The Corner

Judging the Stance

I have seen a lot of discussion this week about the end of quantitative easing, with many commentators saying that Fed policy remains “loose” or “stimulative” (and some even denying that QE has come to an end). So it’s as good a time as any to note that it’s impossible to judge monetary policy should be judged as tight or hard without having a sensible baseline in mind. Which is another way of saying that it’s hard to divorce the characterization of the stance from an evaluation of it.

Most economists correctly regard Fed policy at the start of the Great Depression as disastrously tight, but if you judged it based on interest rates or the size of the monetary base you would have considered it loose — as, indeed, too many policymakers at the time did.

The most useful way to judge the stance of monetary policy would be to look at whether expected nominal spending (the total amount of dollars spent in an economy) is rising slower or faster than its previous trend, with slower suggesting tightness, faster looseness, and neutrality the right goal. We don’t currently have the tools to do that, though, so the best we can do is judge whether monetary policy has been loose or tight based on how nominal spending has performed relative to past trends. Using that standard, monetary policy was loose in the late 1960s and early 1970s (nominal spending growth accelerated), neutral on average during the Great Moderation, extremely tight in 2008–9 (nominal spending fell), and then fairly tight (nominal spending has increased but at a slower rate than during the Great Moderation) since then.

Note that by this standard, Australia — with no QE and a smaller central-bank balance sheet but more rapidly rising nominal spending — has had a looser monetary policy than we have.

Ramesh Ponnuru is a senior editor for National Review, a columnist for Bloomberg Opinion, a visiting fellow at the American Enterprise Institute, and a senior fellow at the National Review Institute.