Tuesday, February 27, 2018

Fed Chair Jay Powell on Monetary Policy Rules

Jay Powell went to Capitol Hill today for his first congressional testimony as Fed Chair. In addition, he submitted the Federal Reserve's annual Monetary Policy Report to Congress.  A lot of ground was covered in his testimony, follow-up questions, and in the report. Here, I want to highlight one very interesting and potentially significant part of his testimony. And that is Jay Powell's endorsement of monetary policy rules.

At the end of his written testimony, Jay Powell had this to say:
In evaluating the stance of monetary policy, the FOMC routinely consults monetary policy rules that connect prescriptions for the policy rate with variables associated with our mandated objectives. Personally, I find these rule prescriptions helpful. Careful judgments are required about the measurement of the variables used, as well as about the implications of the many issues these rules do not take into account. I would like to note that this Monetary Policy Report provides further discussion of monetary policy rules and their role in the Federal Reserve's policy process...
I believe this is the strongest embrace of monetary policy rules to date by any Fed chair. This is progress in my view. But it gets even better. The monetary policy report that Jay referenced lays out a number of monetary policy rules, including a price level target rule. That is a huge departure from past practice when most rule discussions were stated in terms of some Taylor rule. For example, last year's Monetary Policy Report did not have a price level target in it. 

Below is the table from the report listing the various rules:

The inclusion of the price level rule could be signaling an important change taking place at the Fed. It comes after the minutes from the January FOMC meetings indicate members had conversations about the changing the framework for monetary policy. Here is an excerpt from those minutes:

This discussion of an inflation target range and a price level target is interesting. It reinforces the view that the expanded rules list from the Monetary Policy Report is signaling a new openness to change.  And just to be clear, an inflation target range properly done comes pretty close to what a NGDPLT looks like as noted in my previous post for the case of Israel. 

So all of the public conversations about a new monetary policy framework seem to be gaining traction at the Fed. Of course, the one rule that was not on the list in the 2018 Monetary Policy Report was a NGDPLT.  As I have argued elsewhere, there are good reasons to want it over a price level target. But the fact that the Fed is having this discussion and has added a price level target to its menu of rules is major progress.

So kudos to the new Fed chair and the FOMC for engaging in this conversation. Keep it going.

Update: It has been brought to my attention that the price-level target noted above is in practice fairly close to a NGDPLT. This is because the price-level target has the unemployment gap in it. This observation is similar to Michael Woodford's noting that his theory-based call for an output gap-adjusted price level target in practice is roughly the same as doing a NGDPLT. Fair point. I should have noted it, but failed to do so.

My preference, however, is still for a straight-up NGDPLT for two reasons. First, there is a significant knowledge problem surrounding estimates of the output gap as laid out in this article. (For a less technical discussion making the same point see this policy paper.) Second, I approach NGDPLT more from a velocity-adjusted money perspective rather than from an output gap-adjusted price level perspective. That is, I look at NGDP from the MV side of the equation rather than the PY side. Consequently, I see unobserved changes in potential output as a feature not bug of NGDPLT.

With that said, I am super excited that the Fed has effectively put a NGDPLT target on its rule list. 

P.S. Maybe if Jay Powell and the rest of the FOMC started each day with a coffee mug like this, we might see NGDPLT on the list. We need to get some over to the Eccles building. Reach out to us FOMC if you are interested in a mug and a conversation on NGDPLT. 


  1. Dear David. Great post! I only struggle with the range. You correctly mention that an inflation target range, properly done, comes close to NGDPLT. But, the qualification is important. In Switzerland the range (0-2%) has been used to argue that temporarily low inflation is well within the range considered as price stability. At the wrong time (e.g. in a downturn) this view can severly reduce the effectiveness of monetary policy as we can observe in the SNBs balloning balance sheet. What is your view on this? Would you think that introducing a range is enough and policy makers would then understand that it requires an inflation overshooting in a recession?

    Best, Daniel



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