The BEA just published revised GDP estimates, and the main change was that cumulative real GDP growth from 2020 to today was revised up by more than 1%.
Am I being a simpleton if I make the claim that all persistent inflation in our modern era is excess rents in shelter? After all, we can expect productivity gains in every other product and service, but regulatory induced scarcity in housing ultimately defines where we live, when to have children and how many, and distorts our collective perception of value.
Well, the Fed could make inflation of the other categories whatever they want. 0%, 2%, 5%, etc. But I think you’re on to something in that economic growth under conditions of capped housing will tend to flow to shelter inflation and individual households will have to trade off income, other costs, and shelter costs to determine how that is distributed.
Scott wouldn't put it in terms of interest rates and prefers to not frame Fed policy in terms of rates. By mid-2021, nominal GDP was back up to the level a 4% trend would have led to, but NGDP growth was still about 10%, and it has slowly descended back to about 5% since then. And, inflation remained well above the 2% target until mid-2022. He would have preferred tightening nominal growth earlier so that NGDP growth moved back down to 4%-5% more sharply. It's hard to say how high the target rate would have needed to be pushed in 2021 to achieve that. If it had been pushed a bit higher earlier, subsequent Fed Funds rates would have probably been lower, and the Fed Funds rate today would probably be lower than it is, if they had followed Scott's preferred path.
Now that NGDP growth is in the range of his preferred growth path, I don't think he would say there the target rate should be pushed particularly higher today.
"The Fed, however, measures the stance of monetary policy by looking at interest rates and inflation, leading to at least a few FOMC members to want to keep rates higher for longer with some even contemplating another increase since there´s still a bit of excess inflation to be “purged”!
It is always by looking at the economy through the wrong lense that the Fed makes mistakes, resulting in either an increase in inflation or a fall in economic activity (increased unemployment)."
On the topic of QE, I had a position on fixed income futures back in 2013, so I was watching these things very closely. There had been the "taper tantrum" and Bernanke gave a speech where he announced that they changed their minds. QE would be extended longer in order to keep stimulating the market with lower interest rates. Literally, as the words were leaving his mouth, rates popped UP by like 15 basis points.
Scott Sumner is great. George Selgin also has good stuff in his backlog and his books. In some of them he essentially advocates for a flat ngdp trajectory, ie 0% growth. Any productivity increase (and thus also any rgdp growth) leads to a price decrease in this regime.
His book 'Less than zero' explores the consequences and also looks at historic examples, like during some parts of the classic gold standard. (Scott Sumner wrote a new foreword to the re-release of the book a few years ago.)
Comment from left field: Tyler Cowen and some others are ga-ga on AI. Maybe we see some higher productivity stats going forward, meaning lower inflation.
As usual, I think prosperity is always more important than shaving a percent or two off of reported inflation.
I do wonder why the Fed wants to reduce its balance sheet. Saves taxpayers a lot of money to hold onto it. Bank of Japan has a much larger balance sheet (relative to GDP) and low inflation.
The Fed building its balance sheet is a win-win? What if...the Fed buys Treasuries, and the sellers of the Treasuries reallocate capital into productive investments. This would be fantastic if there were a 10-year moratorium on all property zoning. Rents would cool off. Living standards would rise.
The Treasuries send interest income back to the government, saving taxpayers big time.
The Fed has a _Flexible_ Average* inflation Target, This means that it is willing to temporarily exceed the target when that facilitates the economy adjusting to extraordinary shocks like COVID/Putin. The Fed _said_ that over-target inflation was temporary and it it made it so.
I agree with Sumner qualitatively that the Fed delayed starting to disinflate too long so the total amount of over-target inflation WAS excessive, but nobody is perfect.
* "Average" is not the best word as it can suggest a backward-looking arithmetic mean. "Average means that the forward looking target is that inflation would be 2% PCE; the Fed would not not react to small month-to month fluctuations. But is would and should crank up over-target inflation in response to large shocks.
Am I being a simpleton if I make the claim that all persistent inflation in our modern era is excess rents in shelter? After all, we can expect productivity gains in every other product and service, but regulatory induced scarcity in housing ultimately defines where we live, when to have children and how many, and distorts our collective perception of value.
Well, the Fed could make inflation of the other categories whatever they want. 0%, 2%, 5%, etc. But I think you’re on to something in that economic growth under conditions of capped housing will tend to flow to shelter inflation and individual households will have to trade off income, other costs, and shelter costs to determine how that is distributed.
Thanks! Are you saying Scott Sumner thinks the Fed rate should be north of 15%?
Scott wouldn't put it in terms of interest rates and prefers to not frame Fed policy in terms of rates. By mid-2021, nominal GDP was back up to the level a 4% trend would have led to, but NGDP growth was still about 10%, and it has slowly descended back to about 5% since then. And, inflation remained well above the 2% target until mid-2022. He would have preferred tightening nominal growth earlier so that NGDP growth moved back down to 4%-5% more sharply. It's hard to say how high the target rate would have needed to be pushed in 2021 to achieve that. If it had been pushed a bit higher earlier, subsequent Fed Funds rates would have probably been lower, and the Fed Funds rate today would probably be lower than it is, if they had followed Scott's preferred path.
Now that NGDP growth is in the range of his preferred growth path, I don't think he would say there the target rate should be pushed particularly higher today.
In July I wrote
"The Fed, however, measures the stance of monetary policy by looking at interest rates and inflation, leading to at least a few FOMC members to want to keep rates higher for longer with some even contemplating another increase since there´s still a bit of excess inflation to be “purged”!
It is always by looking at the economy through the wrong lense that the Fed makes mistakes, resulting in either an increase in inflation or a fall in economic activity (increased unemployment)."
https://marcusnunes.substack.com/p/monetary-mechanics
Fantastic post. Great stuff.
On the topic of QE, I had a position on fixed income futures back in 2013, so I was watching these things very closely. There had been the "taper tantrum" and Bernanke gave a speech where he announced that they changed their minds. QE would be extended longer in order to keep stimulating the market with lower interest rates. Literally, as the words were leaving his mouth, rates popped UP by like 15 basis points.
Scott Sumner is great. George Selgin also has good stuff in his backlog and his books. In some of them he essentially advocates for a flat ngdp trajectory, ie 0% growth. Any productivity increase (and thus also any rgdp growth) leads to a price decrease in this regime.
His book 'Less than zero' explores the consequences and also looks at historic examples, like during some parts of the classic gold standard. (Scott Sumner wrote a new foreword to the re-release of the book a few years ago.)
Good stuff Kevin, thank you.
Mostly agree.
Comment from left field: Tyler Cowen and some others are ga-ga on AI. Maybe we see some higher productivity stats going forward, meaning lower inflation.
As usual, I think prosperity is always more important than shaving a percent or two off of reported inflation.
I do wonder why the Fed wants to reduce its balance sheet. Saves taxpayers a lot of money to hold onto it. Bank of Japan has a much larger balance sheet (relative to GDP) and low inflation.
The Fed building its balance sheet is a win-win? What if...the Fed buys Treasuries, and the sellers of the Treasuries reallocate capital into productive investments. This would be fantastic if there were a 10-year moratorium on all property zoning. Rents would cool off. Living standards would rise.
The Treasuries send interest income back to the government, saving taxpayers big time.
The Fed has a _Flexible_ Average* inflation Target, This means that it is willing to temporarily exceed the target when that facilitates the economy adjusting to extraordinary shocks like COVID/Putin. The Fed _said_ that over-target inflation was temporary and it it made it so.
I agree with Sumner qualitatively that the Fed delayed starting to disinflate too long so the total amount of over-target inflation WAS excessive, but nobody is perfect.
* "Average" is not the best word as it can suggest a backward-looking arithmetic mean. "Average means that the forward looking target is that inflation would be 2% PCE; the Fed would not not react to small month-to month fluctuations. But is would and should crank up over-target inflation in response to large shocks.
https://thomaslhutcheson.substack.com/p/monetary-story