Saturday , October 31 2020
Home / S. Sumner: Money Illusion / The remainder of the decade

The remainder of the decade

Summary:
The Fed has given us its inflation forecast for the first 4 years of this decade. 2020: 1.2% inflation2021: 1.7% inflation2022: 1.8% inflation2023: 2.0% inflationBut what does it expect for the remainder of the 2020s?I’m not sure, but unless it looks a lot like the following, then the AIT policy has no real meaning:2024: 2.15% inflation2025: 2.25% inflation2026: 2.30% inflation2027: 2.25% inflation2028: 2.20% inflation2029: 2.15% inflation2030 and beyond: 2.0% inflationThat averages 2.0% for the entire 2020s.Obviously my figures are not a precise description of their current intention, but I’d challenge anyone to convince me that these figures aren’t at least close. My claim is that if this isn’t pretty close to what the Fed means by average inflation targeting,

Topics:
Scott Sumner considers the following as important:

This could be interesting, too:

Tyler Cowen writes Friday assorted links

Tyler Cowen writes Novid — a pre-exposure notification system for Covid (and other things)

Tyler Cowen writes Threadhelper, a new method for improving Twitter

Scott Sumner writes Not your older sister’s recession

The Fed has given us its inflation forecast for the first 4 years of this decade.

2020: 1.2% inflation
2021: 1.7% inflation
2022: 1.8% inflation
2023: 2.0% inflation

But what does it expect for the remainder of the 2020s?

I’m not sure, but unless it looks a lot like the following, then the AIT policy has no real meaning:

2024: 2.15% inflation
2025: 2.25% inflation
2026: 2.30% inflation
2027: 2.25% inflation
2028: 2.20% inflation
2029: 2.15% inflation
2030 and beyond: 2.0% inflation

That averages 2.0% for the entire 2020s.

Obviously my figures are not a precise description of their current intention, but I’d challenge anyone to convince me that these figures aren’t at least close. My claim is that if this isn’t pretty close to what the Fed means by average inflation targeting, then the policy is essentially meaningless.

After all, they talk about inflation being moderately above 2% for some period of time to make up for the current shortfall, such that inflation averages 2% in the long run. So what else could it mean? The most common sense interpretation is that ‘moderately’ is a few tenths of a percent above, and “some period” is a few years, not a few months, a few decades or a few centuries.

BTW, I favor a more expansionary policy during 2020-23 so that less make-up is needed in the out years. I’m just taking today’s SEP forecast (with its 130 basis point total shortfall) as the Fed’s current intention, and drawing out the long run implications of that forecast.

So why can’t the Fed do what I just did? Probably because FOMC members are not in agreement as to exactly what AIT means. Vagueness implies a lack of consensus.


Tags:

 
 
 
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".

Leave a Reply

Your email address will not be published. Required fields are marked *