Simple question:

Why should the Fed be frantically searching for the “natural” unemployment rate, which will only incite debate and discord, when it can much more easily find the “adequate” level of spending (NGDP), which is something that it can directly affect?

Meeting minutes from the Federal Reserve‘s late-June gathering suggested the debate over the future of monetary policy stimulus is being fought over what officials think is the true level of “natural” unemployment.

The rate in question isn’t one that can ever be definitively measured. Still, the idea is very important to economists and policy makers, because it is this level of joblessness that plays a starring role in driving inflation. Thus, it guides how stimulative or restrictive monetary policy might need to be.

9 thoughts on “Simple question:

  1. The Fed is following a policy—to generate as much uncertainty as possible in business and financial markets.

    Does anyone know what the Fed will do next? Not me.

  2. Your first sentence made me think of NGDP as adjusting the lens of a good camera to take away the blur. Lots of people don’t want that blur taken away!

  3. Yep, the debate about the NRU is a red herring fit only to get the hawks going again about the inflation bogeyman. Under the current policy regime increasing demand means increasing prices, which means more tightening, more opportunistic disinflation, leading to more market instability. There is no getting out of the trap without at least instituting a credible floor on policy, which has so far been elusive. I tend to violently agree with the folks who say that more QE won’t help, being of the opinion that until the policy reaction function changes, perhaps to NGDPLT, there will never be any meaningful relief for the unemployed.

    • DJ-If you haven´t yet, you should read this Keynes article from May 1932. He´s so frustrated by the mainstream thinking of the time that he believes that even if monetary policy gets on the right track from that point on it would not be enough to pull the economy out of the depression. Fiscal policy would have to come in aid!
      He was proved wrong because less than one year on FDRs delink from gold did the trick. NIRA was a ‘spoiler’, not a booster.

      • Keynes really nails the problem we face today with this:

        “With no financial leadership left in the world and profound intellectual error as to causes and cures prevailing in the responsible seats of power, one begins to wonder and to doubt. “

      • In my original comment, I meant that with the Fed conducting policy with a 2% PCE ceiling, if it did more QE, it would blow it when that ceiling is breached, making it an exercise in futility. I don’t expect it to do anything else given the mindset with which every other decision has been made over the last few years. The fact that the crisis of 2008 happened and NGDP was allowed to free fall until the end of 2009 is case in point for the kind of damage the FOMC will inflict upon the economy for the sake of “controlling inflation”. More QE won’t help until the inmates are no longer in control of asylum.

  4. Pingback: All Roads Lead to Market Monetarism – All of them « dajeeps

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