The Federal Reserve should consider an expansionary monetary policy. So say Ramesh Ponnuru and David Beckworth, who, in the current issue of National Review, argue that the Fed has kept money too tight throughout the economic expansion of the 2010s. “The Fed’s apparent bias against letting spending and inflation drift higher,” they write, “makes it more likely that the next economic downturn will again be severe and the next recovery will again be sluggish.” Progressives such as J.W. Mason, who lament what they see as a lamentable tendency at the Fed to worry more about controlling inflation than maintaining a robust labor market, have made similar arguments.
The two groups have different desiderata, to be sure. Ponnuru and Beckworth are market monetarists who think the conventional wisdom that interest rates indicate the stance of monetary policy is wrong. What really indicates the stance of monetary policy, they say, is nominal-spending growth. Were the Fed to set a nominal-spending target rather than an inflation target, it would be free to pursue a more expansionary policy when the time is right; right now, with spending growth well below its pre-crisis trend, seems like one of those times. Many progressives who want an expansionary policy, on the other hand, are less interested in flexibility and more interested in permanently reorienting the Fed’s institutional priorities towards the interests of the working class. Nonetheless, the two camps seem to agree on what policy the Fed should pursue right now: an expansionary one.
With that in mind, let’s take a look at the minutes from this week’s meeting of the Federal Open Markets Committee. The meeting was the first of Jay Powell’s tenure as chairman of the Fed, and there were some encouraging nuggets for critics of the current monetary regime — left and right alike.
The FOMC minutes briefly mention two key market-monetarist priorities. A “couple” of committee members suggested that the Fed “might consider expressing its [inflation] target as a range rather than a point estimate,” while “a few other participants” mentioned a framework in which the bank “would strive to make up for past deviations of inflation from [the] target.” Inflation has consistently come in below the 2 percent target; it appears at least four FOMC members kicked around the idea of allowing it to temporarily rise in an effort to stabilize nominal-spending growth.
Meanwhile, a “couple” of participants “questioned the usefulness of a Phillips Curve–type framework” that asserts a connection between the tightness of the labor market and inflation. The Fed generally responds to news of low unemployment and strong wage gains by tightening the money supply, fearing a pickup in inflation. But lately, the connection appears to have loosened (some economists believe the labor market is not as tight as it seems): Unemployment is at record lows and wages are beginning to rise, but inflation remains below target. Fed governors skeptical of the Philips Curve might be more amenable to pursuing expansionary policy even if wages continue to rise.
These are encouraging signs to those who want an expansionary policy. But they’re just signs. Most FOMC members agreed that the Philips Curve is a useful concept; the talk about level targeting didn’t gain enough traction to inspire a change in policy; and the headline news from the meeting was that the Fed’s growing optimism about the economy could invite “further” interest-rate hikes. All of this means the conventional wisdom is still conventional wisdom. If you’re hoping for a newly enlightened Federal Reserve, you’re going to have to wait a bit longer.