Long and Variable Lags

A Benjamin Cole post

There is a great escutcheon carried by the tight-money crowd, that actions taken by central banks have “long and variable lags.”  Behind this shield, the tighties always see inflation as a threat on the horizon, and thus always central banks should be tighter. As no one can with certainty project prices two years out, there is always a measure of plausibility in “inflationary threats,” and thus always a case for tightening.

So, let’s look back two years.

Then, as now, the U.S. Federal Reserve had an inflation target of 2% on the PCE deflator, and that is an average. On paper, the Fed should be targeting inflation in the 1.5% to 2.5% range.

So what did the Federal Open Market Committee say two years ago—that is, a long and variable lag ago—about inflation?

They said: “The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.”

At that time the Fed was engaged in quantitative easing. But the Fed announced it would scale back QE, known as tapering, the start of tightening up monetary policy.  Yes, the Fed was below IT, but it would tighten policy. “Beginning in January, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month.” Of course, the Fed phased out QE in October 2014.


The Fed undershot its IT. The PCE deflator as of September 2015 is running at 0.2% above year ago levels, and 1.3% on the PCE core. However, both PCE measures include housing, the supply of which is restricted at local levels through property zoning. Thanks to insights of blogger Kevin Erdmann and others, a very game question is how a central bank can keep inflation (as measured) at microscopic levels and yet support robust growth.  It may be a null set.

And Now?

The Fed is presently predicting 2% PCE inflation will be obtained in 2018. And yet at any gathering of central bankers, we see Topic A through Topic Z is inflation—as we saw at the recent Jackson Hole confab, in which six panels addressed the topic of inflation. There were no other panels. It was literally a monomania.

The far more important topic or how to support robust economic growth is still off the central banker agenda.


The Fed remains unable to adjust to the modern economy, or to migrate to nominal GDP level targeting as a good policy choice. Even an IT band, say of 2% to 3%, is a bridge too far for the ossified Fed. Ever fearful of inflationary boogiemen hiding in thickets of long and variable lags, the Fed suffocates the national economy.

For Americans, the timid, dithering Fed translates into trillions of dollars of lost output every year, and greater political support for non-market safety valves for employees and others.

2 thoughts on “Long and Variable Lags

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.