Bad framing by Bruce Bartlett

In today´s Fiscal Times, Bruce Bartlett has a piece with a catchy title: 7 Reasons the Fed Should Raise Interest Rates…

…and Still Keep Easy Money Flowing through the Economy

And after detailing his 7 reasons, he concludes:

So how is it possible to raise interest rates without tightening monetary policy? The answer is surprisingly simple – raise inflationary expectations. According to economic theory, lenders are mainly concerned about the real rate of interest – the market rate minus the expected rate of inflation over the life of a loan. If expectations of inflation rise, then interest rates should rise by the same rate.

The Fed can raise inflationary expectations just by saying that it intends to allow inflation to rise. If markets believe the Fed means it, they will react accordingly because they know that the Fed is the principal cause of inflation.

There are two main problems with instituting this simple policy change. First, there is very fierce resistance to higher inflation among members of the Federal Open Market Committee, the Fed’s policymaking arm. They will make it as difficult as possible for the Fed to explicitly raise its inflation target and sow as much doubt as possible in financial markets that it really means it, which will frustrate the goal of the policy.

Second, some economists have serious doubt as to whether the Fed is capable of raising inflation under current economic conditions even if it wants to. As we have seen over the last several years, even massive, unprecedented increases in the money supply have had no effect on inflation; indeed it has actually fallen. However, Federal Reserve Chairman Ben Bernanke has repeatedly dismissed this argument, saying the Fed has plenty of ammunition left.

In a future column I plan to explain why fears of future inflation are misplaced and why the risk of doing what I have suggested here is very small – well less than a policy of doing nothing and allowing our economic problems to fester.

Back in October 2011 Bruce Bartlett wrote and talked about NGDP targeting. In a CNBC interview at the time he criticized the Fed for “sitting on its hands” and argued it could spur aggregate demand if it adopted a nominal GDP level target.

I have no idea why he switched to talking about inflation expectations and how they have to be raised. The word inflation is a debate stopper and BB will never be able to assuage people´s fears of future inflation. He should have stuck to NGDP targeting, because that´s exactly what he means.

4 thoughts on “Bad framing by Bruce Bartlett

  1. Hey Marcus – are you going to sign Krugman’s manifesto?

    I’m waiting to see whether the market monetarists are signing — !

    They need to add an addendum all 5 of us can sign.

  2. “The word inflation is a debate stopper and BB will never be able to assuage people´s fears of future inflation.”

    I agree.

    I’ve spent the last couple of years reading market monetarist blogs & essays, and I still don’t understand Sumner when he says Bernanke means something different by the word “inflation” than the public does.

    By the way, I find the phrase “NGDP targeting” impossible to use in conversation. The letters “N” “G” “D” and “P” are practically a tongue twister.

    I’m starting to call it just “level targeting” when I talk about it with friends.

    I’ll see how that works out.

  3. I agree. At this point, with all of the inflation boogeyman fear-mongering by Fed regional presidents that has gone on, and all of the deceptive propaganda floating around, the only real way out of this PR debacle of a policy is to switch to NGDPLT. It doesn’t make any sense to continue on with explicit inflation targeting that has all sorts of political controversy around it when more monetary stimulus is needed. In that sense, it really just becomes more of a menace to society than anything helpful. Although, the idea Lars Christensen had for making an alternative TIPS target or use of the GDP deflator instead of PCE might help some without having to explicitly announce higher inflation as a policy.

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