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Bullard on the Fed’s policy reappraisal

Summary:
St. Louis Fed President James Bullard recently had some interesting comments in response to this question: What will policymakers at the Fed do with the information gathered during this whole review? I think the code word here is evolution, not revolution. I don’t think we want to give the impression that we’re going to overturn the current Fed operating framework or strategic framework overnight. I don’t think that’s realistic or desirable. But I do think that many of these ideas will feed into future monetary policy as we go forward and creep in in various ways. Some of them might be more visible than others, but I would not expect a manifesto to come out that radically reorients Fed policy.This is not necessarily meant to suggest that there are big changes afoot. But

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St. Louis Fed President James Bullard recently had some interesting comments in response to this question:

What will policymakers at the Fed do with the information gathered during this whole review?

I think the code word here is evolution, not revolution. I don’t think we want to give the impression that we’re going to overturn the current Fed operating framework or strategic framework overnight. I don’t think that’s realistic or desirable. But I do think that many of these ideas will feed into future monetary policy as we go forward and creep in in various ways. Some of them might be more visible than others, but I would not expect a manifesto to come out that radically reorients Fed policy.

This is not necessarily meant to suggest that there are big changes afoot. But it is meant to be thoroughgoing, get lots of input and think about these issues deeply on a calendar basis, something like five or seven years. Because otherwise you might go 50 years and you never changed your framework, and it gets badly out of date and it really doesn’t work very well. But because you’ve never thought about the strategy, you’ve never changed it. And if you are going to change it, you would have to change it in small ways in order to make progress.

That’s also what I expect, and it’s probably appropriate. I believe that NGDP level targeting will be implemented very gradually, not all at once. The same is true of NGDP futures targeting—market policy guidance is being introduced at a gradual pace.

The Fed’s biggest mistake was to not use this golden opportunity to have the Congress give them more power, or at least clarify the power that they do have. It’s a rare moment in time when both parties would be supportive of enhancing the Fed’s ability to prevent recessions. What’s the harm in asking?


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Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment".

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