Loading document…
Opening in Pages for Mac...
Your browser isn’t fully supported.
For the best Pages for iCloud experience, use a supported browser.
Learn More
Cancel
Continue
Inflation Targeting Letter
J. Bradford DeLong
U.C. Berkeley
,
NBER
, and WCEG
http://bradford-delong.com
brad.delong@gmail.com
@delong
2017-06-09
.pages:
https://www.icloud.com/pages/0l-SRZoYAmrajW09lcV3Agq9g
.key:
.html:
3910 words
I. 2017-06-09 Weblog Post
A. Background
Conference call today at 9:00 PDT/noon EDT on why the
Federal Reserve would be very smart to abandon its 2
%
/
year no-lookback inflation target for a less destructive
policy framework. The call is to be moderated by
Shawn
Sebastian
. After his introduction
Josh
Bivens
will
summarize
his
short whitepaper
: “
Is 2
%
Too Low?
Rethinking the Fed’s Arbitrary Inflation Target to Avoid
Another Great Recession
” <
http://www.epi.org/publication/
is-2-percent-too-low/
>. Jason Furman will talk about the
evidence for the fall in the equilibrium Wicksellian neutral
rate of interest and the implications of that for optimal
monetary policy. I come next. Joe Stiglitz wraps up. And
then questions from reporters.
B. As Prepared for Delivery
My task today is to set out what the arguments on the other
side are—and why we do not fi nd them convincing.
I hear four arguments for not changing the 2
%
/year
inflation target, even though pursuing that target found us
in a situation where monetary policy was greatly hobbled in
its ability to manage the economy for a solid decade. And,
as best as I can evaluate them, all four of these arguments
seem to me to be wrong. They are:
1
1.
The Federal Reserve, even at the zero lower bound,
has powerful tools suffi cient to carry out its
stabilization policy tasks (Cf.: Mankiw and Weinzierl
(2011) <
https://scholar.harvard.edu/fi les/mankiw/fi les/
exploration_of_optimal.pdf
>), so moving away from
2
%
/year as a target is not necessary.
This leaves
begging the questions of why, then, employment has
been so low over the past decade and why production
is still so low relative to our circa-2007 expectations.
2.
The problem is not the 2
%
/year target but rather
pressure on the Federal Reserve: pressure from
substantial numbers of economists and politicians
practicing bad economics and motivated partisan
reasoning. (As an example, somebody sent me a video
clip this week of the very smart Marvin Goodfriend
half a decade ago, arguing that faster recovery
required the Fed to hit the economy on the head with a
brick to make people more confi dent in its willingness
to fi ght inflation <
http://www.bradford-delong.com/
2017/06/on-the-negative-information-revealed-by-
marvin-goodfriends-i-dont-teach-is-lm.html
>.)
This
ignores the Fed’s long institutional history of being
willing to ignore outside pressure as it performs its
standard monetary policy task of judging what
appropriate interest rates are. Pressure only mattered
when we got into “non-standard” monetary policies,
2
which we needed to do only because the low inflation
target had caused us to hit the zero lower bound.
3.
At 2
%
/year, inflation is non-salient: nobody worries
about it. A higher inflation rate would bring shifting
expectations of inflation back into the mix, distract
people and fi rms from their proper task of calculating
real costs and benefi ts to worry about monetary policy,
and make monetary policy management more
complicated.
But right now people and fi rms are
“distracted” by the high likelihood of depressions that
last longer than fi ve years. That is a much bigger
distraction than worrying about whether inflation will
be 4
%
/year of 5
%
/year. And right now the zero lower
bound makes monetary policy management much
more complicated than it was back in the 1990s when
the impact of Fed policy on inflation expectations was
in the mix.
4.
The Federal Reserve needs to maintain its credibility,
and if it were to even once change the target inflation
rate, its commitment to any target inflation rate would
have no credibility
. But the credibility you want to
have is credibility that you will follow appropriate
policies to successfully stabilize the economy—not
credibility that you will mindlessly pursue a
destructive policy because you think it somehow
wrong to acknowledge that the considerations that led
3
you to adopt it in the fi rst place were wrong or have
changed. As my friend Daniel Davies puts it in his
One-Minute MBA Course: “I
s
a credible
reputation
as
an idiot
a kind of credibility
really worth having?
”
<
http://crookedtimber.org/2006/11/29/reputations-are-
made-of/
>
Over to you, Joe…
C. Additional Things I Said
D. URL, etc.
<
http://www.bradford-delong.com/2017/06/why-the-fed-
should-rethink-its-2year-no-lookback-inflation-target.html
>
WHY THE FED SHOULD RETHINK ITS 2
%
/YEAR NO-
LOOKBACK INFLATION TARGET
II. Inflation Targeting Letter
A.
Rethink 2
%
<
http://populardemocracy.org/sites/default/fi les/Rethink
%202
%
25
%
20letter.pdf
>
Federal Reserve Board of Governors
Constitution Ave NW & 20th Street Northwest
4
Washington, D.C. 20551
Dear Chair Yellen and the Board of Governors:
The end of this year will mark ten years since the beginning
of the Great Recession. This recession and the slow
recovery that followed was extraordinarily damaging to the
livelihoods and fi nancial security of tens of millions of
American households. Accordingly, it should provoke a
serious reappraisal of the key parameters governing
macroeconomic policy.
One of these key parameters is the rate of inflation targeted
by the Federal Reserve. In years past, a 2 percent inflation
target seemed to give ample leverage with which the Fed
could lower real interest rates. But given the evidence that
the equilibrium interest rate had fallen substantially even
prior to the fi nancial crisis, and that the Fed’s short-term
policy rate remained at zero for seven years without
sparking any large acceleration of aggregate demand
growth, a reassessment of this target seems warranted. Such
a reassessment is particularly appropriate when the lack of
evidence that moderately higher inflation would harm
Americans’ standard of living is juxtaposed with the
tremendous evidence that a tighter labor market would
improve Americans’ standards of living.
5
Some Federal Reserve policymakers have acknowledged
these shifting realities and indicated their willingness to
reconsider the appropriate target level. For example, San
Francisco Federal Reserve President John Williams noted
the need for central banks to “adapt policy to changing
economic circumstances,” in suggesting a higher inflation
target, and Boston Federal Reserve President Eric
Rosengren cited the different context in which the inflation
target was set in emphasizing the need for debate about the
right target.[1] [2]
In May, Vice Chair Stanley Fischer highlighted the
Canadian system of reconsidering the inflation target every
fi ve years, saying, “I can envisage–say, in the case of
inflation targeting–a procedure in which you change the
target or you change the other variables that are involved
on some regular basis and through some regular
participation.”[3]
The comments made by Fischer, Rosengren, and Williams
all underscore the ample evidence that the long-term
neutral rate of interest may have fallen. Even if a 2 percent
inflation target set an appropriate balance a decade ago, it is
increasingly clear that the underlying changes in the
economy would mean that, whatever the correct rate was
then, it would be higher today. To ensure the future
effectiveness of monetary policy in stabilizing the economy
after negative shocks–specifi cally, to avoid the zero lower
6
bound on the funds rate–this fall in the neutral rate may
well need to be met with an increase in the long-run
inflation target set by the Fed.
More immediately, new, post-crisis economic conditions
suggest that a reiteration of the meaning of the Fed’s
current target is in order. In its 2016 statement of long-run
goals and strategy, the Federal Open Market Committee
wrote: “The Committee would be concerned if inflation
were running persistently above or below this objective.”
Some FOMC participants, however, appear to instead
consider 2 percent a hard ceiling that should never be
breached, and justify their decision-making on that basis. It
is important that the Federal Reserve makes clear–and
operates policy based on–its stated goal that it aims to
avoid inflation being either below or above its target.
Economies change over time. Recent decades have seen
growing evidence that developed economies have harder
times generating faster growth in aggregate demand than in
decades past. Policymakers must be willing to rigorously
assess the costs and benefi ts of previously-accepted policy
parameters in response to economic changes.
One of these key parameters that should be rigorously
reassessed is the very low inflation targets that have guided
monetary policy in recent decades. We believe that the Fed
should appoint a diverse and representative blue ribbon
7
commission with expertise, integrity, and transparency to
evaluate and expeditiously recommend a path forward on
these questions. We believe such a process will strengthen
the Fed as an institution and its conduct of monetary policy,
and help ensure wise policymaking for the years and
decades to come.
Yours,
Dean Baker
Laurence Ball
Jared Bernstein
Heather Boushey
Josh Bivens
David Blanchflower
J. Bradford DeLong
Tim Duy
Jason Furman
Joseph Gagnon
Marc Jarsulic
Narayana Kocherlakota
Mike Konczal
Michael Madowitz
Lawrence Mishel
Manuel Pastor
Gene Sperling
William Spriggs
Mark Thoma
8
Joseph Stiglitz
Valerie Wilson
Justin Wolfers
----
[1] John Williams, “Monetary Policy in a Low R-Star
World,” August 15, 2016
[2] Sam Fleming, “Inflation Goal May Be Too Low, says
Fed’s Rosengren,” Financial Times, April 21, 2015
[3] Greg Robb, “Fed’s Williams Backs Changing Central
Bank’s Strategy to Price-Level Targeting,” Market Watch,
May 5, 2017
III. Press Call
•
1-917-962-0650; Dial-in: 934406
•
Moderated by
Shawn Sebastian
:
Shawn will open the call
with 2 minutes of context
•
Josh
Bivens
will then summarize a short whitepaper he
has written
: “
Is 2
%
Too Low? Rethinking the Fed’s
Arbitrary Inflation Target to Avoid Another Great
Recession
” <
http://www.epi.org/publication/is-2-percent-
too-low/
>
•
Jason Furman
9
