Skanda Amarnath and Preston Mui on the Tribal Transitory Debate and the Future of the Fed’s Framework
Jan 15, 2024
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Skanda Amarnath and Preston Mui from Employ America discuss U.S. disinflation debates, future Fed policy, and the upcoming framework review. They explore the impact of energy prices, trade-offs in the inflation debate, and the complexities of rate normalization. Critiques of the Federal Reserve's approach and communication are also discussed.
One motivation for cutting rates in 2024 is to mitigate downside risks to the labor market and financial stability by front-loading rate cuts and slowing down as the economy approaches a more neutral policy stance.
Another motivation for cutting rates is to align policy with falling inflation trends, using a proportional approach that tracks the magnitude of inflation undershoot or overshoot to provide a guideline for rate adjustments.
The third motivation for cutting rates in 2024 is to support a soft landing for the economy by normalizing interest rates and moving away from significantly restrictive policy, remaining forward-looking and preemptive in response to visible deterioration in labor markets or financial stability.
Deep dives
Motivation 1: Managing Nonlinear Downside Risks
The first motivation for cutting rates in 2024 is the recognition that downside risks to the labor market and financial stability can materialize quickly and be difficult to reverse. By front-loading rate cuts, the Fed can mitigate these risks and avoid significant damage to the economy. The strategy is to go faster with rate cuts initially and then slow down as the economy approaches a more neutral policy stance.
Motivation 2: Consistency on Inflation
The second motivation for cutting rates is to align policy with the falling inflation trends. As inflation recedes and returns to target levels, it makes sense for the Fed to normalize interest rates. Following a proportional approach that tracks the magnitude of the inflation undershoot or overshoot can provide a sound guideline for rate adjustments. Lagging the Taylor rule implies on the way up and following proportionality on the way down can help maintain consistency in monetary policy.
Motivation 3: Soft Landing Strategy
The third motivation for cutting rates in 2024 is to support a soft landing for the economy. By normalizing interest rates and moving away from significantly restrictive policy, the Fed can avoid unnecessary damage to the economy and allow for a more sustainable outcome. The strategy is to move towards a more normalized interest rate path, but not necessarily following mechanistic guidelines, and to remain forward-looking and preemptive in response to visible deterioration in labor markets or financial stability.
The Impact of Supply and Demand Shocks on Inflation
The podcast episode discusses the impact of supply and demand shocks on inflation. The speaker emphasizes the lasting effects of these shocks, particularly those related to the reopening of the economy. They highlight that policymakers chose to let the prices of goods go up rather than seeing a fall in service prices. The discussion also touches on the role of rent and rental demand in the inflation surge, suggesting that it is driven more by demand factors. Overall, the episode explores the complex dynamics between supply and demand in shaping inflation.
The Fed's Framework Review and Nominal GDP Targeting
The podcast delves into the upcoming Fed framework review and the potential adoption of nominal GDP targeting. The speakers discuss how nominal aggregates, such as labor income growth and consumer spending, can provide better indicators of macro pressures than price indexes. They argue that targeting nominal GDP or labor income can help guide monetary policy more effectively and improve communication with different groups. The speakers also address potential concerns about data availability and the challenges of disentangling the various factors influencing inflation. They emphasize the importance of a thorough framework review to ensure the Fed's policies remain robust and transparent.
Skanda Amarnath is the executive director of Employ America, a think tank that promotes full employment in the American economy, and Preston Mui is also a senior economist at Employ America. Skanda and Preston join Macro Musings to talk about U.S. disinflation and the debates surrounding it, as well as what we can expect from Fed policy in 2024 and beyond, and finally, the Fed’s framework review that is set to begin later this year.
Jerome Powell’s Opening Remarks at Monetary Policy Challenges in a Global Economy, a policy panel at the 24th Jacques Polak Annual Research Conferences, hosted by the IMF
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