Tuesday, August 7, 2012

The Fed Is Inching Closer to a NGDP Level Target

Market Monetarists have long championed the Chuck Norris approach to central banking.  That is, the Fed should explicitly adopt a Nominal GDP (NGDP) level target and use this target to better manage nominal spending expectations.  Doing so would catalyze the public into changing their current spending and investment decisions toward more nominal expenditures.  In other words, it would incentivize the public to do the heavy lifting in sparking a robust recovery.   To make this credible, the Fed would have to commit to purchasing as many assets as necessary to hit its target.   Such open-ended QEs would be a vast improvement over the current make-it-up-as-we-go-along, incremental approach to QE.  

This idea is now gaining traction at the Fed.  San Francisco Fed President John Williams first endorsed it a few weeks ago.  Now, Boston Fed Presdient Eric Rosengren has come out in favor of it (my bold):
Eric S. Rosengren, president of the Federal Reserve Bank of Boston, said that the Fed should again expand its holdings of mortgage bonds and Treasury securities, and that the purchases should steadily continue until the Fed was satisfied with the health of the economy.

Mr. Rosengren’s proposal for new action would be a significant shift from earlier rounds of asset purchases, when the Fed announced in advance how much money it would spend and over what period of time. Mr. Rosengren and other officials, including John C. Williams, president of the Federal Reserve Bank of San Francisco, say that the focus instead should be on results.
Mr. Rosengren said he did not have a firm view on what kind of measuring stick the Fed should use for a new program of asset purchases. But he suggested the Fed could target a minimum rate of nominal growth — economic growth plus inflation — of 4.5 percent. The government estimates the rate of nominal growth in the 2012 second quarter at 3.1 percent. 
Now Rosengren is not a voting member this year at the FOMC, but his views in conjunction with those of John Williams show how the thinking at the Fed is changing.  Ben Bernanke the academic who studied Japan would certainly be sympathetic to this view.  Throw in Janet Yellen  along with a few more Williams and Rosengrens and there may be some serious momentum for open-ended QE.  All the efforts of the blogosphere may yet payoff. [Update: I forgot that Chicago Fed President Charles Evans was the first Fed official to officially endorse NGDP level targeting.]   

P.S. By adopting a NGDP level target the Fed would not unmoore long-term inflation expectations.  A NGDP level target would, though, be solving an excess money demand problem created by a shortage of safe assets.

ht: dwb


  1. Charles Evans has repeatedly expressed support for NGDP targeting. If you count him that's three members of the Fed (although I still think Williams is a little less committed).

    The problem is that we have 0 board of governers who are on board.

  2. Great point. I will update the post.

  3. This comment has been removed by the author.

  4. I don't think we can expect a yes vote from Cleveland

    The "reader" Scott refers to is me, and the fed official is a friend of mine who was recently one of the top analysts at the Cleveland Fed.

    So in the "likely yes" column we have:

    San Fran - Janet Yellen
    San Fran - John Williams
    Boston - Eric Rosengren
    Sarah Bloom Raskin?

    Vs the "likely no" column:

    Cleveland - Sandra Pianalto
    Richmond - Jeff Lacker?

    Unknowns (at least by me):

    Jerome Powell
    Elizabeth Duke
    Dennis Lockhart
    Jeremy Stein
    Daniel Tarullo