Thursday, October 13, 2011

Mohamed El-Erian vs. Bruce Bartlett on the Fed


Bruce Bartlett  in a recent CNBC interview made the case that the Fed should be doing more.  He criticized the Fed for "sitting on its hands"  and argued it could spur aggregate demand if it adopted a nominal GDP level target.  Mohammed El-Erian was shocked to hear this claim.  He replied that most people, including himself, believe the Fed cannot do anything constructive at this point and that it probably has gone too far.  He wanted to know why Bartlett would argue otherwise.   (You can see the exchange above at about the 6:50 mark.)

I am shocked that El-Erian was shocked.  The man who seems to own a column space at the FT and a studio chair at CNBC is convinced that the Fed now is in incapable of making a meaningful dent in aggregate demand and that most observers agree with him. Apparently, he has not been reading Mike Woodford, Greg Mankiw, Ken Rogoff, Paul Krugman, Charles Evans, Scott Sumner, and others who claim the Fed could be doing more. Even Fed Chairman Bernanke has said the Fed could do more.  For example, here is Bernanke in September:
 In addition to refining our forward guidance, the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus.
Now the key to the successful aggregate demand management comes from the Fed properly managing expectations.  So far the Fed has not done very well on this front and, as a result, the economy is suffering.  But it doesn't have to be this way.  FDR was able to properly shape monetary policy expectations and turn things around from 1933 to 1936 and Sweden has done  the same more recently.  So El-Erian can take comfort in knowing that this view is more than academic pipe dream.  In case El-Erian is curious, here is a short primer on nominal GDP targeting, here is how it could make a big dent in nominal spending, and here is why the Fed should adopt it.

Hat Tip: Edward Harrison


  1. I was also shocked by El-Erian's reaction to my comment.

    Bruce Bartlett

  2. Bank of England, targeting NGDP?
    Charles Bean, Deputy Governor of the Bank of England, October 2009:
    "Moreover, the ultimate aim of the [QE] policy is to get the annual rate of growth of nominal spending in the economy back to the 5% or so that it averaged during the first decade of the Monetary Policy Committee’s existence and which is consistent with inflation at target and growth at trend." (p3)

  3. I was not surprised. Pimco has twice made very public bearish calls on US treasuries which they then had to reverse both times. Apparently they don't understand that low rates is not the same as easy money. My guess is that their thinking has been more influenced by republican dogma than by economic theory.

  4. I wonder about those PIMCO guys.

    They were betting heavily on Treasury yields soaring earlier in the year. I figured that might be a bet on aggressive Fed easing, because they understood that the lack of AD was the problem, and that the Fed could fix it, and that it should cause Tsy prices to fall not rise.

    Maybe they do still get it, but they are playing dumb because the Fed didn't act as they expected.

    Or maybe they are just dumb. EMH wins, I guess.

  5. In his 4/11/2011 NRO primer, David writes: ' In contrast, a rigid inflation target of, say, 2 percent in conjunction with the 5 percent real economic growth would require 7 percent nominal-GDP growth, or a potentially destabilizing surge in spending. Better to ... allow the temporary disinflation than to have a boom in spending.' Why does the 2 percent disinflation unambiguously dominate the real spending boom?

  6. I have an incredibly smart former boss, Ramin Toloui, who last I knew worked for PIMCO. I would love to know if he holds similar views to El-Erian and Gross.