At the Cato Institute’s 40th Annual Monetary Conference, held virtually on September 8, Fed Chair Jerome Powell stated:
We’ve got a dual mandate—maximum employment and price stability—and it comes down to: Is nominal income [GDP] targeting the best way to promote that? We don’t think it is; I don’t think it is. And part of that is that it would be very difficult, I think, to explain to the public the relationship between a nominal income target (nominal GDP target) to those goals. It’s just … a level of complexity that even some economists and policymakers struggle with, let alone the general public. So, it seems like it would be a reach to have that be our fundamental framework.
In other words, Powell is concerned that estimates of the trend growth of output are “highly uncertain” and that a decline in trend growth would require higher inflation. Thus, under a nominal gross domestic product (NGDP) target, he thinks there would be “communication issues” as well as “big chances of policy error because we just don’t know any of the starred variables” (e.g., the equilibrium values of real output, employment, and interest rates).
While Powell’s concern is not only that it may be hard to relate NGDP targeting to the goals of maximum employment and price stability, but also that NGDP targeting is complex and hard to explain. Yet, in June, at a conference held by the European Central Bank, Powell stated: “We now understand better how little we understand about inflation.” If that is true, then the alleged complexity of NGDP targeting should not be a reason to not pursue it given the current monetary system is already so complicated that even the Fed struggles to understand it.
This article counters Fed Chair Powell’s contention that NGDP targeting, although “interesting,” is not suitable to serve as the Fed’s “fundamental framework” for the conduct of monetary policy. He prefers to stay with the current floor system, with its administratively set interest rates on reserves and reverse repos, a large balance sheet, and flexible average inflation targeting (FAIT). Yet, that system itself is complex and hasn’t worked to prevent inflation from rising to a 40-year high. A close examination of NGDP targeting shows that it is not as complex as Powell contends, that the information requirements to implement it are less onerous than under current operating procedures, and that it is superior to either a price-level rule or inflation targeting.
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