According to David Altig:
What if, rather than some measure of nominal GDP, the 2004–06 Fed had instead been solely focused on the inflation rate? You can’t answer that question without operationalizing what it means to be “focused on the inflation rate,” but for the sake of argument let’s simply consider actual annualized PCE inflation over a two-year horizon. (In his press statementexplaining the Federal Open Market Committee’s (FOMC) latest decision, Fed Chairman Ben Bernanke suggested using a one- to two-year horizon for inflation forecasting horizon to smooth through purely transitory influences on inflation that the central bank would inclined to “look through.”) Here’s the record, with the period from 2004 through 2006 highlighted:
If you really do think that there was a policy mistake over the 2004–06 period—and in particular if you believe the FOMC during that should have adopted a more restrictive policy stance—I’m hard-pressed to see what advantage is offered by focusing on nominal GDP rather than inflation alone. In fact, you could argue that that the GDP part of the nominal GDP target would have added just about nothing to the discussion.
Lo and behold, Mr. Altig. Focusing on NGDP makes all the difference as an adaptation to your chart, including both the same calculation for the Core PCE and the estimate of the NGDP gap, indicates.
In the 2004-06 period monetary policy was “geared” to take nominal spending back to trend, which it succeeded in doing by the end of Greenspan´s tenure. The difference to Bernanke in 2007-08 was that Greenspan didn´t make monetary policy a “slave” of Headline inflation. By focusing on oil and commodity price increases in 2007-08 Bernanke “punched” nominal spending “right in the nose”. The “bleeding” was copious!