Vous êtes sur la page 1sur 4

12/14/12

We're Experiencing Truly Historic Times For Monetary Policy - Business Insider

Money Game Contributors

We're Experiencing Truly Historic Times For Monetary Policy


David Beckworth, Macro and Other Market Musings | Dec. 13, 2012, 9:15 PM |
Recommend 8 Share 1 Tw eet 38 0

735 |

Email

More

This past summer Ramesh Ponnuru and I wrotethat it is time for monetary regime change: Twice in the last century, economic turmoil revealed the failure of a monetary regime and forced the West to abandon it for another. During the Great Depression of the 1930s one country after another abandoned the gold standarda decision vindicated when they recovered in the same order. The inflation of the late 1960s and 1970s, meanwhile, persuaded most of the developed worlds central bankers to quit trying to fine-tune the real growth rate of the economy and instead concentrate on achieving price stability. It is once again time for regime change. The crisis in Europe and our stagnation at home both have primarily monetary causes, and a solution will require a new approach to monetary policy that learns from both the successes and the failures of the past.

David Beckworth David Beckworth is assistant professor of economics at Western Kentucky University in Bowling Green, Kentucky. I am using this blog as an outlet to express my ideas, concerns, and questions on macroeconomics and markets.
Recent Posts
Dear Goldbugs: Here's What You Don't Understand About The Fed...

URL

We argued that NGDP level targeting is the new monetary regime needed. Since we wrote this piece, there have been some major changes in Fed policy that have increased the likelihood of this approach becoming reality. First, the Fed decided at its September FOMC meeting to start a new large-scale asset purchase program, QE3, conditional on the state of the economy, rather than tie it to a specific dollar amount up front. This conditionality approach was a vast improvement over previous QE programs in that it better tied expectations of future monetary policy to economic outcomes, similar to NGDP level target. QE3, however, was linked to the vague objectives of "labor market improvements...in the context of price stability." More clarity was needed to for this program to fully utilize the power of expectations management. Yesterday, the FOMC unexpectedly did just that. It tied QE3--or more accurately QE Flex since it now includes both MBS and treasury purchases--to the specific targets of 6.5% unemployment rate and 2.5% inflation. This is huge. It makes very clear to the public that the Fed will not stop until these targets are hit. Markets, in turn, should respond in anticipation of these goals being hit. That is, the elevated demand for liquid assets should start declining as households and firms start moving their funds into higher yielding assets. This rebalancing should raise asset prices, help repair balance sheets, and ultimately spur nominal spending. In other words, by better managing expectations, the Fed should cause the public to do the heavy lifting--and they already have started. If all goes according to plan, the Fed may not have to actually purchase that many additional assets. Ironically, this means that had the Fed been
www.businessinsider.com/were-experiencing-truly-historic-times-for-monetary-policy-2012-12 1/4

12/14/12

We're Experiencing Truly Historic Times For Monetary Policy - Business Insider

doing this all along its balance sheet would be much smaller now. So this announcement is big news and fundamentally changes how U.S. monetary policy gets conducted. Matt Yglesias sums it nicely up as only he can: With today's policy announcement, the Federal Reserve's Open Market Committee has stopped screwing around and started doing real expectations-based monetary easing. Indeed. But the transformation is not complete. The Fed needs to take the final step and adopt an explicit NGDP level target. The new unemployment rate and inflation targets get us closer to this ideal, but as Michael Woodford notes they are not the same. The Fed can only target nominal variables in the long-run and that is where it emphasis should ultimately be. A NGDP level target would do just that. Interestingly, the Fed's actions today were not the only winds of change bearing down on monetary policy this week. Current Bank of Canada governor and future Bank of England governor Mark Carney came out and endorsed NGDP level targeting in a speech. Wow! It was not so long ago he was against it. These ongoing developments all point to a sea change in how monetary policy gets conducted. These truly are historic changes.
Recommended For You

Apple Is Suddenly Spending Billions Of Dollars On Secret Projects

Well, I Finally Got An iPhone 5...

Apple Collapse ContinuesStock Nears New Closing Low

A Timeline Of Taylor Swift's AgeInappropriate Romances

Please follow Money Game on Twitter and Facebook. Tags: Federal Reserve, Monetary Policy | Get Alerts for these topics
Share:

Short URL

http://read.bi/SXVwY2

Twitter Newsletter

Facebook

Buzz

Digg

StumbleUpon

Reddit

LinkedIn

Email

Embed

Alerts

The Water Cooler


Featured 6 All Comments 12
Apply to be a featured commenter

Click to see more of this discussion. depression on Dec 13, 9:32 PM said: Nominal Gross domestic product (NGDP) "It makes very clear to the public that the Fed will not stop until these targets are hit."

Flag as Offensive

www.businessinsider.com/were-experiencing-truly-historic-times-for-monetary-policy-2012-12

2/4

12/14/12

We're Experiencing Truly Historic Times For Monetary Policy - Business Insider

i'm not quite sure what's different now with the announced numbers vs the way it was before when the FED kept us guessing ... i mean before the FED put out the hard targets , did anyone think interest rates were going to be rising ? Did any of the major players think the ground was becoming more firm for an economic recovery ? i for one can say that i expected the FED to keep pumping , just as i expect them to keep at it today ... i don't think these new changes in FED policy are going to amount to much .... if you want to discuss what has impact right now , then i'll agree that the FED buying up 45 BILLION dollars of Bonds each month is more likely to move the dial compared to this new program of explicit goals by the FED .. I agree with the Intro of the article , that radical changes will have to be made , much like after the great depression ..... and i think i can get a feel for what those new changes in the economy might be someday .... but one thing is for certain .... we are FAR FAR away from that day .... In the meantime the FED will keep trying new things .. Reply Gary Anderson (URL) on Dec 13, 10:18 PM said: @depression: Here is the problem, Depression. Now we have a global economy and we have diminishing wages in the USA. We have nominal GDP trying to push oil (WTI) to 120 bucks. We have inflationary commodities with Nominal GDP in a deflationary environment. That is a recipe for disaster.

Flag as Offensive

Nominal GDP is a recipe for disaster. Scott Sumner is not afraid of massively increasing oil prices. I am. I am sane. He is crazy. Reply

Gary Anderson (URL) on Dec 13, 10:42 PM said: @Tornado Jones: I don't agree with Joe about Nominal GDP. I believe in judicious and sparing QE. It only should buy time, not become a way of life. Reply

Flag as Offensive

ooohlalalarry on Dec 13, 10:53 PM said: @depression: Add up all the Fed buying and it comes to about a $1 TRILLION PER YEAR added to its balance sheet.... this is historic. During the Great Recession, the Fed increased its balance sheet by $1.5 trillion, now they want to add a trillion per year into the foreseeable future? Are alarm bells going off anywhere?

Flag as Offensive

The Fed has boxed itself into a corner. They can never stop because if they do interest rates will go up and we will hit some serious problems in trying to service the debt.... this is a historic moment. Reply

Gary Anderson (URL) on Dec 13, 11:05 PM said: @ooohlalalarry: Interest rates don't go up in Japan. We need to lower the cost of living. Reply

Flag as Offensive

ooohlalalarry on Dec 13, 10:47 PM said: Yes, it is a historic time for the Fed. Historic because for the first time, the Fed has become irrelevant.

Flag as Offensive

Isn't the purpose of the QEs is to boost markets, raise investor confidence and hopefully boost the economy? QE2 had a few months effect on the markets, QE3 gave the markets a boost for about a week, and QE4 gave the markets a boost for about an hour.... truly historic. Reply

www.businessinsider.com/were-experiencing-truly-historic-times-for-monetary-policy-2012-12

3/4

12/14/12

We're Experiencing Truly Historic Times For Monetary Policy - Business Insider

www.businessinsider.com/were-experiencing-truly-historic-times-for-monetary-policy-2012-12

4/4