A French assessment of NGDP Targeting misses the point

A James Alexander post  

A few days ago we contrasted the bad news of Draghi disappointing markets after the December ECB Board meeting with the good news of the growing debate on NGDP Targeting in the Europe. We noted that the Committee on Economic and Monetary Affairs of the European Parliament held a session on NGDP Targeting. One of the papers they commissioned was very positive, while the other two were somewhat critical of the idea. It is worth taking a look at the work of the sceptics in turn.

A view from France:

The French paper was by three academics, Christophe BLOT, Jérôme CREEL and Xavier RAGOT, from the influential OFCE/Science Po in Paris.

The paper starts with a review of the literature on Inflation Targeting and says things went well until the crisis. A caveat they mention is that since both IT regimes and non-IT regimes did well in bringing down inflation it is really too hard to tell if IT was all that superior.

We think it is also very hard to tell apart exactly what regimes are doing from what they say they are doing. The paper says that:

The Bank of England is, for example, a “pure” inflation targeter, whereas [the] ECB has not adopted this regime, although with its price stability objective, it is close to [it].

The evidence would surely suggest that the BoE was actually pretty flexible in all but the last 18 months or so, and in fact its Deputy Governor for Monetary Policy showed recently the UK central bank was actually targeting RGDP in its interest rate decisions. Very confusing.

To be fair the French authors cite:

[T]he outcome of Creel and Hubert (2015) [that] suggests that inflation targeting countries which have adopted the IT framework have not over-emphasize[d] inflation deviations from target like “inflation nutters” to take the words of King (1997).

Ironically, Mervyn King was probably a “nutter”, but not an “inflation nutter”. He became so obsessed with not being seen to bail out banks in the crisis that he ignored both high headline inflation (good) and collapsing nominal growth expectations (tragic).

If anyone should be labelled an “inflation nutter” it should probably be Jean-Claude Trichet. He was the ECB President who aggressively raised rates in both 2008 and 2011, unique among major central banks. These moves condemned the Euro Area to the most prolonged, double-dip, recession of any major monetary area. The authors seem to have missed this, but then so have most  mainstream European macroeconomists, for the moment.

To be fair again, the authors do at least address criticism of IT and do ask the right question:

The advent of the global financial crisis has certainly revived criticism against IT. Contrary to what had been long taken for granted (see Blot et al., 2015), the objective of price stability has not showed a unique relationship with financial stability. Stated differently, price stability has not produced financial stability.

A slight understatement there, the lack of a “unique relationship”.

Frappa and Mésonnier (2010) have notably suggested that house prices increases have been higher for countries adopting IT regimes than for non-IT countries.

Is this the authors´ only criterion for financial stability, house price increases?  Then they go on:

Does this mean that IT has been responsible for the crisis? The empirical literature discussed above shows that the performance of IT countries has not been worse than non-IT countries. In this respect, IT would not be a specific “perpetrator” of the crisis (see the introduction of Reichlin and Baldwin, 2013). Moreover, the anchoring of expectations that IT or IT-like monetary policies (e.g. ECB policies) have performed has been unanimously praised (Gillitzer and Simon, 2015). Finally, Fazio et al. (2015) suggest that banks in countries which have adopted IT regime are more stable and seem to be less vulnerable to global liquidity shocks.

This rather strange result appears to be because Fazio et al seem to be judging IT on its success in not creating bubbles rather than creating crashes. Fazio et al is therefore like the authors who think the crisis was, at least partly, caused by house price bubbles. There seems to have been no consideration of obsession with inflation, “à la Trichet”, causing tough monetary tightening at just the moments it needed to be loosened. It seems to have been ruled out a priori.

In fact, both IT and the ECB have been “unanimously praised” for anchoring inflation expectations, and only judged on this. Moreover, it is probably true. However, this judgement ignores that it’s been a very heavy anchor, dragging down the ship of the economy into double-dip recession. And now, in any case, actually de-anchoring those expectations on the downside.

With these searing experiences within the Euro Area over the last seven years, the authors rather incredibly, claim that:

IT regimes have generally not overlooked output performance (and notably the output gap) either because such a variable can be seen as a leading indicator of future inflation or because central bankers also care about growth and employment performance and consider that monetary policy may help to stabilize the output, at least in the short term.

And so there is no need to formally adopt NGDP Targeting since they already do it informally.

“There’s none so blind as them that can’t see”, as we say in Northern England.

The paper then lists three arguments for NGDP Targeting:

  1. It allows for an immediate monetary stimulus in the current deflationary environment.
  2. It is good at coping with supply shocks, like productivity improvements, if the real effect were more important than the inflation effect.
  3. It would help prevent crises caused by rising debt to gdp ratios in a deflationary environment.

There is a bit more to NGDP Targeting than these points, but we will let that be for now.

The paper then lists five drawbacks of NGDP Targeting. We summarise and reply.

  1. It is close to flexible inflation-targeting, so not necessary.

The problem with flexible inflation-targeting is that it allows too much discretion, and trusts central bankers are sagacious enough not to be distracted by volatile inflation, something in which the ECB miserably failed.

  1. Level-targeting would create confusion if rational expectations were not shared by the central bank and the public.

The public only really want stability of nominal growth. They don’t really understand inflation. Even if they can sense prices rising in certain parts of their shopping basket they struggle with the total figure and they and statisticians struggle with actual rents, imputed rents, hedonic adjustments, changes in mix and the price of services, to name just six very tricky areas. CPI just isn’t an easy concept at all. They especially don’t understand real growth.

But money illusion is real. The public understands nominal growth in income, and rightly fear job losses when nominal growth goes negative. That is the most important point of all: central banks must prevent too slow or negative nominal growth. All else is noise. And we just have to assume central banks will be rational in future when they have a proper plan like NGDP Targeting, even if in the past they have caused massive damage with their discretionary monetary policies.

  1. Nominal GDP has no tangible content for the public whereas the CPI does. And NGDP is revised constantly, too.

NGDP is measured in three ways, output, expenditure and income, and they equal each other. The public certainly understands nominal income, their take home wage packet and how it grows. Obviously, the output method is more difficult to understand but that is irrelevant, it’s just another way of  accounting for the same thing.

The NGDP revisions criticism is a red herring, partly as bygones are always bygones, partly because the key point of Market Monetarism is to work on expectations of NGDP growth, not the rear-view mirror numbers – just like the central banks claim they work with CPI expectations more than the rear-view numbers. The fact that many countries CPI numbers are not revised means they are not proper economic statistics and therefore an unreliable record of the past and should not be targeted in the future either. No proper macro economic statistics can be perfect first time. The fact that the GDP Deflator gets revised means it is a far more reliable piece of data than CPI.

4 . The composition of NGDP between inflation and real growth may be a social target and not to be set by the market. [I think this is what the authors mean.]

The only answer is, yes, governments may well want to try and alter this balance through fiscal or other policy. But they would surely have just as much of a challenge as doing it via management of CPI and RGDP separately.

  1. Central banks should not only look at monetary stability but financial stability.

This is not an argument against NGDP Targeting per se, but against any pure focus on monetary policy.  Some NGDP Targeters argue for completely separating monetary policy from marco-prudential policy, others see this as impossible. It doesn’t make NGDP Targeting any less plausible.

The authors then run a model that shows that flexible inflation-targeting worked as well as NGDP Targeting. It should be expected that perfectly operated Flexible IT would work well, but it rather begs the question about practice. The problem isn’t so much with the theory of Flexible IT but the practice.

Still, it’s good the authors have addressed the issues if not covered themselves in glory in their analysis. Especially lacking is a long, hard self-examination of the ECB in its own IT regime in practice in 2008 and 2011.

Not surprising that Bullard is surprised!

Apparently, Janet Yellen is a strong leader:

The leader of the Federal Reserve is often described as among the most powerful people in the world. But in late summer, as the Fed weighed whether to raise interest rates for the first time in nearly a decade, Yellen found herself outnumbered.

Yellen wanted to wait. The wild swings in global financial markets over the summer were potentially bad omens for China’s economy — which in turn could drag down America, she feared. But her colleagues were not as worried. A slim majority of the 17 people who make up the central bank’s top brass was willing to start pulling back the Fed’s support for the recovery in September.

One of those was certainly Bullard:

One of the most vocal officials has been St. Louis Fed President James Bullard. He often pushes the envelope of debate at the central bank, and he is the last top official to speak before the Fed’s big decision. In an interview with The Washington Post, he said not raising rates in September was a “mistake” and that the U.S. economy could be ready to take off.


WP: When you review the last seven years that the crisis occurred and the actions that the Fed has taken since then, would it ever have entered your imagination in, say, 2007 that the Fed ever would provide as much stimulus as it did for the economy?

Bullard: No, I would not in 2007 — certainly not in 2007, or even 2008 or 2009 — think that we would be in the position that we’re in today. Historically, when you had big shocks, you also had a period of bounce back that was stronger than what we actually got here. I certainly did not predict that things would linger this long, seven years later. I think that’s been the major surprise in the aftermath of the big crisis.

Bullard never imagines that this time around there was no “bounce back” simply because he (and his colleagues) didn´t want one!

First, see the drop and timid rise in NGDP compared to the two previous cycles

Janet Leader_1

Given sticky nominal wages, the wage/NGDP ratio rises strongly and falls slowly

Janet Leader_2

Explaining the much weaker rise in employment

Janet Leader_3

Why, one could ask, did employment rise much less robustly in the 2001 cycle than in the 1990 cycle, given that NGDP (and wage/NGDP) behaved similarly?

The reason is mostly due to the 2001 recession being a “productivity rich” recession.

Janet Leader_4

HT Kevin Tryon, James Alexander

At least Bernanke gets the grade order right

In a long interview with Freakonomics, Bernanke has the chance to self-grade:

DUBNER: Alright, so if you’re going to give yourself a letter grade for before and after, what are your letter grades?

BERNANKE: C- and A-, something like that.  But I don’t — it’s really not up to me.  I think that, you know, others have to make those judgments.  In the end, we did stabilize the system and the economy has recovered.  And the U.S. recovery, while not everything we would like, has been pretty good compared to other industrial countries.

He´s too easy on himself. He started bungling from day 1 at the job. The errors quickly accumulated, giving rise to “Great Recession”. So that´s not a C-, but a big F.

I think George Selgin would do the same. From his review of Bernanke´s The Courage to Act, we read:

…a central bank that allows the overall volume of spending to collapse has blown it, no matter how much emergency lending it undertakes…

Given his failing grade in the “first exam”, he should have strived for an A+ in the “second exam”. But no, he managed at best a C-. So overall, he failed BIG!  It appears Yellen wants to compound on the mistakes!

Give the Fed a new compass. We´re going in the wrong direction

According to the news:

Friday’s employment report clears the way for the Federal Reserve to raise short-term interest rates by a quarter-percentage point at its Dec. 15-16 policy meeting, ending seven years of near-zero interest rates.

The Fed can reasonably well control nominal spending (NGDP) growth. Stable NGDP growth at the appropriate level well defines what good monetary policy is supposed to look like.

If that´s true, when NGDP growth falters, things like employment growth will register the “punch”, just as it will “blossom” when monetary policy pulls NGDP growth up. Stable NGDP growth goes hand-in-hand with stable employment growth (only thing is if NGDP level falls short, so will the level of employment)

Examples from the mid-1990s and early 2000s show the Greenspan years. For the last ten years, we have been under Bernanke and Yellen. The pictures are illustrative. (The montlhy NGDP numbers come from Macroeconomic Advisers)

Throughout the period, inflation was not a problem. By the mid-1990s, it had reached the “low and stable” target of the time. Ironically, after the numerical 2% target was set in January 2012, inflation has languished, but is still “low and stable”!

Employ Report 11-15_1

Employ Report 11-15_2

But if you zoom in on the past 15 months, things seem “fishy”. For all the Fed´s “communication”, the truth is that they have been tightening policy. NGDP growth is coming down which was shortly followed by decreasing employment growth. Won´t even mention inflation.

Employ Report 11-15_3

To wrap up, where´s the much touted wage growth-inflation nexus so cherished by some at the FOMC?

Employ Report 11-15_4

Great harm might be on the way!

PS If you don´t believe me about the “beauty” of stable nominal spending, believe George Selgin:

a central bank that allows the overall volume of spending to collapse has blown it, no matter how much emergency lending it undertakes.  Indeed, to the extent that a central bank engages in emergency lending while failing to preserve aggregate spending, it may be guilty of compounding the damage attributable to the collapse of spending itself with that attributable to a misallocation of scarce resources in favor of irresponsibly-managed firms.

The communications “conundrum”

This report dealt with yesterday´s ECB “surprise” – Draghi’s Weeks of Rhetoric Culminate in ECB Stumble on Stimulus. Concluding:

Draghi isn’t alone among central bankers struggling to convey their message. Bank of England Governor Mark Carney was labeled an “unreliable boyfriend” by a U.K. lawmaker last year after he first told investors they were behind the curve, then two weeks later said there was more spare capacity in the labor market than thought.

Yellen has faced criticism this year for holding off on a decision to imposing the Fed’s first rate increases since the financial crisis, contrary to previous signals.

Draghi, who has successfully introduced multiple measures in the face of opposition from politicians and policy makers, may now have to work to repair his reputation among investors who once lauded him as “Super Mario.”

Contrast that with Greenspan´s very “clear” communication “strategy”:

“I know you think you understand what you thought I said but I’m not sure you realize that what you heard is not what I meant”

What this implies is that “communication” does not matter very much. What really matters is that there´s a generalized expectation that monetary policy will continue to be “good”, meaning that expectations of continued future Nominal Stability (at an adequate level of spending) is pervasive!

More rays of light in the Euro Area

A James Alexander post

In a few decades, if the European monetary union experiment has failed, the gravestone will be marked with the utterly depressing and anti-stimulative inflation objective of “Below, but close to, two percent”.

You just knew the press conference after the ECB meeting this week was going to go badly when Draghi intoned the dreaded six words in the second paragraph of his opening statement. This was a record for the year in fact. My analysis shows that normally it is in the third paragraph, and at the last two press conferences it was rather excitingly relegated to the sixth and seventh paragraphs. There can be no convincing recovery in the Euro Area while there is an inflation ceiling like this.

Scott Sumner has already opined on the undoubted tightening of monetary policy today as markets reacted negatively: the Euro currency strengthened and stocks fell. He also correctly points out that expectations were running high.

However, the data from the rear view mirror isn’t too bad if you look at base money or NGDP growth. Draghi pointed out the strong growth of M1 at 11% before launching into the newer central bank creed of creditism. Loans were much cheaper, following bond yields down.

Of course, true success for his monetary easing would be bond yields rising. Ironically, on the day yields did rise. But this was more due to the disappointment of no additional QE bond buying rather than any additional hopes for a recovery. A sort of reverse liquidity effect (ie bonds had been overbought and fell back in price) rather than any Fisher effect (where higher nominal growth expectations cut the real return on bonds and their prices fall).

A growing debate on changing the mandate of the ECB

I am still looking for silver linings and was very interested to see this policy report from a pro-European think tank, the Centre for European Reform, with a very heavyweight Advisory Board of VSPs. The author, Christian Odendahl, recommends ending national monetary influences in the ECB Board – a great idea and one we alluded to recently. But even more he recommends investigating targeting a higher inflation rate, a level target and even Aggregate Demand.

A stable level of demand is crucially important in a monetary union, as excessively low demand can lead to regional depressions and soaring debt, destabilising the whole union in the process. The European Central Bank (ECB) has failed to maintain the necessary level of demand and inflation during the course of the eurozone crisis, and needs a stronger mandate to prevent this from happening in the future. Such a mandate should include a higher and symmetrical inflation target, as well as the explicit responsibility for maintaining an adequate level of demand. National central banks should no longer be involved in eurozone monetary policy, since they tend to politicise decisions along national lines.

Ideally, therefore, the ECB should be given a more robust and activist mandate to manage demand.

This mandate should include:

« A higher inflation target of 3 per cent so that interest rates can be lowered more in the event of a crisis.18

« An explicit commitment that this target be symmetrical, so that undershooting and overshooting the target are of equal concern.

« A provision to take overall demand into account, rather than just inflation. In 2011, for example, inflation rose but demand was weak – and the ECB made the wrong decision to raise interest rates, which weakened demand further. In such a situation, preference should not be given to inflation.

Odendahl also included a great, Marcus Nunes-style chart showing the colossal failure of the ECB to properly manage Aggregate Demand, aka Nominal GDP.

JA Draghi-1

Odendahl referred readers to the recent European Parliament hearing on NGDP Targeting. A draft of just one of the papers had found its way onto various blog sites but the link shows there were in fact three papers presented. I have reproduced all three abstracts of the final papers.

It is both fascinating and hopeful that academics from leading German, French and British economics departments were represented even if only one (can you guess which?) was clearly in favour. The two others were sympathetic but did go off on some strange tangents. One favoured flexible inflation targeting and thought NGDP  targeting wouldn’t help central banks with their central problem of “financial stability”. The third  favoured a complex amendment to the Taylor Rule.

Is nominal GDP targeting a suitable tool for the ECB’s monetary policy? 

We seek to clarify whether or not nominal GDP targeting (NGDP) may be a suitable tool for the ECB’s monetary policy. We argue that this question really consists of three distinct but related questions: (1) Is it better for the ECB to put more weight on output than it does currently, by switching to a NGDP target? (The theoretical evidence suggests, maybe, but this depends on the distortions faced by the economy.) (2) Should a NGDP (or inflation) target be formulated in rates of growth, or in levels? (The theoretical evidence suggests that a levels target may have some appealing properties, by stabilizing expectations.) (3) What technical issues remain to be addressed? (Issues include the selection of an operating instrument, difficulties in estimating trends, data revisions, and communication.) Altogether, we argue that thinking about nominal GDP targeting in this way might help to clarify what is otherwise a confusing debate.

(Wolfgang LECHTHALER, Kiel Institute for the World Economy; Claire A. REICHER, Kiel Institute for the World Economy; Mewael F. TESFASELASSIE, Kiel Institute for the World Economy)

Flexible inflation targeting vs. nominal GDP targeting in the euro area 

We assess the pros and cons of nominal GDP targeting vis-à-vis flexible inflation targeting regime. We show that the benefit of a regime shift towards nominal GDP targeting in the euro area might be small. Moreover, nominal GDP targeting is not concerned with financial stability. Finally, targeting nominal GDP would make ECB communication very difficult. If the aim of a regime shift were to bring the ECB to pay more attention to growth, it would be more straightforward to fix a dual mandate and to set an explicit target for real output growth or the unemployment rate.

(Christophe BLOT, OFCE/Sciences Po; Jérôme CREEL, OFCE/Sciences Po and ESCP Europe; Xavier RAGOT, OFCE/Sciences Po, CNRS and PSE)

Is Nominal GDP targeting a suitable tool for ECB monetary policy? 

The idea of targeting smooth growth for nominal income (GDP), as an alternative to the conventional Taylor or inflation targeting rules for setting monetary policy, has been in discussion for many years. But they have never been used in practice. In this paper we review the pros and cons of adopting such an approach, and find them to be rather finely balanced. To dig deeper, we consider certain particular features of nominal income targeting: the crucial role of supply side responsive- ness (nominal income targeting substitutes for poor responses or a lack of market or structural reform); the need to bring market forces into play; the question of whether income targeting increases discipline; and the extra constraints imposed by having a dual mandate. The upshot is that nominal income targeting emerges as a special case of the more flexible Taylor rule formulation, although it does generalise on pure inflation targeting. In practice the Taylor rule form may be improved by using time varying, state contingent coefficients. De facto, this is what the ECB has done in recent years. The simulation studies available suggest that the more flexible rules of this kind perform better in reducing the fluctuations of output and inflation away from target; and are, crucially, more robust to model uncertainty (important for design) and real-time data/information errors (important in implementation).

(Andrew HUGHES HALLETT, School of Economics and Finance, University of St Andrews, Scotland)


Janet´s occasionally funny non-sequiturs

From her speech today at The Economic Club of Washington, DC:

N.S. 1Continuing improvement in the labor market helps strengthen confidence that inflation will move back to our 2 percent objective over the medium term.”

But inflation has been moving away from the target, despite falling unemployment!

N.S. 2 The Fed has held its benchmark federal-funds rate near zero for seven years. When it raises the rate, it will be a sign that the economy has “come a long way” toward recovering from the 2007-09 financial crisis. In that sense, it is a day that I expect we all are looking forward to.”

Five years ago, the economy had already recovered from the financial crisis. Why did the Fed wait so long to “tell us”? Maybe only now they got tired of their “extended vacation”.

N.S. 3 Were the [Fed] to delay the start of policy normalization for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals”. “Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession.”

That´s exactly what the Fed has been doing, inadvertently, over the past year by indicating “the time is coming”!

N.S. 4 “I anticipate that the neutral federal funds rate will gradually move higher over time.” “In September, most [Fed officials] projected that, in the long run, the nominal federal funds rate would be near 3.5 percent, and that the actual federal funds rate would rise to that level fairly slowly.”

That´s just misplaced faith. By their actions, the Fed is likely stifling the rise in the neutral FF rate.

PS The power of words: Yellen talks and the DOW tumbles

Non sequiturs

Switzerland goes to negative NGDP growth: it won’t end well

A James Alexander post

With no one to blame but itself, Switzerland has slipped into negative YoY NGDP growth in the third quarter 2015.

The credibility-busting move of  the hard money chief of the Swiss National Bank, Thomas Jordan, to abandon the ceiling vs the Euro in January led to a dramatic and mostly sustained currency appreciation.

One of the purported reasons was that the size of the SNB balance sheet had expanded too fast and got too large relative to Swiss GDP. Actually, the balance sheet hadn’t risen, or at least there had been no further EUR purchases, since the hard-fought battle to win credibility for the ceiling back in 2011 and again in early 2012.

There were also rumours of mysterious pressure on the SNB from some of the regional cantonal governments who supposedly relied on dividends from the central bank to support their budgets. The depreciation of the Swiss Franc had led to paper losses and suspension of the dividend. We will have to wait until later in 2016 for the 2015 accounts to see if the SNB is back making paper profits and paying a dividend.

On the abolition of the ceiling, the surge in the Swiss Franc was only controlled by further money creation. The balance sheet rose even further. We now have another quarter of data and see that these FX reserves are still climbing, as is the SNB balance sheet as the currency floats dirtily. Well done the SNB.

JA Swiss_1

The third reason Jordan seemed to give was that he just couldn’t stomach further depreciation vs non-Euro currencies.  For sure, as the Euro rose and fell relative to other countries so did the Swiss Franc.

Whatever the reason he’s ensured hard money and the currency has been stronger that it would otherwise have been. The evidence of further FX purchases comes from the fact that the SNB is still intervening to hold back the currency from even stronger appreciation.

Monetary tightening impacts Nominal GDP and thus Real GDP

And what is this tight money policy doing to the economy? The markets (and thus Market Monetarists) predicted it would lead to weak NGDP growth and that this would drag down RGDP. This is precisely what has happened with NGDP now in actual decline. Well done the SNB.

JA Swiss_2

We’ve already commented  on how weird it is that some people think this deflation is welcome. The Swiss don’t think so themselves.

And declining nominal GDP can only be a bad thing for wages and for unemployment too. This UBS 2016 Swiss Compensation Survey has some fascinating charts, almost all highly supportive of the basic theory at the heart of Market Monetarism, low (or negative) expected Nominal  GDP growth is a really bad thing given downwardly sticky wages. It sometimes feels as if it is the only useful insight of macro-economics.

You have to ignore the foolishly optimistic notion that Swiss workers will be enjoying their “high real wages” as their job security collapses. I say “nearly all” the charts are supportive as there is some room to reduce the bonus element of total compensation (Slide 15). And don’t forget Swiss unemployment is also impressively low by international standards, even if it is rising (Slide 7).

JA Swiss_3

JA Swiss_4

JA Swiss_5

Implication of Lael Brainard´s conclusions

Much like she did before the last FOMC meeting, Lael Brainard advises caution, concluding:

A variety of evidence suggests that the longer-run neutral rate is lower now than it has been historically, and that the very low shorter-run neutral rate may adjust to it very slowly, due to a combination of weaker foreign demand growth, greater risk sensitivity as a result of the crisis, higher risk premiums for productive investment, and lower growth in potential output.

The lower neutral rate means the normalization of the federal funds rate is likely to follow a more gradual and shallower path than in previous cycles, although the actual path will be determined by economic conditions.

It also implies that the likelihood of the federal funds rate hitting the zero lower bound will be persistently greater than it has been previously, which could make it more difficult to achieve our objectives of full employment and 2 percent inflation. With the nominal neutral interest rate lower than in the past, and with policy options being more limited if conditions deteriorate than if inflationary pressures accelerate, the asymmetry in risk-management considerations counsels a cautious and gradual approach.

If she listened to herself, she would conclude that what needs “normalization” is not the federal funds rate but the level and growth rate of nominal spending (NGDP).