The Independent Fed And NGDPLT

A Benjamin Cole post

“I agree that a credible NGDP level target would go a long ways in addressing this problem (of weak economic growth). I am, however, becoming less convinced the Fed could politically do something like NGDP level targeting….”

David Beckworth, Kentucky scholar and new podcaster, makes the fascinating statement above in the comments section of his excellent blog, Macro And Other Market Musings.

At first, Beckworth’s observation is something of a shoulder-shrug. Yes, the U.S. Federal Reserve Board operates within political limits.

Independent? What For?

But on second look, Beckworth’s comment is thought-provoking. Wait a minute—isn’t the Fed an independent agency?

Central bank independence, one of the most–gloried and cartouched escutcheons in the modern macroeconomics parade, is why the Fed does what is right, not bowing to short-term political demands, or so the story goes. No printing money around election time, for example.

But in watching the current presidential campaign antics, the question arises of what minute fraction of the voting population has the slightest idea of what is NGPDLT, or that the Fed has a 2% inflation target (on PCE no less), or that Janet Yellen is the Fed Chair?

Frankly, it does not seem likely that if the Fed switched the NGDPLT that the vast public would know, and if they did know, would care.

Even the perennial tight-money crackpots have been fading into the background, having cried wolf a few thousand times too many, most notably and loudly after 2008.

So who would take umbrage of Fed switch to a NGDPLT policy? A few academics and eccentric radio talk-show loonies?


More probably the Fed, or Fed staffers truly believe that keeping inflation as measured by the PCE under 2% is the only way to conduct monetary policy. Abundant Fed literature shows no embrace of NGDPLT. The vast sea of Fed Phd’s (in sinecures) appear comfortable with recent macroeconomic results, as does the FOMC, while lurking inflation is ever the potent bogeyman in Fed reports and regional bank websites.

The most recent Fed-bash in Jackson Hole featured four panels, all on inflation, and no other panels. This monomania on inflation exists in a prolonged era of microscopic inflation rates, but weak economic growth.

Marcus Nunes has documented that central banks often appear dissolute and chronically ineffective when faced with serious economic contractions. The short story may be the U.S. got out of the Great Depression, but only thanks to WWII, which forced Fed accommodation. That accommodation extended through the worst of the Cold War, and into the late 1960s.

But in the decades since, that concept of central bank independence has become enshrined high in the pantheon of macroeconomic totems, and other nations and regions, such as Europe and Japan have adopted similar institutions. There is a book out, “The Rise of the People’s Bank of China,” that suggests the PBOC is able to muster a degree of independence in recent years, as the Chinese Communist Party, like pols everywhere, is uncertain as to the intricacies of financial systems and central banking and so defers to the PBOC.

It is worth noting that in recent years Chinese inflation and growth rates have slowed.


More likely, it is not political constraints but rather central bank independence and ossification that is a barrier to the Fed adopting NGDPLT, or even to merely tilt to the growth side of policy-making, through more QE, or lower interest on excess reserves.

The Fed is independent and that is the problem.


One thought on “The Independent Fed And NGDPLT

  1. I agree with you about Fed “independence” being a problem. But then I worry that if that independence gets curtailed that it could very well end up being curtailed in the wrong direction. You and I want the Fed to pursue NGDPLT rather than inflation targeting, and would be happy if that direction was imposed on the Fed. But are the chances that restricting Fed independence would result in a move towards NGDPLT greater than the chance that the Fed would be ordered away from that? I don’t know.

    Btw, NGDPLT is such an awkward name for a policy. I doubt that 5% of people know what it means,. Everyone knows what inflation targeting is, or at least they think they do. Can’t you guys come up with something better sounding? Maybe Income level targeting? It would be a lot easier to get support for a Level Income Target that called for income to be targeted for increases of 5%. Who in the general public could really be against that? If someone said they supported the Fed adopting an Income Growth Level Target of say 5%, is that significantly different from NGDPLT of 5%?

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