged about 3% per annum, suggesting that the stabilization of PCE growth at 5% would produce long-term average inflation of about 2% – the very thing the Fed now seeks using the complex tools that instead produced the 2021-2022 fiasco.
The inflation component of the 5% would of course be an average only, as real consumption changed, but the spent dollar, as a constant share of a stabilized total, would be “stable” in a way that individual prices never can be, or should, in perpetually changing conditions.
When gold was “money” it worked in much this way. The world’s total stock of it grew at roughly the rate of human economic activity, so that the total amount of it spent (and not worn or hoarded) did too, a given amount representing a roughly constant share of the total. Borrowers’ debts were not made unpayable in hard times, as they might be if equated (as by an index) to a basket of things that were unexpectedly scarce. Gold was pretty constantly so. Lenders were protected but also shared in unexpected real growth. We don’t know which it will now be, feast or famine, but stabilized total spending would work similarly in a recession. Fewer businesses would fail and consumers, the special wards of the mandate, would see their credit card rates fall, driven down by the Fed to maintain the total spending level.
The Fed was set up in 1913 to stabilize the banking system and provide an “elastic” currency that could expand and contract, but around a stable value, that of gold at the time. The task is newly-critical in the face of uncontrolled government spending. As to what that value should be, what better successor to gold than a share of consumption in the world’s largest economy? As to the mandate, Congress could hardly have meant to freeze the Fed in its headlights just as a recession loomed in the road up ahead.
David Patterson, Dpatterson@bganyc.com, www.brandytrust.com
"the baggage of overshoot promises?"
FAIT certainly allows a period of over target inflation that moves the PL trajectory above a previous trajectory if that is what is required to restore full employment after a shock -- that is guess is the "overshoot," but where is the "promise?"
"So how can the Fed implement a FIT that (1) responds to persistent, demand-driven deviations of inflation from target while ignoring supply shocks and (2) keeps long-term inflation expectations firmly anchored? A straightforward way to achieve this vision is to anchor the FIT regime to a stable growth path of total dollar spending."
Hypothetically. But how does a stable growth path of NGDP "respond persistent, demand-driven deviations of inflation from target? Does that not imply downward deviations in real GDP growth? And to inflation expectations remained anchored during FAIT with forward looking inflation (TIPS falling substantially below target only briefly). Why gamble on an untried policy?
Putting these two desires together implies that what FOMC really wants is a FIT framework that is “capable of correcting persistent demand-driven deviations of inflation from either side”
Does this imply that the Fed sees demand-side shocks (budget deficit shocks, what else?) as different, as not causing shifts in sectoral relative prices that need over target inflation to facilitate adjustment? Is that the inherent nature of demand-side shocks?
Deviations "from either side" would imply that the Fed would sometimes reduce inflation to less than 2% PCE.
How could this be optimal if 2% had been correctly chosen as the minimum inflation needed to allow relative prices to continuously adjust to "Brownian Movement" micro shocks? Why would this rate decline just because in some previous period inflation needed to be greater than 2%? What is the Fed trying to optimize with its inflation management? [As before, there is always a translation of any inflation targeting statement into an NGDP targeting statement.]
"The inflation target, in short, isn’t purely forward-looking, it retains a shadow of its recent history. That is remarkable!"
Remarkable, but under what kind of model would that maximize real income growth?
The 2025 statement quoted seems totally off base. "Flexible" ought to mean flexible to inflate enough restore full employment and then return to a forward looking 2% whether this is more or less than enough to restore the PL trajectory,
I’ve had two main objectives: (1) to urge the FOMC to adopt NGDP as a cross-check on their traditional economic indicators, and (2) to help ensure they don’t throw out the makeup policy baby with the FAIT bathwater.
It would have been better to urge retaining FIAT*, although Flexible NGDPLT could be the equivalent if the Fed cannot bring itself to say publicly that sometimes more than just "catch up" inflation is needed to allow full adjustment to economic shocks.
*The "A" of "FAIT" can be problematic if interpreted as a backward looking average.