A COLLEAGUE emailed me a Reuters story noting that, according to polling, the vast majority of Americans have no idea what quantitative easing is. This is a result I find neither surprising nor discouraging; surely the public has better things to do than learn about QE. At any rate, the colleague shared the story as part of an ongoing discussion about just how central bank expectations-setting works. I dashed off some thoughts back to him in an email, and I thought I may as well share them with the internet.
My sense is that what the Fed should do is target the trend path for a nominal variable that minimises the consumer experience “weak job market”. I think a nominal GDP level target accomplishes that. And once the Fed adopts that target the system will work as it does around any target. The Fed message will be intermediated by financial markets. Consumers will to some extent take their cues directly from financial markets and will to some extent take their cues from the reaction by sophisticated businesses to the reaction in financial markets.
That’s not to say that the system never relies on direct communication from Fed to household. It’s different for regime change events like Rooseveltian reflation or Volcker disinflation, when someone is basically shouting “expect higher (or lower) prices!”. My sense of what the Fed should do at this moment is shout “expect faster growth” for the benefit of households, and announce a target switch to NGDPLT complemented by QE for the benefit of financial markets.