The Federal Reserve has started a revision of its monetary policy framework. The previous assessment was carried out in 2020 and led to the “flexible average inflation targeting” framework. The Fait approach would have been effective if it had been tried. Unfortunately, the Fed forgets the meaning of “average”.
In one Recent podcast With David Beckworth, Evan Koenig explained what went wrong with the monetary policy in 2021:
At the moment I think that another example that the question you raised answered, an article Together with Tyler Atkinson and Ezra Max, I wrote. This was one Dallas Fed Economics Blog piece that came out in January 2022, but we wrote it in the fall or, yes, the late autumn of 2021, where the last GDP data was for the third quarter of 2021. The reason we wrote that if you looked at an extrapolation of the nominal gbp growth of the Fedel, given the Covid-Given, Given the Given the Given the Given the Given, Given the Given, Given the Given the Given, Given the Given the Given, Given, Given the Covid-Given, Given, Given the Covid-Given, Given the Covid-Given-Given-Given-Get-Get-Get-Get-Get-Get-Get-Get-Get-Get-Vrisis. The most estimates of the economy were in the time that the economy was in time, and was that of the economy, and was that of the economy, and that of the economy was the most that the economy was at the time that the economy was in time. Was approximately with full employment, the natural target path for the nominal GDP would have been a growth path of 4% that was expanded at the end of 2019.
We did that; We have extrapolated a growth path of 4% and we have deported the nominal GDP since the start of the COVID recession. In the third quarter of 2021 we just returned to that hypothetical target path in the third quarter of 2021, which is great. That’s what you want to do. The problem was that if you were to look at the projections of private predictors, and although we could not talk about it at the time, if you looked at internal FED projections, the projection that the nominal BBP would be considered considerably, that path, that path and not coming back.
Our argument was: “Hey, great so far, but the problems unless the Fed accommodation starts to remove.
In their Dallas Fed PaperThey clearly indicated that the current FED policy (at the end of 2021) was too expansive:
But will NGDP stay on that path? Professional predictors don’t think. Blue chip forelators see the growth of the NGDP growth of more than 4.0 percent of now until 2025. Then the growth stabilizes, so that the level from NGDP 4.2 percent above the trend, as shown in the right panel of graph 1.
If the pandemic has no lasting effect on the real output, that upward shift in NGDP would imply a price path with 4.2 percent higher than before the pandemic. If the pandemic leaves a permanent negative figure on the output, the upward shift in the price path will be even greater. The expectations of FED policy makers, as documented in the latest Summary of economic projectionsare largely consistent with these prospects.
An NGDP targeting strategy would prescribe the removal of policy accommodation faster than currently expected to keep the income closer to their prepandemical trends and to reduce the impact at the long-term price level.
They offer a graph that shows the outcome where they feared.
The actual NGDP crossing was even worse than expected, but at least the Dallas Fed -economists understood that the policy was too expansive. I hope that the people who revise the FED policy framework will take into account which parts of the Fed have rightly warned that the policy was not good in 2021. When policy errors are made, it makes sense to ask for advice from those who oppose those mistakes.