Tomorrow we get another CPI. If it's good, as many expect, it would be the third month of core close to the pre-Covid pace. But the Fed is so busy looking in the mirror; it might not even notice.
That most Americans are consumers AND workers as you point out - and in particular, most are workers in non-white collar non-office settings, i.e. production & nonsupervisory - is such an important concept to keep in mind! I think many economists and policymakers struggle to grasp this both for theoretical reasons and also practical ones. I’d be curious if there’s anything written about it. It does seem to be central to the success of neoliberal anti-worker politics.
Claudia i miss you from Twitter but I completely understand your reasons for quitting. This is yet another exceptional article from you highlighting the trade offs that have been made.
Great piece Claudia! The point about Walmart is thought-provoking. Almost like the federal government subsidizes WMT by allowing it to pay below-living wages, while providing social services like Medicaid so WMT doesn’t have to 🤔
I’ve been wondering for a while what a single-payer HC system in the US would look like. The WMT/Medicaid point supports the view that it would actually be good for (non-HC) businesses’ bottom lines. After all, business owners and entrepreneurs would rather focus on running their business, not choosing a HC plan for employees. And if the government is paying, that is one less line item on their income statement, boosting their bottom line. Workers would benefit from not stressing over what plans to choose and paying medical bills. And generally I think HC costs would go down: if care was provided by the government, 1) it would save on marketing and other admin costs 2) it would benefit from huge economy of scale and 3) with no ownership, there wouldn’t be shareholders demanding a return on equity capital. All of this I would think would be structurally lower cost than our current system. Something to think about...
Higher inflation has made me feel really good about my fixed rate mortgage and that joyful feeling will only get better over the next 30 years. Higher interest rates have made me feel better about safe havens like bonds, annuities and savings accounts. While I know this is penny wise and a penny foolish thinking, as long as I have a job, I can fight inflation each day.
I largely agree with you but not for all the same reasons you may advocate. The Fed has lost its inflation credibility and is desperately seeking to regain it. So much so that it is blind to the other ramifications of its policies.
While low inflation is a nice goal, stable prices are more important than the absolute level of inflation. Stable prices are key to keeping markets functioning on a reasonable basis where prices today and 6 months down the road are relatively predictable. Low or negative inflation, as you have demonstrated, can be equally pernicious in the effects they have on markets and the economy. I have been a Volcker fan and inflation hawk most of my life-- but the single minded pursuit of inflation by the fed (by itself alone) is in my mind the single most destructive act to the economy. Inflation exists today for a multitude of reasons not just monetary policy in isolation. Inflation will persist because deglobalization, Ukraine War, Covid supply disruption and a pivot away from China. The Feds raising rates will not stop inflation but it will kill growth and employment and wage gains that are sorely needed to address the excess debt problem that we have. A wiser course of action would be to set a goal of getting inflation back under 2 percent in 5-6 years. This allows inflation to partially reduce the debt burden while we have both growth and robust employment and wages gains that give us the ability to put both our fiscal and monetary houses in order on a gradual, but committed basis.
The current course we are in of raising rates with unprecedented speed and to higher levels risks destabilizing international markets and l exchange rates and risks some unexpected contagion issue when a small segment of the economy can’t react fast enough to the changes and causes panic and mayhem which destabilize the economy.
Be the turtle, not the hare, slow and steady with absolute conviction wins the race.
All good points. I agree the mandate and goal of stable prices it to make inflation predictable. There's nothing magic about 2% though I think it would really hard to explain to people that the Fed wants a higher level like 3%/ I am not an advocate of the Fed changing its target now. I could make sense after we are back to 2% and then during a framework review.
Also true that the Fed can choose how quickly it gets back to 2%. I suspect that's the most contentious part of the debate inside the building. Some fear that the longer we stay above 2 the more likely we are to never get back to 2. Maybe but there are tradeoffs like the ones you pointed to.
Isn’t the risk of a central bank “allowing” inflation that it becomes entrenched and leads to price spirals (note I’m not using “wage price spiral”) across the economy?
I don't think we are at risk of price spirals, but the longer inflation is high the higher the chance that it gets stuck (embedded) above 2. That said, there are risks of being too aggressive in getting inflation down quickly. The Fed could unnecessarily weaken the economy. The Fed's job is to hit both sides of its mandate, not back and forth between the two.
Certainly, a central bank can’t admit it is going to “allow” inflation as a policy without some adverse consequences. And the Fed has already compromised itself and lacks full credibility here. Which makes it exceptionally difficult to tack to the strategy I advocated. Had the Fed properly read inflation and started earlier it’s rate rises could have been more modest but sustained and we could talk about other prolonged sources of inflation beyond monetary policy. Raising rates to crush demand in an effort to stop supply chain/deglobalization/Ukraine-Russia energy and food / and China pivot inflation is only a temporary solution unless we fix these problems--- otherwise they will return when demand returns. Instead, Fed should recognize the multiple drivers and acknowledge that rate alone can’t eliminate inflation so it will employ a slower, drawn out rate rise and pair it with fiscal restraint and other programs necessary to respond to the multiple drivers. What is the better answer long term? Powell can’t stop inflation without a punishing recession. Will he choose that route to get his credibility back?
My post is only pushing back on the idea that low inflation is only long-term benefits and no mention of the costs. Also the idea that stable prices are THE bedrock of the economy is absurd. It might be to the Fed, but the Fed is not ruler of all.
I never really understood what the nominal GDP targeting people are on about, but this made me think they may be right about one thing: if nominal GDP growth were much higher, high inflation would be much easier to stomach because of rising incomes.
I always get a little annoyed too when people think the central federal authority in charge of the economy is the fed. I'd love to see some analysis on the relative impacts of fiscal policy (broadly construed) on key economic outcomes so we can focus on where the important power actually lies: with state and federal legislatures and their executives.
When I say "broadly construed" I mean, more than just tax policy. Any case where congress or state legislatures affect how dollars are allocated, directly—through distribution and collection—and indirectly—through incentives and regulations.
I agree. It is too the detriment of our economy and people that my elite macroeconomist peers have focused so much on monetary policy. Fiscal policy is very strong and we need to know how to use strong tools wisely.
Social Security and Medicare are primary source of income for retirees. Both have cost-of-living adjustments. Retirees are the most protected from inflation. All that said, I’m not saying we should have high inflation. I want and think there’s a path back to 2%.
I'd have preferred to see an explanation of why the Fed SHOULD target inflation at the rate it has chosen and the costs of positive or negative deviations from the target as a way of asking whether right now how the Fed should be setting its policy instruments.
But I have to admit to not being a typical reader and know you can't please everybody. :)
I am not questioning the 2% inflation target my argument is that inflation is not the bedrock of the economy and low inflation has had costs to workers. We should admit there are trade offs.
FWIW, This is what I posted to my FB page with the link to the speech
"I will address three main points. First, the Federal Reserve's monetary policy independence is an important and broadly supported institutional arrangement that has served the American public well. Second, the Fed must continuously earn that independence by using our tools to achieve our assigned goals of maximum employment and price stability, and by providing transparency to facilitate understanding and effective oversight by the public and their elected representatives in Congress. Third, we should "stick to our knitting" and not wander off to pursue perceived social benefits that are not tightly linked to our statutory goals and authorities."
I do not disagree with any of the three theses, but I do disagree or find inadequate some of the exegesis of the first two.
“The case for monetary policy independence lies in the benefits of insulating monetary policy decisions from short-term political considerations.”
Yes central bank independence is beneficial, but less to prevent “political” interference than to fix the responsibility for the exercise of its mandates: price stability and maximum employment. Without independence, the Fed can shift the blame for deviations from price stability and maximum employment to political actors instead of its own analytical errors, which with any human institution will occur.
“Price stability is the bedrock of a healthy economy. ”
“Bedrock” or not, inflation that is too high OR too low has economic costs. I wish the Chairman had elaborated on those costs and how the Fed estimates them, in part because I suspect that the costs of too low inflation are often under-appreciated in relation to the costs of too high inflation, at least outside the Fed if not inside it.
“But restoring price stability when inflation is high can require measures that are not popular in the short term.”
This is a conceptual possibility, but in practice we have seen more political pressure on the Fed when inflation is low as it was in 2008-2020 and the Fed's failure to return it to target was entirely too popular.
“We are tightly focused on achieving our statutory mandate and on providing useful and appropriate transparency.”
I can think of at least two things to tighten this focus. A) Retrospective analyses. Based on developments since past decisions were made, has the Fed’s (presumably improving) understanding of the relation between its instruments and outcomes changed in a way that suggests that past decisions were erroneous? B) Additional data: The Fed could ask Treasury to create new securities whose trading would improve the Fed’s knowledge of market expectations with regard to inflation and GDP.
And the target probably _should_ be questioned. The target ought to depend on "structural" variables like degrees of absolute price flexibility and size and frequency of shocks that require changes in relative, ergo, absolute prices. If these have changed since the Bank of New Zealand came up with 2%, the Fed should change the target. Achieving a soft landing would be evidence that 2% is OK. A recession would suggest (though not prove definitively) that the target should be raised.
I agree. And I want the Fed to explain those tradeoffs, just how over AND undershooting the target (assuming the target is well chosen, which should also be explained) are harmful. I agree with you that rhetoric like "bedrock" implies more cost to overshooting than can be justified and that "political" pressure is always on the side of overshooting.
That most Americans are consumers AND workers as you point out - and in particular, most are workers in non-white collar non-office settings, i.e. production & nonsupervisory - is such an important concept to keep in mind! I think many economists and policymakers struggle to grasp this both for theoretical reasons and also practical ones. I’d be curious if there’s anything written about it. It does seem to be central to the success of neoliberal anti-worker politics.
Claudia i miss you from Twitter but I completely understand your reasons for quitting. This is yet another exceptional article from you highlighting the trade offs that have been made.
I put all my press on LinkedIn now https://www.linkedin.com/in/claudiasahm/ often with commentary. Not as rapid fire as Twitter but it's still me.
and thank you! for the kind words.
Great piece Claudia! The point about Walmart is thought-provoking. Almost like the federal government subsidizes WMT by allowing it to pay below-living wages, while providing social services like Medicaid so WMT doesn’t have to 🤔
I’ve been wondering for a while what a single-payer HC system in the US would look like. The WMT/Medicaid point supports the view that it would actually be good for (non-HC) businesses’ bottom lines. After all, business owners and entrepreneurs would rather focus on running their business, not choosing a HC plan for employees. And if the government is paying, that is one less line item on their income statement, boosting their bottom line. Workers would benefit from not stressing over what plans to choose and paying medical bills. And generally I think HC costs would go down: if care was provided by the government, 1) it would save on marketing and other admin costs 2) it would benefit from huge economy of scale and 3) with no ownership, there wouldn’t be shareholders demanding a return on equity capital. All of this I would think would be structurally lower cost than our current system. Something to think about...
Higher inflation has made me feel really good about my fixed rate mortgage and that joyful feeling will only get better over the next 30 years. Higher interest rates have made me feel better about safe havens like bonds, annuities and savings accounts. While I know this is penny wise and a penny foolish thinking, as long as I have a job, I can fight inflation each day.
I largely agree with you but not for all the same reasons you may advocate. The Fed has lost its inflation credibility and is desperately seeking to regain it. So much so that it is blind to the other ramifications of its policies.
While low inflation is a nice goal, stable prices are more important than the absolute level of inflation. Stable prices are key to keeping markets functioning on a reasonable basis where prices today and 6 months down the road are relatively predictable. Low or negative inflation, as you have demonstrated, can be equally pernicious in the effects they have on markets and the economy. I have been a Volcker fan and inflation hawk most of my life-- but the single minded pursuit of inflation by the fed (by itself alone) is in my mind the single most destructive act to the economy. Inflation exists today for a multitude of reasons not just monetary policy in isolation. Inflation will persist because deglobalization, Ukraine War, Covid supply disruption and a pivot away from China. The Feds raising rates will not stop inflation but it will kill growth and employment and wage gains that are sorely needed to address the excess debt problem that we have. A wiser course of action would be to set a goal of getting inflation back under 2 percent in 5-6 years. This allows inflation to partially reduce the debt burden while we have both growth and robust employment and wages gains that give us the ability to put both our fiscal and monetary houses in order on a gradual, but committed basis.
The current course we are in of raising rates with unprecedented speed and to higher levels risks destabilizing international markets and l exchange rates and risks some unexpected contagion issue when a small segment of the economy can’t react fast enough to the changes and causes panic and mayhem which destabilize the economy.
Be the turtle, not the hare, slow and steady with absolute conviction wins the race.
All good points. I agree the mandate and goal of stable prices it to make inflation predictable. There's nothing magic about 2% though I think it would really hard to explain to people that the Fed wants a higher level like 3%/ I am not an advocate of the Fed changing its target now. I could make sense after we are back to 2% and then during a framework review.
Also true that the Fed can choose how quickly it gets back to 2%. I suspect that's the most contentious part of the debate inside the building. Some fear that the longer we stay above 2 the more likely we are to never get back to 2. Maybe but there are tradeoffs like the ones you pointed to.
Isn’t the risk of a central bank “allowing” inflation that it becomes entrenched and leads to price spirals (note I’m not using “wage price spiral”) across the economy?
I don't think we are at risk of price spirals, but the longer inflation is high the higher the chance that it gets stuck (embedded) above 2. That said, there are risks of being too aggressive in getting inflation down quickly. The Fed could unnecessarily weaken the economy. The Fed's job is to hit both sides of its mandate, not back and forth between the two.
Certainly, a central bank can’t admit it is going to “allow” inflation as a policy without some adverse consequences. And the Fed has already compromised itself and lacks full credibility here. Which makes it exceptionally difficult to tack to the strategy I advocated. Had the Fed properly read inflation and started earlier it’s rate rises could have been more modest but sustained and we could talk about other prolonged sources of inflation beyond monetary policy. Raising rates to crush demand in an effort to stop supply chain/deglobalization/Ukraine-Russia energy and food / and China pivot inflation is only a temporary solution unless we fix these problems--- otherwise they will return when demand returns. Instead, Fed should recognize the multiple drivers and acknowledge that rate alone can’t eliminate inflation so it will employ a slower, drawn out rate rise and pair it with fiscal restraint and other programs necessary to respond to the multiple drivers. What is the better answer long term? Powell can’t stop inflation without a punishing recession. Will he choose that route to get his credibility back?
My post is only pushing back on the idea that low inflation is only long-term benefits and no mention of the costs. Also the idea that stable prices are THE bedrock of the economy is absurd. It might be to the Fed, but the Fed is not ruler of all.
I never really understood what the nominal GDP targeting people are on about, but this made me think they may be right about one thing: if nominal GDP growth were much higher, high inflation would be much easier to stomach because of rising incomes.
I always get a little annoyed too when people think the central federal authority in charge of the economy is the fed. I'd love to see some analysis on the relative impacts of fiscal policy (broadly construed) on key economic outcomes so we can focus on where the important power actually lies: with state and federal legislatures and their executives.
When I say "broadly construed" I mean, more than just tax policy. Any case where congress or state legislatures affect how dollars are allocated, directly—through distribution and collection—and indirectly—through incentives and regulations.
I agree. It is too the detriment of our economy and people that my elite macroeconomist peers have focused so much on monetary policy. Fiscal policy is very strong and we need to know how to use strong tools wisely.
Mr summers at it again!! From Davos, of course!! Please retort!
What about us retired, fixed income people?
Social Security and Medicare are primary source of income for retirees. Both have cost-of-living adjustments. Retirees are the most protected from inflation. All that said, I’m not saying we should have high inflation. I want and think there’s a path back to 2%.
I'd have preferred to see an explanation of why the Fed SHOULD target inflation at the rate it has chosen and the costs of positive or negative deviations from the target as a way of asking whether right now how the Fed should be setting its policy instruments.
But I have to admit to not being a typical reader and know you can't please everybody. :)
I am not questioning the 2% inflation target my argument is that inflation is not the bedrock of the economy and low inflation has had costs to workers. We should admit there are trade offs.
FWIW, This is what I posted to my FB page with the link to the speech
"I will address three main points. First, the Federal Reserve's monetary policy independence is an important and broadly supported institutional arrangement that has served the American public well. Second, the Fed must continuously earn that independence by using our tools to achieve our assigned goals of maximum employment and price stability, and by providing transparency to facilitate understanding and effective oversight by the public and their elected representatives in Congress. Third, we should "stick to our knitting" and not wander off to pursue perceived social benefits that are not tightly linked to our statutory goals and authorities."
I do not disagree with any of the three theses, but I do disagree or find inadequate some of the exegesis of the first two.
“The case for monetary policy independence lies in the benefits of insulating monetary policy decisions from short-term political considerations.”
Yes central bank independence is beneficial, but less to prevent “political” interference than to fix the responsibility for the exercise of its mandates: price stability and maximum employment. Without independence, the Fed can shift the blame for deviations from price stability and maximum employment to political actors instead of its own analytical errors, which with any human institution will occur.
“Price stability is the bedrock of a healthy economy. ”
“Bedrock” or not, inflation that is too high OR too low has economic costs. I wish the Chairman had elaborated on those costs and how the Fed estimates them, in part because I suspect that the costs of too low inflation are often under-appreciated in relation to the costs of too high inflation, at least outside the Fed if not inside it.
“But restoring price stability when inflation is high can require measures that are not popular in the short term.”
This is a conceptual possibility, but in practice we have seen more political pressure on the Fed when inflation is low as it was in 2008-2020 and the Fed's failure to return it to target was entirely too popular.
“We are tightly focused on achieving our statutory mandate and on providing useful and appropriate transparency.”
I can think of at least two things to tighten this focus. A) Retrospective analyses. Based on developments since past decisions were made, has the Fed’s (presumably improving) understanding of the relation between its instruments and outcomes changed in a way that suggests that past decisions were erroneous? B) Additional data: The Fed could ask Treasury to create new securities whose trading would improve the Fed’s knowledge of market expectations with regard to inflation and GDP.
And the target probably _should_ be questioned. The target ought to depend on "structural" variables like degrees of absolute price flexibility and size and frequency of shocks that require changes in relative, ergo, absolute prices. If these have changed since the Bank of New Zealand came up with 2%, the Fed should change the target. Achieving a soft landing would be evidence that 2% is OK. A recession would suggest (though not prove definitively) that the target should be raised.
I agree. And I want the Fed to explain those tradeoffs, just how over AND undershooting the target (assuming the target is well chosen, which should also be explained) are harmful. I agree with you that rhetoric like "bedrock" implies more cost to overshooting than can be justified and that "political" pressure is always on the side of overshooting.