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A bad economy doesn’t mean monetary policy is off course

Summary:
The economy is currently beset by all sorts of problems, mostly related to supply-side problems. And yet, I see no evidence that monetary policy is significantly off course.There are some reasons to worry that monetary policy is too expansionary. Inflation is above target and wage inflation (a far more important indicator than price inflation) is at 4.6% over the past 12 months. And yet NGDP growth over the past 18 months is running at an annual rate of roughly 3.6% and TIPS spreads are still reasonable, so there’s not much evidence of wildly excessive monetary expansion.There are some reasons to worry that monetary policy is too contractionary. Employment is still down by 5 million compared to pre-Covid levels. But the unemployment rate has plunged from 14.8% to only

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The economy is currently beset by all sorts of problems, mostly related to supply-side problems. And yet, I see no evidence that monetary policy is significantly off course.

There are some reasons to worry that monetary policy is too expansionary. Inflation is above target and wage inflation (a far more important indicator than price inflation) is at 4.6% over the past 12 months. And yet NGDP growth over the past 18 months is running at an annual rate of roughly 3.6% and TIPS spreads are still reasonable, so there’s not much evidence of wildly excessive monetary expansion.

There are some reasons to worry that monetary policy is too contractionary. Employment is still down by 5 million compared to pre-Covid levels. But the unemployment rate has plunged from 14.8% to only 4.8%, a far faster recovery than from any other recent recession. And the solid growth in NGDP and strong TIPS spreads provides no indication of dramatically insufficient monetary stimulus. Total employment seems inhibited by supply-side factors.

A bad economic outcome is not evidence of a bad monetary policy. The economy is influenced by many factors, and monetary policy is just one of those factors.

That’s not to say that monetary policy is perfect; the distortions caused by Covid make it much harder than usual to “read the tea leaves”. But we are not far off course.

Off topic: While on vacation in the Pacific Northwest I read an article about a big surge in baby boomers retiring. An hour later in a small town coffee shop I heard someone say, “Boy, people are retiring right and left.”


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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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