Only die-hards could have expected that the FOMC would drop the “CT” language at today´s meeting! It would have been inconsistent with the inflation report, which showed the headline CPI dropping and the Core rate unchanged over July.
The chart indicates that both measures of inflation have remained below target for the past two years. Although the likes of Plosser were “excited” about inflation moving towards target in recent months, the latest data show they are moving “south” once again!
The next chart shows that while a measure of inflation expectations moved up after QE3, for the past year they have remained pat and well below target.
On a related matter, this post by Matt Iglezias goes to the “heart of the matter” – “Obama’s biggest economic policy mistake”:
But as the country waits to hear the latest announcement from the Fed about how rapidly it will end its Quantitative Easing programs, we are witnessing the biggest mistake of Obama’s presidency: the systematic neglect of the Federal Reserve and of his ability to influence its course of action.
The viewpoint that there is nothing the Federal Reserve can do to boost the economy when short-term interest rates are already at zero, leaving deficit spending as the only effective stimulus option, is not believed by most experts. This particular combination of views is most closely associated with a somewhat marginal group of left-wing thinkers who describe themselves as modern monetary theorists. Except it’s also something that key Obama advisor Larry Summers believes, and the fact that Obama tried to install Summers as Fed Chair indicates that Obama believes it too.
This belief in monetary impotence likely explains why Obama is so lackadaisical about filling vacancies. He believes the Fed’s role in fighting a potential crisis is crucial, but the current team helmed by Yellen and Deputy Chair Stanley Fisher is up to that job. Bolstering the left flank on the FOMC so that Yellen’s consensus-building efforts would land in a more stimulative spot isn’t on the agenda. (HT David Levey)
Taken at face value, the rule suggests that it is time for the Fed to start raising the federal funds rate. If you believe this rule was reasonably good during the period of the Great Moderation, does this mean the Fed should start tightening now, as the economy gets back to normal?
Maybe, but not necessarily.
Update: Ricardo Reis writes to me the following useful observation:
There is another (related) argument for not raising rates now to offset shortfalls in the past. It is not about the interest rate. It is about the price level, the ultimate goal of monetary policy and measure of its performance.
A price-level target rule is optimal in normal times (Ball, Mankiw, and Reis) but is also an optimal policy in response to the dangers of the zero lower bound (Woodford). We have to catch up for the shortfall in the price level right now. And if you look at inflation expectations from surveys or markets, there seems to be no catch up expected, indicating that policy is still too tight.
Just substitute PLT for NGDP-LT!