The Fed should be concerned exclusively with nominal stability

Larry Kudlow writes:

As for rules and the Fed, there are a bunch of proposals out there: There’s the inflation-fighting Taylor rule, which seemed to work in the 1980s and ’90s. There’s a gold-commodity-King Dollar price rule (which I favor) that also worked in the ’80s and ’90s. There’s the new-monetarist nominal-GDP-growth rule, although the trouble here is that velocity keeps falling and money GDP has gone nowhere. Alan Greenspan (!) is actually telling people that gold is the only true currency. And Professor Taylor himself is suggesting that the Fed could create its own rule, any rule, but would have to answer to Congress if it ever went off it.

At the end of the day, the economic incentives from lower tax rates and regulatory burdens are the right levers to promote faster growth. And central banks should focus on sound currencies and price stability.

Looking at a renewed King Dollar and low U.S. inflation, the Fed seems to have done its job. So either 1) it’s a miracle or 2) the Fed actually knows what it’s doing.

There’s the new-monetarist nominal-GDP-growth rule, although the trouble here is that velocity keeps falling and money GDP has gone nowhere”.

It´s no “trouble”. It´s exactly what indicates that the Fed is not pursuing an NGDP level target rule, because that would entail offsetting velocity changes!

“King dollar and low inflation is neither a miracle nor indicates the Fed knows what it´s doing.

King dollar derives from higher relative US growth and the prospect of rising US interest rates (when others are turning them negative). And the Fed does not know what it´s doing because it has fallen short of its 2% target from the get go in January 2012!

The chart provides a good illustration of where the Fed is failing:

Fed Fails

It has now obtained nominal stability but at the wrong (too low) LEVEL!

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