Way Too Tight


The Fed’s new inflation and unemployment projections show that monetary policy is currently way too tight. Unemployment is projected to remain high through 2022. That may be excused by the Covid-19 pandemic, but there is no excuse for the low inflation, especially low core inflation:

The Fed had the option of switching to level targeting, and blinked. That error will be quite costly in terms of both inflation and growth.

Again, unemployment may be beyond the Fed’s control at the moment, but at a minimum, they need to target the inflation forecast. I can’t even comprehend the 1.7% PCE inflation forecast for 2022. Does the Fed plan to acquiesce to this sort of policy failure for two whole years, without even attempting level targeting?

PS. The implied 2019-2021 NGDP growth forecast seems to be about 0.9% (total). By comparison, the total NGDP growth from 2008:Q2 to 2010:Q2 was 0.8%. And unemployment was over 9% throughout 2010. Perhaps they are assuming a greater degree of wage flexibility today.

PPS. Is there anything more annoying than talking heads on Wall Street TV shows saying the Fed has already done too much because stocks are recovering?

PPPS. Powell was asked about inflation forecasts being under target, but sort of dodged the question.

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