Sam Bell on Fed Policy, Personnel, and Politics in 2021

Sam Bell is the policy director of Employ America, a think tank dedicated to having the economy run at full employment levels. Sam is also known on FOMC Twitter as an influencer when it comes to nominations for the Board of Governors. Sam returns to Macro Musings to talk about what 2021 likely has in store for the Fed. Specifically, Sam and David discuss Fed Vice Chair Richard Clarida’s vision for temporary price level targeting, the prospects of Jay Powell and Lael Brainard (and others) for the next Fed chair, the significance of Janet Yellen’s treasury secretary appointment, and the political pressures facing the Fed in 2021.

Read the full episode transcript:

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to

David Beckworth: Sam, welcome back.

Sam Bell: Thank you so much for having me, David.

Beckworth: Oh, it's great to have you back. I miss our times together in DC, I miss our FOMC watch parties. Luckily, we still have Twitter and I get to interact with you there. But I thought it'd be great to have you back on the show, Sam, because this is a new year, a lot of big potential changes coming up at the Federal Reserve, at the Board of Governors, particularly when it comes to personnel questions. And you have got yourself right there at the center of all this, you have a good sense of what's going on. So I'm delighted to have you on to walk us through some big changes that might take place this year in 2021.

Beckworth: Before we dive into that, though, Sam, as I mentioned, you're the policy director of Employ America, maybe just give our listeners a little bit about what's going on there. The bird's eye view, what you guys are doing right now.

Employ America

Bell: Yeah. So we are dedicated to full employment, tight labor markets, we want rising wages. And we like so many are actually doing more on the fiscal side these days. So my colleagues, Liz and Arnab, we're deeply involved in all of the Congressional, various iterations of relief bills, and specifically on trying to get more generous unemployment insurance in terms of extended benefits. And also, we're deeply invested in the concept of automatic stabilizers. So we want to, as much as possible have relief tied not to some arbitrary date, but to conditions.

Bell: So we're trying to work that and we have been moderately successful on some fronts, not so successful on others, but I'm really lucky to be working with people who are much smarter than I am. And I'm very in awe of their efforts. And yeah, and my colleague, Alex Williams, who just joined us has written something recently, pushing back on the CBO, and how they're thinking about fiscal multipliers in some of these relief bills. And my colleagues, Arnab and Skanda just wrote up a big report about the sector ammunition, taking the CARES Act funds that were supposed to backstop the Fed facilities, taking them back and whether he had legal authority to do that.

Bell: So we're really trying to, I think we're getting more involved in fiscal policy. And we're trying to find these opportunities where a little bit of technical input or a little bit of research will go a long way, potentially, in terms of policy outcomes. That's the snapshot.

Beckworth: Yeah. Now you mentioned you got some smart talent on your team. I want our listeners to know that Sam is the reason we have Employ America. He is the policy innovator here himself, an entrepreneur of sorts. So he brought it together. And that's a nice segue into a question that was asked on Twitter to you. So Sam, you post on Twitter, some questions about coming on this show, and any feedback. And one of the questions that was sent back to you is, how did you get into this? How did you get on this path of becoming a Fed watcher and ultimately, creating Employ America?

Sam Bell’s Background

Bell: Yeah, I'm sort of embarrassed to say that I was somebody who was very focused internationally for the early years of my career, I was doing international human rights, and was basically in a mindset where we have challenges in the United States, but fundamentally, the good I can do in the world is abroad and globally. And the Great Recession really just knocked that out of me. And I really couldn't understand how we were dragging on for so long with so much, what I felt was human suffering, and it drove me into this world, and you and many others on Twitter, helped guide me and helped educate me and simultaneously I was working with organizations, leaders of organizations on management issues, how do you run an organization well.

Bell: And I had a bird's eye view about what folks in Washington were doing, what issues they were working on, and from my personal perspective there was just very little focused on, are we getting macro right? And are the big institutions working on these issues, like the Fed, getting pressured to do better and get to better outcomes? It felt like the... Obviously a lot of people in financial markets are interested, and there's a lot of media coverage but it felt like a very barren landscape and then Fed Up popped up, which was this activist campaign and I ended up doing consulting for them and then out of that found Employ America.

Bell: So I really got lucky and really, Ady Barkan and the Fed Up folks really were the avenue to pull me into some of this Federal Reserve work. And on me, personally, I've been focused on Federal Reserve nominations. And I just saw early on in the Trump period that people who were being in the conversation about Fed chair, their records were undiscovered and even people who I thought should be in the know, didn't know basic things about some of these potential Fed chair candidates. So that really drove me to, make this a full time thing and start an organization and we've expanded from there.

Beckworth: Yes. And you have quite a legacy behind you. Maybe later, we'll talk about some of the Fed governors that didn't happen because of your efforts and your research. And I think we mentioned this on the previous show, that you spend a lot of time in the Library of Congress researching some of these individuals. So you are a familiar face there, based on your Fed research.

Beckworth: All right. So a second question from Twitter for you is: what signs, what dashboard of indicators are you looking for that will tell you, we are getting close to full employment? So we hope 2021 will be a great year, a great boom year. But what will you be looking for, to tell you that we finally have arrived back at full employment?

Indicators of Full Employment

Bell: Yeah. So I would encourage folks to... I think my colleague, Skanda has come up with a brilliant proposal about the Fed and its framework. And you've called it a close cousin of NGDP targeting but he zeroes in on gross labor income growth and says the Fed should be trying to get above a floor for gross labor income growth. And that's what gross labor income is like, it incorporates flows into employment and also wage growth. So we like that. We like that metric. I don't know. That's generally how we're thinking about things, is like, let's get to a floor. So four, four and a half percent would be one floor for gross labor income growth. Another floor would be, what is the reason we can't get back to the year 2000 prime age employment to population ratio? That's one thing that looms large for us, is what are... Intellectually it doesn't make sense why we wouldn't be able to get back, at least to there. So we're looking at, yeah, participation, wages, employment and yeah, a host of other things, but I would identify those three.

Beckworth: Okay. Well, let's move on to the main thrust of our show. And that is this big year ahead of us. And we've just come off a very busy week in terms of Fed happenings. We are recording this January 15th, so this is the week of the 11th through the 15th. Next week is going to be a pretty quiet week for Fed events. This past week was very busy, a number of speeches, if I counted correctly, Sam, there were 13 different appearances. Probably the most notable was Raphael Bostic, in terms of regional presidents. He started raising questions about tapering and the Fed's purchases, got the market interested, some of us understood. But luckily, Jay Powell came along and whacked that one down. I think Tim Dewey had a good article on that, where he said, "Powell has hammered down any questions about tapering. It's not going to happen for a long time and it will happen in very different circumstances." There were also some, I think, great speeches from Lael Brainard and Rich Clarida. And I just want to mention, Rich Clarida's speech, Sam, just indulge me here for a few minutes.

Clarida’s Vision for Temporary Price Level Targeting

Bell: Please.

Beckworth: It's very similar to the one he did in November, and in it, he lays out more of the details on this new framework the Federal Reserve introduced in August, the average inflation targeting framework. I mean, there was some excitement this week because this one year window of at least 2% inflation for one year or more came up, but here is what I liked about that speech, and honestly, I had to read that speech in November several times to understand it, I still have questions from it. I'm not sure I understand everything about it. But he really goes in depth in this article about temporary price level targeting. In fact, Rich Clarida calls it a version of temporary price level targeting like Ben Bernanke introduced in 2017. And then Bernanke, Kiley and Roberts in 2019, had a follow up paper. And it's a version. And maybe you could call it a watered down version, or I with some humor called the poor man's version of temporary price level targeting.

Beckworth: But I like his view of this, and I don't know if this represents the rest of the FOMC's view of it, but I'm excited to see Rich promoting this as a version of temporary price level targeting because Bernanke's original exposition of the temporary price level targeting was it's a framework that does price level targeting when you're at the zero lower bound, and then outside of that you go back to a regular inflation target. And Bernanke is very clear, he said, "Look at the zero lower bound, we've had some very severe demand shocks. And when we get away from that, we don't want to be overreacting because of some temporary inflation caused by supply shocks."

Beckworth: And you start putting that together, you're like okay, "What is their framework that really worries about demand shocks, but wants us to avoid supply shocks?" And to me, as an advocate of nominal GDP targeting, it screams some version of that. What in my mind, temporary price level targeting does is it itself is a version of something like nominal GDP level targeting. In fact, if you look at nominal income, nominal GDP over the past decade, it's been a relatively straight line. And I'm just excited, I guess, Sam, that he sees it this way, because then it really does reinforce the point that Jim Bullard made when this was introduced, that this is a version of nominal GDP targeting. At least a step in the direction of that. I don't know if you have any thoughts on that perspective or not.

Bell: Yeah, I think Clarida is clearly a leader here. I think the question, and I'm always focused on personnel. I mean, I think the question is, does everybody on the FOMC see it the same way he does? On the one hand, he led the process, on the other hand, when he talks about it, it sounds different than when Kaplan talks about it or when Bostic talks about it. And maybe that's okay. But it strikes me that the framework is a little bit in the eye of the beholder. And so, yes, I think I was surprised at him saying that explicitly. And until I saw your tweet that he had said, previously, yeah, I was surprised at his, inflation has to be running above 2% for a year before we're going to raise rates. I think he and Powell are very committed not to become Japan. And you've talked about it on your show a lot. That's their big fear, I think.

Beckworth: Yeah. And that's a great point. Even if Clarida has this vision, does everybody else have the vision? And that's why I have you on, Sam, and that's why I do this podcast. To make sure everyone is singing from the same page of the choir handbook. Okay. So let's talk about personnel, you brought that up. And that's a nice segue, there's a lot of potential changes this year. There's also a lot of maybe new politics weighing into this. So let's talk about the people and the politics of the Fed in 2021. And let's think about the timeline as it relates to that. I think the first big position, that's the Fed chair. So talk us through what's at stake this year and when will this all unfold.

Fed Personnel in 2021 and Beyond

Bell: Yeah. So Jay Powell, his term as chair is up in February 2022. But we probably will have a Fed chair decision this fall. So right now, the Fed chair sweepstakes are about to begin if they haven't already. And I remember in December 2016, there were already contenders, giving campaigning speeches, right after Trump had one about seeming to make their case for why they should be Fed chair. So I think the term is up February 2022, but we'll get a decision, I think probably likely in the fall. I think the two top candidates, I think are Lael Brainard and Jay Powell. We usually have people from the Fed stepping into leadership role. So we don't usually have outside... Or we could talk more about potential outsiders, but I see those two as the top candidates. And I'm happy to talk through what I see as the case for both of them, which I think is a little bit different, even though they're, in some ways, very closely connected and working very closely together.

Beckworth: Yes. Why don't we do that, Sam? Start with Chair Powell. Why he should return as the Chair.

Bell: Yeah, so I think the key thing with Chair Powell is, there's five things I'd love to hit. One, pre-pandemic, he was assaulting the natural rate. And especially the natural rate of unemployment. And that was basically from the start of his chairmanship, he was very skeptical about using these fixed point estimates as guides to policy. And from our perspective at Employ America, even in 2019, when we were way below the committee's estimates for maximum employment, he was saying, memorably, "We need to see heat to call something hot." In other words, we need to see wage growth to call maximum employment. And as late as December 2019, he was saying, "This is just a start," in terms of labor market progress.

Bell: So the fear we had always had is the Fed's going to cut off more employment gains before we actually get to a point when people have rising wages and people on the margins are pulled back in. And he was, at least rhetorically, very much in a space where he was, on our wavelength. And then, you've talked a lot on your show about the response to the coronavirus recession, and we have our issues with what happened. But on the whole, it was aggressive, multi-dimensional experimental response that I think took the crisis very seriously in all its manifestations. And one thing that got a little bit lost, because we talked so much about monetary policy, I don't know if there's a Fed chair who's ever been more vocal about fiscal policy [than Jay Powell] and ever allowed himself to be used as a tool to get more fiscal policy.

I don't know if there's a Fed chair who's ever been more vocal about fiscal policy [than Jay Powell] and ever allowed himself to be used as a tool to get more fiscal policy.

Bell: If you go back and look at Nancy Pelosi's press releases, she is justifying CARES and justifying Heroes on the back of her conversations with Jay Powell. To such an extent that even though he has great relationships, it seems with Republicans in the Senate, by the fall, Republicans were vocally pushing back on him because he was so outspoken about the need for fiscal, that it seemed like he was taking sides in the House Democrats want more, Senate Republicans want less fight about what relief bill. So here's someone who has gone to bat for not just an aggressive monetary policy response, but an aggressive fiscal policy response and basically staked, you could see it as staking the Fed's credibility on that.

Bell: So the third thing I'll say is in September, he led the committee to this very aggressive forward guidance. So the committee said, "We're not going to raise rates until we reach maximum employment and have gotten to 2% inflation threshold." Which for us, that and is so key. So he's saying that reaching maximum employment is a necessary condition for interest rate lift off, which, if you run it back, if we had that in place, it's not clear we would have had any rate hikes from 2015 to 2018. This is like a super dovish, potentially, framework.

Bell: So I would say, that's a point in his favor, and you can see that some of Biden's advisors like Jared Bernstein, and others have talked in a really complimentary way about his leadership in that regard.

Bell: I think to two other things for Powell. One is, Janet Yellen was the first Democrat to run the Fed since Paul Volcker. And she faced sharp pressure on a number of fronts, a number of political fronts, from talking about inequality to the perception that she was too dovish. And I think the simple fact of the matter is, you can get away with more dovishness as a Fed Chair, if you have an R next to your name, and you were appointed by Donald Trump than if you have the progressive label on you. I think that's a real, fair or not, I think that's a real factor. And you will remember, David that when Yellen came in all of a sudden there was like a... I mean, not all of a sudden but there was a heightened clamoring of like, can the Berkeley labor economists do what it takes to normalize interest rates? This whole media cycle and definitely congressional cycle. And I think Jay Powell has the potential to avoid some of that, partly because he's been in the job, partly because he's a Republican.

Bell: And then the final thing which might loom the largest, and I don't know Joe Biden, so I haven't talked to him about this. But he's very much in the mode of an institution healer, whereas Donald Trump was an institution disrupter. And if you think about his time in Washington, so he saw Paul Volcker get reappointed by Reagan. He saw Greenspan get reappointed by H.W Bush, Clinton, W. Bush. And then, of course, Obama reappointed Bernanke. So these are all, the Yellen not being retained was the first time in a very long time we had had a one term Fed chair who wanted a second term.

Bell: So part of me thinks, Biden will want to restore that institutional arrangement where we don't just dump the person because they're from the opposite party if they're doing a good job. So I think all of those things are working for Powell, and of course, there are things that are working against him, that I'm happy to talk about. But-

Part of me thinks, Biden will want to restore that institutional arrangement where we don't just dump the person because they're from the opposite party if they're doing a good job. So I think all of those things are working for Powell.

Beckworth: Yeah. Those are great points. And I just want to go back and touch on a few of them. Your point about Powell being skeptical of U star, R star, I mean, it's so true. And I go back to his speech, Navigating by the stars at Jackson Hole, very clearly laid out that it's difficult to navigate by the stars, if we don't know our R star, our U star in real time. So I think that's a great point. He brings in some healthy skepticism, where maybe someone who formerly trained as a PhD economist may have had a harder time maybe, thinking outside the box.

Beckworth: Now, to be clear, and we had this discussion on Twitter recently, having a PhD shouldn't be a detriment against you. And sometimes you get people, we won't mention any names, but some regional Fed presidents who aren't PhDs who were a disaster, I think both of us would agree, in terms of their policy in 2008. So I think it's the personality more than anything, having a sense of humility, knowing that there's new things to learn and not being preset on a course that you can't vary from.

Beckworth: And another point you brought up, I think is important is it touches on his political savviness. There's an article that mentioned, or he said that he was going to wear out the carpet on Capitol Hill. He made a point to visit, visit, visit, visit. He's a smart operator, and that's worth a lot in DC. More so than knowing the deep underlying equations of a DSGE model is knowing how to reach these people who are going to make your life easier or tougher, depending on where you stand.

Beckworth: And then finally, your last point about continuity and restoring institutional vigor and maybe healing, that's a great, I think, compelling point too. So those are very strong points, all five of them. But I believe you can make a strong case for Lael Brainard as well. So why don't you do that?

Bell: Yeah. So we've said a lot of nice things about Jay Powell's views about labor markets and dovish monetary policy. And he's really... Everything that he's said and done, especially in the last two years suggests he's pretty committed to full employment. But in some ways Lael was there first. I mean, she basically, as soon as she got on the board, she pushed back pretty hard against the move to tighten policy. And we just had the 2015 transcripts, they just got released last week. And she basically says, "I don't think there's a great case for hiking at this meeting." And this is December 2015. "Not only have we not hit our inflation target, and not only are we probably not going to because globally, global situation is getting more complicated and the dollar is getting stronger," and whatever. But she was also saying, "I think we need to look beyond the unemployment rate, and look at participation." And basically suggesting that there was more slack in labor markets. And she didn't end up dissenting, but she was there.

Bell: I think the one counterpoint that critics could come up with was where she and Jay might have diverged is by September 2018, there was a ton of narrative about overheating and we had the Trump tax cuts on top of the budget deal, on top of tariffs. And it was just going to be this perfect storm for inflation. And she said in September 2018, that we would need a year or two more of hikes. So that's like four to eight more hikes after-

Beckworth: Yikes.

Bell: ... the Reagan cycle stopped literally two months later. But I feel like that's a little bit of a blip in her record. And she has been pretty interested and engaged on these questions of reevaluating how we think about labor market slack and how we reevaluate this environment of low inflation, low interest rates. I think that the key thing with Lael is regulations. So if there's a place where there's unified Democratic dissatisfaction with Jay Powell is on the supervision. And one way I like to think about it is, Congress is much more interested in supervision than the president is usually, I think. And you can see that at the Humphrey Hawkins hearings that, this was supposed to be a monetary policy hearing and a lion's share of the questions are about these issues of supervision.

Bell: And so I think there'll be a caucus of folks in the Congress who would prefer Lael to Jay Powell [as the next Fed Chair]. She has dissented at least 20 times on regulatory matters in the last two plus years, which, I tried to go back and count all the regulatory dissents in Fed history, but I only got a few decades deep. But suffice it to say, she alone has more regulatory dissents than all other governors combined, going back-

I think there'll be a caucus of folks in the Congress who would prefer Lael to Jay Powell [as the next Fed Chair]. She has dissented at least 20 times on regulatory matters in the last two plus years.

Beckworth: Wow.

Bell: ... two or three decades, at least, just in the last two plus years. And it's on a variety of stuff. So she wanted the countercyclical capital buffer to be activated. She just sent it on that, she wanted the Fed to suspend bank dividends during this crisis. There's a whole bunch of stuff around capital requirements, liquidity regulations, where she's dissented. But she's both done that and staked her claim that says, "We've gone too far on the deregulatory side." But also, it hasn't all been sour grapes. She's also simultaneously managed to win some fights in the Fed. So most notably on CRA, Community Reinvestment Act, the OCC was trying to do a full revamp, and basically Lael Brainard got the board to push back and take her side. And it became very contentious. Your listeners can look up arguments about that. And then there was a payment systems issue, which I'm a little bit less familiar with, but I think she was internally leading the charge and private sector wanted to do this on their own. And she will she succeeded in persuading her colleagues to bring it in-house.

Bell: Anyway. So I think, this is a, if you remember back to the conversation about Powell, one way people described it was we're getting Yellen on monetary policy, but with a more Republican friendly regulatory posture. Right?

Beckworth: Right.

Bell: You can see the inverse for Lael. So it's like, we're getting Jay Powell on monetary policy, but we're getting a supervision posture that's much more aligned with where the Biden administration is. And one note that's funny on that, Nick Timiraos had a good piece, in which he broke the news to me, at least, that Jay Powell has invited Lael into the troika. Usually, because the committee is so big, usually the Fed chair, the vice chair and the New York Fed president are really teeing up all the conversations and decisions for the committee. And the three of them operate as the command center for the FOMC and that been the case going back multiple committees. And Nick reported that Lael has entered that, so now it's a quartet of officials who are doing that. And that she was in on his call, on Jay Powell's calls with Treasury.

Bell: So it's funny that the two leading contenders actually seem to be working quite closely together right now. And this is all speculation I should say. And it could be the case that Lael Brainard is actually going to move over and become Treasury secretary after Janet Yellen steps down. So maybe this is a moot point. But that would be the main thing I see as the reasons why the Biden people might select Lael.

Beckworth: That's very interesting. And if I can digress just for a minute, back to Brainard's record, her resistance to raising rates in 2015, I think is a very interesting one. And she had the right perspective, she ultimately voted, the voting itself was an interesting story, too. She did it she said, if I understand correctly, to maintain the credibility of monetary policy. She wanted to support it, even though she was uncomfortable with it. And that's something that just the politics, the internal getting votes on one issue, supporting someone on another issue, that by itself was a fascinating conversation. But Brainard's view, I think she had it right, one of the few people in the board who had it right or at the Fed who had it right. And that is the Fed talking up rates in 2014, led to a higher expected path of rates in the future, which helped contribute to the dollar's rise, which in turn, helped slow the global economy down. And she saw that. I mean, she saw that the rate hike talk was coming back to bite the US economy in the rear. And I appreciate that about her.

Beckworth: And I think probably that has something to do with the fact that she oversaw international affairs at Treasury. She's really into the international economy and has, I think a rich perspective to bring. And I think that's valuable in the world we live in, where we are very globalized system. And the dollar is so important. It's good to have someone who can keep the focus on that. But two very interesting contenders. Now, do you have any one outside that group there? I mean, any outsiders who have been discussed, who could possibly make the cut?

Bell: Yeah. This is me speculating. The treasury secretary and the chair of the Council of Economic Advisers are always thrown into these conversations. So Cecilia Rouse wouldn't seem to be based on her academic focus, someone who would be in line for this. But she's in a prominent position, she's super accomplished. So you can never count out the people working most directly with the president. And then obviously, Janet Yellen is treasury secretary and there would be some sort of, I don't know if it's full circle-ness, she got passed over by Trump and got to finish her second term with Biden.

Beckworth: Yeah.

Bell: I'm skeptical of both of those. There's one other person, Raphael Bostic was in the Obama administration, now he's the Atlanta Fed president. And so he's already in the Federal Reserve System. And his name came up a bunch for treasury secretary and has come up a little bit, people speculating about Fed chair. I think the challenge there is, in my mind, he's clearly not as progressive on the labor market pieces and not as dovish as either Brainard or Powell. And as you said earlier in the program, he's talked up tapering recently, he talked up a rate hike, basically trying to move up the timeline for rate hikes, potentially to 2022. And even before that, he even while Jay Powell was saying, "We can't take NAIRU too seriously," Raphael Bostic in his first big speech was saying, "We can't actually let unemployment go below CBO's definition of NAIRU or really bad things will happen." So I wouldn't be surprised if he became the pick, but there's at least been some buzz about him.

Bell: And then there's always private sector people who enter the conversation. I find it hard to imagine going straight from outside government to become Fed chair. That hasn't been the pattern of the last many years.

Beckworth: Okay. Well, let's talk about some of the other openings at the Fed. So another position that may come open is the vice chair for supervision. Doesn't Randal Quarles' role end this year?

Bell: Yep. So Randal Quarles' term ends in October as vice chair for supervision. He might end up staying on the board a little bit. His term at the Financial Stability Board, where he is also, he chairs the Financial Stability Board, which is the international group of central banks. And that doesn't end until the end of this year, but his term as vice chair ends in October. And that's a highly consequential pick. Because it's, as I told you, I mean, from Congress' perspective, he has been enemy number one for congressional Democrats. Chipping away at Dodd Frank, in their view.

Bell: And so this will be a place where there'll be a very stark... There might be continuity in other places on Fed, on chair and vice chair. This is a place where I would imagine a pivot. And yeah, there's many candidates you could think about, Nellie Liang was rumored to be going into Treasury, she was formerly at the Fed. She was actually nominated by President Trump, but Republicans in the Senate pushed back really hard on her because she had a reputation as a regulator who had implemented Dodd Frank. And she's a former colleague of Janet Yellen. So you can imagine her as a potential. I think, and I have no intelligence on this, but you can imagine someone like Bharat Ramamurti, who worked for Elizabeth Warren, and then he was on the oversight commission that Pat Toomey was also on. And he would be the Dan Tarullo model, where he's a lawyer and he's worked in policy and politics and on these issues and would be coming in. But I have no intel on any of those positions. I'm just speculating about the profiles of people that you can mention in that role.

Beckworth: Yeah. So they got to be people who have a fairly high profile, in addition to having the policy chops to fill the position. So you can't just pick someone who might be really good with financial regulation, you got to have someone who's been active, who's known.

Bell: Yeah. I think there will be a desire to make change right away. So I'm imagining the Biden team doesn't want to go through the learning pains, somebody having to get up to speed on either the current Fed architecture or the Fed itself, which I would think lends itself to someone who's really been engaged in a direct way in these debates. That would be my guess.

I think there will be a desire to make change right away. So I'm imagining the Biden team doesn't want to go through the learning pains, somebody having to get up to speed on either the current Fed architecture or the Fed itself, which I would think lends itself to someone who's really been engaged in a direct way in these debates.

Beckworth: Well, let me throw out three names, which I haven't heard, but just to make it interesting and maybe stir the pot a little bit for the Biden's transition team. If we're going to fill that position, it is going to come open, I mean, why not? Morgan Ricks, Lev Menand, Kate Judge. I mean, these are people who I think are following this conversation closely. There's others and I apologize, I didn't list everyone who has been a part of this program or I'm engaged with on Twitter. But those are three people just atop my head who seem would fill that Dan Tarullo kind of role.

Bell: Yep. Yeah. I think them and there's a whole host of other people we're probably forgetting-

Beckworth: Yep.

Bell: ... that... And I think Lev was on the transition team for Biden this time. But yeah, there's no shortage of people who have expertise in that area.

Beckworth: Okay. And finally, the open seat at the Fed. So the one that you helped keep open, Judy Shelton's seat. Any talk about that?

Bell: I haven't heard any talk yet. I think they can do it anytime once he's-

Beckworth: Yeah.

Bell: Once Biden is inaugurated. Obviously, they have a whole bunch of positions to fill in the government. Nominations to make at Treasury and all the other executive agencies. And what I would like to avoid is a situation like we had during the Obama administration, where there was an initial Dan Tarullo appointment and then there were three seats that were left open until April 2010. So hopefully, we avoid that kind of delay, it would be nice to have a fully staffed Fed board.

Bell: But from my perspective, I'm hoping that what they'll consider is folks who are both progressive or aligned with us on how we think about priorities, but also people who can win arguments internally. I think that's an underappreciated point, which is like, it's one thing to agree with me, it's another thing to be able to agree with me and to win the day at the Fed.

Beckworth: Right.

Bell: I think people like Julia Coronado, who's a friend of the program, who's a former Fed staffer, is someone who would come in and right away be respected and listened to and know the building and she's been very upfront on a number of different topics that are important to us. But I'm hoping that balance of, yes, focused on full employment, focused on, but also can actually move things inside the building.

Beckworth: Yeah, very interesting and something to follow closely as this year unfolds. Go ahead.

Bell: One thing I should say is, our mutual friend, Kaleb Nygaard, just wrote an op-ed about labor. And he went back in the archives and actually, even though the Federal Reserve Act says that Fed officials should come from all various walks of life, we've never actually had a sitting member of the FOMC who comes from labor, like any labor alliance institute.

Beckworth: Interesting. Yeah.

Bell: And Bill Spriggs, who's the chief economist at AFL-CIO, a very accomplished labor economist, he would seem to slot in there and he would seem to be consistent with the Biden theme of elevating labor and balancing things out in terms of capital and labor. So that would be one way they could go as well.

Beckworth: Well, we will look forward to seeing this unfold. And again, you will be on top of it. So we will follow you on Twitter, Sam, and we may get you back on the show later in the year, when we have an update on some of these positions. Okay. So that's the Fed itself. Of course, the Fed doesn't operate in a vacuum. There's political pressure, there's DC around, it's running the government. So there's a lot of politics at play as well. So let's talk about that now. We have a new chair of the Senate Banking Committee, Sherrod Brown and what does that mean for the Fed going forward?

Political Pressures Facing the Fed

Bell: Yeah, actually, as I said before, I think Congress when it comes to the Fed is much more concerned about the supervision, aspects of the Fed, whereas the president is concerned about the monetary policy.

Beckworth: Yeah.

Bell: And if you talk to folks on the hill, I think the thing that they're most frustrated with are on the supervision side. So I can imagine a lot of focus there. It is interesting that Senator Brown, last year released a bill basically authorizing or demanding that the Fed create bank accounts, so Fed accounts. I think he called it digital wallets in his actual legislation. But I think he is interested in this issue, especially after the CARES Act and after the 13(3) facilities. I think we will see a much more emphasis on how can the Fed work more directly with households or small businesses in a crisis? And I think there might be appetite to look at how can we do better next time on the 13(3) facilities. And that may require new authorities. In a 50-50 Senate, where I'm a little skeptical that big Fed legislation would have the votes to pass, reforming the Federal Reserve Act or anything like that.

Beckworth: Okay.

Bell: So I would expect that a lot of focus in the hearings on the supervision piece and then maybe also a focus on this, how can we give the Fed more tools to be not necessarily having to work through the financial system.

Beckworth: So the emphasis in Congress will be on regulation, maybe giving a few more tools in the margin, but what you didn't say is, will they be on top of the Fed about this new framework? And that's what I'm wondering, will Senator Brown be saying, "Hey, are you guys living up to your new framework or not?"

Bell: Yeah, it's an interesting question. I mean, I'm not necessarily expecting a ton of backsliding from the Fed in 2021 in terms of their forward guidance. But yeah, hopefully, if there was, we would see, and we saw. I was pleasantly surprised, the last two years we saw much more engagement, especially on the House side. Everyone from Trey Hollingsworth, to AOC engaging on these questions. So I just don't know. Yeah, I think that will come up in the hearings. I just don't know that there'll be a legislative push or anything of that sort related to Fed framework.

Beckworth: Okay. What about the president? So Joe Biden is now the president, last evening, he introduced a big stimulus bill, some people are calling it the fiscal Palooza. Let me just run through some of the numbers, 400 billion toward the COVID response, one trillion divided between $2,000 checks and $400 unemployment insurance 440 billion in small business communities, another 130 billion for schools. And there are a number of other items in there, but it's a pretty large number, 1.9 trillion total. A good chunk of the economy. I mean, depending on where you measure, where nominal GDP should be, it could be eight to 9% of the dollar size of the economy. So that's a fairly large bill. What do you think this means for the Fed in 2021?

Bell: Well, I think they have to be happy about it. I mean, they were sort of asking for it. I mean, not sort of, it seems like they're asking for this sort of sized fiscal package. And not just the size, I mean, [the Fed has] been pretty clear, there's a macro aspect to this and getting the macro dials right, and then there's a relief aspect to this, where there's a segment of people who desperately need help and need it in big quantity. And there's a huge investment we need to make about defeating the virus.

[The Fed has] been pretty clear, there's a macro aspect to this and getting the macro dials right, and then there's a relief aspect to this, where there's a segment of people who desperately need help and need it in big quantity. And there's a huge investment we need to make about defeating the virus.

Bell: So I have to think they're pleased with it, and I don't know that it changes their... It seems like, at least Powell and Clarida and Brainard are in a position where they're as close to whites of inflation's eyes as you can get and they're saying, "This is great, but we're not going to change things in expectation that fiscal will have a big pop. We want to see it. Show us the inflation outcomes, show us the labor market outcomes. And then we can talk about adjusting." So from their point of view, I guess maybe the way to put it would be, it's hopeful that we're in play for better outcomes, but I don't see them changing anything until we actually see those outcomes.

Beckworth: Okay. So you, I think are a little more optimistic that they will stick through with their commitment in this new framework. I'm a little more worried. I'm a little more worried that when inflation does pass 2% there's going to be this large outcry from public commentary, from the media, from Wall Street, even from Congress, "What are you doing? What are you doing?" And I think I have some reason to be worried that this is going to happen. I already see some articles talking about this, when the 10 year Treasury yield went to 1.10%, people were talking, "What does it mean?"

Beckworth: But moreover, if you look at forecasts, so you look at consensus forecasts, if you look at breakevens, if you look at the Fed's own SEP forecast, where inflation will be in three years out, it's 2% at most. You don't see evidence of a makeup, you don't see, I would want to see a little bit more progress, and I'm not seeing it. And I'm just wondering if the public has not internalized what this new framework means. And therefore when the Fed does come, let's say second half of 2021 and the economy's running really hot, say inflation hits 3%. What are they going to do? Are they going to say, "Hey, just see through it, the dollar's well." I mean, I think, to flesh this out, I think this is one of the challenges of an inflation framework.

Beckworth: And I know that's why your team and myself, we advocated a nominal income approach. This should be sold as, “we're restoring your incomes to where they would have been in the absence of the pandemic,” but the way they're going to have to sell it because it's an inflation targeting framework is, “we need inflation to be higher temporarily.” And that to me is the political economy challenge of this framework. But you, I think, are a little more optimistic that they can still pull it off. Is that fair?

Bell: Well, I don't know. It's a great question. And it's a committee. So I did a Twitter poll a few months ago, and maybe this was before coronavirus, and I asked, "Would Jay Powell be singing this full employment song if inflation was 2.3 instead of 1.7?" And a lot of people were skeptical that he would be. I guess I'm a little bit more hopeful, given that and, that key and, in their forward guidance for us, made a lot of difference. But I agree, I think we should be skeptical until they prove it. And yeah, it will be a different environment if we have 2.8, 3.1, whatever and the conversation changes, both on the FOMC and in press and congressional hearings. So, yeah, we should wait till we see the whites of the framework's eyes before we lend in our skepticism.

Beckworth: Exactly. And that's where your organization and my program need to step up and say, "Look, Fed, this is how you explain it. You explain it in terms of dollar incomes, not inflation." But you need to really market and pitch the right angle. In fact, Sam, I recall at a visit we had with Chair Powell, the two of us and Karl Smith, and we tried to make this point, "This is the way you're going to make this policy work, is you need to talk about higher incomes." We were actually trying to pitch nominal GDP targeting or labor income. But I think in general, this is the way you understand makeup policy.

Beckworth: Okay. With the time we have left, let's transition into the treasury secretary, Janet Yellen. You already mentioned her, but she could have a large role both in terms of what the Fed does, because she might shape some of the people who get appointed. But she might also work in a way that treasury secretaries haven't worked before in coordinating policy between Treasury and the Fed. And maybe she'll advocate, some have suggested she might advocate for policies that would require support from Congress to take an active role, such as the central bank digital currency, something along those lines. So do you see her as being pivotal or important in what the Fed does this year?

Importance of Janet Yellen as Treasury Secretary

Bell: I don't know. I don't know. I mean, she definitely, I think, will have a big voice on the nominations front. Your listeners will remember that Steven Mnuchin is the reason why Jay Powell became Fed chair. He maneuvered that so that the Jay Powell became Fed chair. So Treasury secretary will have a big influence there. I don't know how much action there will be on 13(3) programs. And in the absence of that, I don't know what she will push in terms of Fed policy. And I think ultimately, [Yellen] and Powell are both institutionalists and I think she will be careful about overstepping her bounds and being seen as entering the Fed's turf. And frankly, there's a lot to do on the other aspects of the job. So I don't know. If I had to guess I would think it was a little bit of a red herring, just because she was Fed chair, so what's she going to do on the Fed?

I think ultimately, [Yellen] and Powell are both institutionalists and I think she will be careful about overstepping her bounds and being seen as entering the Fed's turf.

Bell: But I would imagine that actually, most of her focus will be elsewhere and I'm not sure it will have huge implications for... Her specifically being in that role will have huge implications for the Fed itself. But I'm mostly guessing. So I very well could be proven wrong.

Beckworth: I think you're right, in terms of she'll have a full plate and most of the plate will not include the Fed. I mean, she has the vaccine, got the virus beat. I mean, that is the biggest key to getting our economy going again, is bringing an end to this virus, getting those vaccines out there. And the Treasury is going to help fund a large part of that, as well as the relief, the other parts of the relief bill that Biden has proposed. So I think you're right, there'll be other issues where she'll play an important role in terms of the economy. And maybe the way to look at it is to the extent those policies do foster a robust recovery, her influence will be felt in how the Fed has to respond to that robust recovery we have at the end of the year.

Beckworth: So it's going to be, nonetheless, very interesting. And maybe another way to look at it also is, you won't have this disagreement between Secretary Mnuchin and Jay Powell we had it in the last year, with Janet Yellen. They're going to be much more together when it comes to making these important decisions. So I think all in all, it's going to be an exciting year to watch and a lot of interesting positions to be filled, the chair. So you mentioned the chair conversation will get started fairly soon?

Bell: Yeah. I think we'll start seeing stories in the spring about who's in the running, who's being considered and I'm sure, PredictIt will put up a betting market where all the gamblers can bet on who will become Fed chair. So yeah, I would imagine sometime this spring we'll start hearing more about.

Beckworth: Okay. So last question before we have to end the show, what is your estimated probability of Judy Shelton getting confirmed?

The Judy Shelton Nomination

Bell: Oh. There would have to be like, what's the probability of a meteor, a good sized meteor hitting the earth in the next six days? No, I think she doesn't have the votes anymore. And the Senate is not in session. So her nomination at long last is looking like it's going to expire. And she was first rumored right after Stephen Moore dropped out. So that was May 2019. And Trump tweeted her out on July 2019. So it's been a long road, but it looks like she will not be joining the Fed.

Beckworth: Yeah. Would you say her nomination process has been the longest of any in recent history?

Bell: I don't know. The Peter Diamond nomination at the beginning of the Obama term actually was out there for a long time.

Beckworth: Okay.

Bell: He had to be renominated in 2011. So if you put them together, his might be longer.

Beckworth: It's a very similar story, though. They both were out there for a long time, and finally he withdrew his name at some point. I think she's just going to have time run out on her.

Bell: Yep. He withdrew his name because he wasn't getting committee vote.

Beckworth: Yeah. Okay. Well, with that our time is up. Our guest today has been Sam Bell. Sam, thank you so much for coming on the show again.

Bell: Thank you so much, David.

Photo by Eric Baradat via Getty Images

David Beckworth
Calendar Date: 
Jan 25, 2021
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Lael Brainard and Jay Powell are the leading candidates for the next Fed chair, and either choice could have important implications for the future of the US economy.

Employ America’s Webcast Panel on the Federal Reserve’s Updated Framework and Its Implications for Monetary Policy

Macro Musings is back with another bonus episode, as Sam Bell and Skanda Amarnath (Employ America) are joined by Julia Coronado (Macro Policy Perspectives) and David Beckworth (Macro Musings) to talk through the announcement of the Fed’s framework transition towards average inflation targeting. Specifically, this panel of guests discuss the implications of moving to an average inflation targeting regime, whether the shift may cause credibility problems for the central bank, how to continue to improve the Fed’s toolkit, and more.

Read the full episode transcript:

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to

Sam Bell:  Thank you so much for joining us on this morning of a new Fed framework. Let's see. Let me start by saying a lot's happening in our country, in our world. And we have many of our countrymen falling ill and dying of COVID. We have many millions unemployed. We have our black brothers and sisters living in fear. And so I just want to acknowledge those things at the top. And we're trying to bring to this and all conversations around monetary policy, a lightness, a festive atmosphere. Our goal there is just to make it inclusive and make it accessible and make it a bit of fun. But I also realize these are heavy times.

Bell:  So, all right, with that, I don't want to do too much in terms of introductions because I think folks who are watching this probably know everyone, but we will post in the links the full bios. Julia's bio is so long, it would take like six minutes to get through it all. But let me dive in. We had Jay Powell give a speech this morning at the Digital Jackson Hole. And in addition to that, we had the Fed release a revised statement basically of their framework. And I think the ... Well, actually, Julia would you want to give a summary of what the major pieces are just for our listeners who might not have scrolled through Twitter?

Julia Coronado: Of the changes to the framework?

Bell:  Yeah.

Changes to the Federal Reserve Framework

Coronado: So, I mean, I think that there was ... To me, the big picture here is this is the flipping of the order of operations here. The goal is now maximum employment. That takes precedence. That showed up in the statement in a few ways. They actually flipped the words inflation and employment when they were talking about their objectives. They moved the employment paragraph up in the statement. They included more words around what maximum employment means. So I think it really is an overarching emphasis on using an average inflation targeting framework, which we widely expected. That was the most socialized thing that we were expecting.

The big picture here is this is the flipping of the order of operations here. The goal is now maximum employment. That takes precedence...They included more words around what maximum employment means. So I think it really is an overarching emphasis on using an average inflation targeting framework, which we widely expected.

Coronado: We got it. We got it largely as expected. They're going to try to have inflation centered and averaging 2%, but that's a means to an end. And the end is a broad based and inclusive realization of full employment. And to me, that's the significance that was maybe less appreciated was ... And I mean, Sam, we've been talking about this for a long time. Jay Powell is about as dovish a labor market dove there is. I think he took Janet Yellen's lessons deep in his soul. He went out to the people and heard them. And I think his fingerprints are all over this.

Bell:  Yeah. All right. So let me push you on that, on the employment side. And Skanda and I have been going back and forth about how satisfied should we be about this? And you never want to be in the position where you pushed for something significant and then don't recognize it. So we don't want to move the goalposts. At the same time, the speech itself and most of Powell's speeches now are really love songs to full employment, right? It's just like tight labor markets are the greatest thing ever, they do so much. I think, to give him credit, I think that his main innovation, I'd be curious David and Julia, if you think this is right, his main innovation in 2019 was to say, "We just don't know enough about our estimates of maximum employment to say we're beyond full employment."

Bell:  And as a result, I'm not going to be the Fed chairman that tries to bring unemployment back up to some estimated level. Right. So props to him. That was big. I guess the question for us is if you're not actually targeting a labor market outcome, is that enough? Is our framework high powered enough to generate a more robust jobs recovery? I guess I'm curious for reactions to that. Julia, David, Skanda, should Employ America be happy about this, I guess is ... We're starting at a place where we have very high unemployment right now and we're about to hopefully start a recovery. So should Employ America be happy about this framework?

Evaluating the Change in Fed Framework

Coronado: David, do you want to take that first?

David Beckworth: Sure. I'll jump in. I'll say a big maybe. I think this is great and it's a step in the right direction. I've been calling for a long time for some kind of makeup policy, which would be level targeting. And this is a step in that direction. And why would that matter for labor markets? The way I look at it is make up policy is huge because it allows for some reflation in the economy, including labor income, or particularly labor income. If you don't encourage, you don't allow for reflation, which in plain English means dollar incomes growing rapidly to get back to where they would have been in the absence of a recession and spending, if you don't have that, you're not going to have these healthy labor markets. So this opens the door for that. It gives the Fed license.

I think this is great and it's a step in the right direction. I've been calling for a long time for some kind of makeup policy, which would be level targeting. And this is a step in that direction.

Beckworth: It also means if you get to a level target that provides powerful forward guidance, but I think makeup policy is the silver lining I see in this. I say a big maybe because I'm not convinced this is a terribly credible policy yet, and maybe things will come out. I think there's a lot to be done. I'll stop there. I can discuss some of those later, but I do worry whether this will be a credible policy, but it has the potential, Sam, to make you happy.

Bell:  Okay. Skanda, what do you think? If we were doing this in 2008 or 2011, you just wrote a big piece about the dangers of inflation target, and you looked at 2008 and 2011. 2008 I think is ... Yeah. Anyway, how would average inflation targeting plus maybe more of an emphasis on, or a de-emphasis on sort of a natural rate of unemployment, have fared in those periods?

Skanda Amarnath: I think that the latter is probably more important for our purposes as far as de-emphasizing the whole idea of… I think one of the critical changes in the document that was released today was it changed from talking about avoiding deviations in unemployment to talking about addressing shortfalls. So it's effectively saying there's no such thing as too much employment. Now maybe there's some other problems that are associated with that that need to be addressed. But the notion that we're symmetrically optimizing the amount of employment in the economy is not actually true. Right? And that runs counter to a lot of the Fed forecasts that were effectively projecting that optimal policy would raise the unemployment rate. Right? So that, I think, was not something was widely talked about or expected coming into today. I think that's probably what Julia was saying, a very positive development.

One of the critical changes in the document that was released today was it changed from talking about avoiding deviations in unemployment to talking about addressing shortfalls. So it's effectively saying there's no such thing as too much employment.

Amarnath: I think the average inflation targeting point is one where I'm conflicted in the sense that I do understand that they're trying to be more accommodative to welcome or increase the probability of tight labor markets. As to what David was saying, there is a chance for reflation. You don't do preemptive tightening the way they did in 2015, '16 to '18. So you don't actually try to tighten the ... If the economy is running, don't try to choke it off in terms of trying to preemptively avoid future inflation. At least try to see some of it.

Amarnath: I do think it sort of misses the point that, to all the things that David was talking about, in my mind it's why not calibrate policy with that specifically in mind, specifically trying to raise dollar incomes? That seems like we're kind of doing this very indirectly through inflation to talk about labor markets. I get that there is a dovish overtone to some of this, but inflation can do very weird things in the moment. It can distract both FOMC members and financial markets. And I think 2008 and 2011 are the two examples, I think, of where there was divergence. This is also the 2011 particular was when David and Scott Sumner's ideas around market monetarism and nominal GDP targeting, I think kind of got into the popular discourse more so because inflation was doing something very different from the economy itself.

Amarnath: And I do worry while Jay Powell and people like Janet Yellen have a certain set of instincts that say, "We need to deliver accommodation when unemployment is high," I don't think that's necessarily what average inflation targeting implies all the time. Not everyone's going to have the same worldview or the same set of values. So it does lead to a more fragility in those types of environments. Again, it may not play out. So if we're talking about the sort of late 2010s, when we had both low inflation and low wage growth and low nominal GDP growth, and all those things are moving in the same direction, this is a helpful policy. But I think it is something where it does feel like a very oblique way of actually trying to attack the issue of labor market tightness.

If we're talking about the sort of late 2010s, when we had both low inflation and low wage growth and low nominal GDP growth, and all those things are moving in the same direction, this is a helpful policy. But I think it is something where it does feel like a very oblique way of actually trying to attack the issue of labor market tightness.

Bell:  That's a little bit ... Just if I can add one more thing. Yeah. That's a little bit my concern is the framework is supposed to be a structure that persists across different FOMCs. And I kind of worry a little bit that we're calling it dovish because we're marrying it with the whole Powell emphasis on full employment, and when Don Jr appoints Judy Shelton to be Fed chair, will the framework be as robust? Well, we might have other problems in that scenario, but even in a lesser scenario, I guess are we over-weighting the dovishness of it because of the messenger and because we've just come off this period in 2019 where he did exactly this thing where the committee wasn't willing to push unemployment up. I don't know. Julia, you want to weigh in?

Coronado: Yeah. I mean, I agree with the points made. It's sort of a do no harm statement. It's not a guarantee. It's not a stated objective, but I will say, one of the reasons that might be the case is that it's not clear they have the tools. Their tool kit is increasingly not well suited to the job. They work through asset prices. The credit channel in an aging society characterized by extreme inequality, the credit channel is muted at best. It's there. Housing is doing well. It's there. But there's tons of people left out of that. And the asset price channel, even more people are left out of that.

It's sort of a do no harm statement. It's not a guarantee. It's not a stated objective, but I will say, one of the reasons that might be the case is that it's not clear they have the tools.

Coronado: So full employment is a truly macroeconomic outcome that, as Powell stresses, really means we're getting to the people that are the most vulnerable. They're the ones that suffer the most in a recession. They're the last to realize the benefits of an expansion. The Fed doesn't really have the best tools to get at that. David made the point earlier about they're going to kind of have to prove their credibility over time, right? And that's the danger of making a bolder statement about full employment objectives, which I'm extremely sympathetic to, is that they even lack of credibility even more than what they've done today.

Bell:  Let me ask you, so on tools ... And David, we're going to come back to your ... In the chat, people are asking about credibility and we're going to come back to it. On tools, two questions. One is, I know you've thought a lot about tools. Three questions would be one, are there tools that they already have legal authority to do that they should be talking up more? Two, are there tools they should get legal authority to do that they don't currently have legal authority to do? And then three, my thing is should they be talking up more fiscal policy so everyone is socialized to the notion that we need fiscal policy to do more of the work? They could even call for more rule like fiscal policy, like automatic stabilizers or something like that. Anyway, do you want to take one or all of those?

Beckworth: Well, Sam, can I jump in? I want to go back to Julia's comment about do no harm. I think that’s key. I think that even if we acknowledged maybe that it doesn't have the tools that need, it still has the ability to do great harm. And the challenge is being able to let inflation rip, if it needs to temporarily, on the upside of a recovery. We want the economy to run hot. We want to get back to full employment. They want to have nominal incomes back to where they would be. And the danger, in my view, of this policy is it's going to be hard for policymakers, when we get 2% inflation, two and a half percent inflation, and pundits start crying out, the market starts worrying.

Beckworth: Congress starts worrying, and it may be hard for the Fed to do no harm. They might be tempted to raise rates. So I think even before we get to the question of additional tools, can they constrain themselves from raising rates, like they did in the past. And our hope is, this policy does that. But I'm still not sure this goes back to credibility, I'm not sure though. We'll have to wait and see when they go through a true test of inflation going up.

Even before we get to the question of additional tools, can they constrain themselves from raising rates, like they did in the past. And our hope is, this policy does that.

Bell:  Yeah.

Coronado: That's fair.

Bell:  We have another question from folks about credibility. David said a few times, one of the main problems of Fed right now is credibility. What is the main change in that direction with average inflation targeting, instead of inflation targeting? Do you think there's a significant change here in terms of credibility?

The Fed’s Credibility with Average Inflation Targeting

Beckworth: Well, let me speak to this since I brought it up, but I'm sure the other two would like to respond as well. The two big credibility questions I see is one, this policy, as we've alluded to earlier, under it, you have to sell higher inflation as a good thing. You're going to tell people, "Hey, I know you just went through a recession and come through a pandemic, let me generate a little extra higher inflation it'll only be six months a year, but this is what you need for a fix."

Beckworth: And they're constrained to do that, because this is under the framework of an inflation target. I think Skanda was alluding to, it'd be a whole lot easier if we just said, "Look, but what we're really aiming to do is to restore normal incomes, or your dollar incomes. And as a byproduct, maybe there'll be some higher inflation temporarily." And I think that's where credibility comes in. I don't again think, and I worry that the Fed, when it comes to this point, may back down and not do no harm.

Beckworth: The other thing, another concern I have about credibility with this is, average inflation targeting, the parameters around it aren't defined very well. And they even said in the statement, and I think Powell mentioned it that we still reserve all the discretion. And I think in this case it's actually detrimental. If you don't define well what average inflation targeting is, it leaves a big open hole to make it up as you go along and therefore you get back to what we already have today. One of the benefits of a pure price level target is it really does tie the hands of the Fed and says, "You have to get it back up." But the fact that it's so vague and uncertain, I think that undermines its credibility as well.

Bell:  Yeah. I thought they were going to anchor around the Bernanke proposal, which is however many quarters we are at the lower bounds, we're going to make it up with quarters above 2% inflation. I'm probably butchering it a little bit, but he had some metric around that. But yeah they kept discretion. I wonder if that was like an escape clause for financial stability.

Coronado: Yeah, they did strengthen the financial stability escape clause. They had one in there before. They added some language that strengthened it a little bit. So, I think credibility comes on a number of fronts. So I agree with David, if you're going to be truly credible, it would be a lot more effective to tie your hands. On the other hand, you might not still be fully credible, because there are these other dimensions that they do care about. And there have been times when, all else equal, they still prefer to use non-monetary tools to address financial stability. But they get nervous when markets get super frothy and debt starts piling up. And I don't think that that's necessarily something they should take off the table.

Coronado: Those are how imbalances that can be very detrimental to full employment over the cycle can develop. So I think it's just inherent to the institution and how they make decisions, that there's going to be some squishiness. And I agree that the proof will be in the pudding. And I think Powell has acknowledged this too, that this anchoring of inflation expectations, is something… if they want to re-anchor them a bit higher, it's going to take some time. They are going to have to prove themselves.

Coronado: I do think that in effect, what they've done with how they look at inflation is, look unless inflation is coming from wages, it's not going to be persistent. Supply chain driven pops, energy price pops, they look through those, they've done it before. They'll do it again. But, I think Sam, you mentioned that that requires that the personnel is that technocratic, credible people that want the right thing for the medium term interest of the economy. And if we follow that tradition of appointing types of people, then you'll get that outcome, but there's no guarantee. So, at the end of the day, the Fed is a political institution tied to the whims of Congress and subject to some of that malleability over time.

Amarnath: To that point into what David was saying about the political language. I think obviously with the political alignment right now of you have Congress, that's not really criticizing the Fed for being overly dovish. I don't think you're really seeing that side from maybe a couple of senators, but generally speaking, under Trump's presidency, we've seen actually a more dovish Republican party and the Democrats have not gotten particularly critical of the Fed for being overly dovish either.

Amarnath: But I think you can see the scenario where this language sounds very tone deaf. Where you say, "We are shooting for higher inflation." I think this is where like part of the political credibility, central banks do not operate, they may be independent, but they don't operate in a political vacuum. So there still is political pressures. If we think back to 2010, '11, '12, where there was a lot of scrutiny of the Fed in terms of, what are you actually trying to achieve here? Are you trying to debase the dollar? Are you trying to just create inflation and raise my cost of living? Or are you trying to achieve something?

Amarnath: The actual thing, I think to your point about... The inflation pressures, and I think a lot of FOMC members who are dovish are thinking about, are the ones that are wage driven. The ones that are income driven, not supply chain issues that should fall out of the system in 12 months time. But I think it's worth being explicit about that, because otherwise I feel like we're also going to get back to square one, where we're going to be talking, it's not that hard to see a scenario where you see the faster inflation, temporarily. And the question is what should the Fed do about it?

Amarnath: I think the problem with the level targeting stuff… And I think this is why some doves even, I read a Brainard speech from earlier this year, Governor Brainard talked about how, "I prefer a more flexible approach." It's not because she wants to withdraw accommodation necessarily in those sorts of environments. But let's say we did get some excess of the price level target itself. Does that necessarily warrant tightening? I think it really depends on what we're talking about. What kind of price level overshoot are we really seeing? Is this the kind of thing that is idiosyncratic, transitory, or is it actually driven by some persistent pressure?

Amarnath: And to me, all of these linguistic and credibility problems really would be better hammered out by moving away from the inflation-centric paradigm that the Fed has fenced itself into. And then it really depends on who is the personnel? And I think that gets away from the whole notion of a framework, which shouldn't really be highly depend... Personnel always matters, but to the extent it really turns on, who's the Fed chair? Or, who are the FOMC members. Maybe that's a better way to put it. What's the composition of the FOMC? I think to make that count, and moving away from this framework would actually be helpful to our Senate.

All of these linguistic and credibility problems really would be better hammered out by moving away from the inflation-centric paradigm that the Fed has fenced itself into.

Coronado: Well, I think there's scope for moving in that direction. Skanda, I think, again, if our understanding of inflation dynamics and persistent inflation dynamics is ultimately rooted in wage dynamics, there is some scope for, maybe in the next five year review, you'll get your wish.

Amarnath: Yeah. One thing that I wanted to bring up, given some of the things both of you talked about, was the framework review was supposed to also discuss tools, whether the Fed had the right tools. And it really did not get a lot of attention. Powell didn't really talk about it in his speech. And yet I can go both ways on this in the sense that we just see now, unpredictably a little bit that the Fed now has all these new authorities under the CARES Act to really lend to more of the economy. They have fenced themselves in, by certain rules that say we have to lend at a penalty rate. We can't be too generous with our lending. Some of this is just really a function of their choice, so they could actually do more if they were creative enough.

Amarnath: But some of it also does reflect like, "Look, credit channel is not the same as it used to be." And so it's the question of, are there other ways to explore new tools? It strikes me this would be a much better emphasis of their time than trying to toggle with, I don't know, a handful of basis points on inflation expectations. If we're talking about moving it back up to 2%, or targeting 2.2 or 2.3% on core and headline PCE, I'm not sure where these inflation expectations, calibration exercises, is that really worth their time for the past 18 months relative to the toolkit discussion? I think it's important to at least discuss the strategy, but it has to be rooted in, "Do we have the right tools to do the job too?"

Coronado: Amen. Woo. They spent so much time fine-tuning this little average inflation targeting thing. And when push came to shove in the recovery, it was all about the balance sheet. 150% about the balance sheet. And the statement still says their primary tool is interest rates. No, it's not. It's the balance sheet guys. Hello? The balance sheet is primary and interest rates are a companion to it. That's how I see it, in terms of sitting in financial markets, what has had the most impact in catching the falling knife when the COVID recession hit and market seized up? It certainly wasn't interest rates. That was part of it. But the balance sheet and then the credit facilities. And they're still, Powell, they're struggling. That's a lot that they were asked to take on in a very short period of time. I'm very sympathetic to the personnel and logistical issues.

They spent so much time fine-tuning this little average inflation targeting thing. And when push came to shove in the recovery, it was all about the balance sheet. 150% about the balance sheet. And the statement still says their primary tool is interest rates. No, it's not. It's the balance sheet guys. Hello? The balance sheet is primary and interest rates are a companion to it.

Beckworth: For Julia, maybe for Skanda too, and Sam you as well, why don't we have more healthy discussions about the tools? Is that itself a product of the political environment? Is the Fed hesitant to go there? Julia, you have some great ideas.

Coronado: Yeah, so do you.

Beckworth: Yeah, but you've been thinking about this longer than I have, but why haven't we seen this more openly discussed? Is it a function of the environment, or what?

Rethinking and Expanding the Fed’s Toolkit

Coronado: I think that there's also a function of personnel and it being new and it's a new front. And the Fed tends to have been a more academically based institution, where they want a theory and some evidence to make decisions based on, which is admirable. I'm not discounting that. But naturally speaking, when things change very quickly, it's hard for them to adapt quickly. And Bernanke, boy to get to QE2, that was such a heavy lift on the committee. And the staff is still... Love the staff, a little behind the curve on balance sheets.

Coronado: Really thinking about it, thinking about how it interacts with financial markets, the different dimensions. They're now moving, some of the more recent staff papers are using [inaudible] framework, they're more flexible. They're more open-ended about the channels through which this all works, and how it coordinates with interest rate policy and forward guidance. But it was really, really amazing to me, during the review that that wasn't right there in the middle. And there was a little presumption, and this was on the part of investors too, that, "Oh, the next recession will be more like a garden variety of risk."

Bell:  Yes, yes, yes, yes.

Coronado: It was complacency. And it's amazing how quickly complacency returns.

Bell:  Yes. I remember a significant former Fed official saying, "We shouldn't just assume that the next recession will be as big as the Great Recession." I was like, "We should assume that. It might not be, but we should." But Julia, can you say a few sentences on your two ideas for new tools, recession insurance and your, I forget what you call it, the direct deposits to households.

Coronado: Yeah, yeah. So I have a proposal with Simon Potter, the former markets group head at the New York Fed, and you all know who Simon Potter is. So to create a system of digital currency, digital payment providers, that's one thing that we... One, I think that the Fed, and they are moving in this direction and Brainard's recent speech definitely I felt was a pretty big move forward on the thinking of the Fed should absolutely be on the frontier of digital technology and delivering the benefits of digital technology to the public. It can provide a more inclusive, lower cost, more efficient, faster payment system. It can create better financial stability as a result and a more inclusive financial system. So that's one prong of it, is they should embrace it, they should work diligently to put that into place.

The Fed should absolutely be on the frontier of digital technology and delivering the benefits of digital technology to the public. It can provide a more inclusive, lower cost, more efficient, faster payment system. It can create better financial stability as a result and a more inclusive financial system.

Coronado: And then that would facilitate, with the blessing of Congress, it would have to be authorized by Congress. And we have a construct of recession insurance bonds where Congress authorizes a certain percentage of GDP that the Fed can deliver into these digital accounts in a recession. So it's money rains. It's just helicopter money direct to consumers. This is not a new idea. It's just operationalizing it. Simon is excellent on operational and plumbing issues, which matters so much to getting policy right. And again, I don't think enough policymakers weight that as heavily as they should. So that's what our proposal is about.

Coronado: And to me, one, it does belong… this isn't fiscal policy. Look, if we got automatic stabilizers, a la Claudia Sahm's proposal, I'm all for that, 100% supportive of that. But at the same time, this is a different way to operationalize that and it is arguably the domain of monetary policy because why did we develop an independent central bank over time to take decisions with a medium term view, but based on near term circumstances? Because fiscal policy gets stuck in the mud, only in the most extreme circumstances, it's too little too late.

Coronado: And if the Fed could have jumped in and deposited $500 into everyone's account in mid-March, then they may not have had to go as far in buying corporate bonds and because the people would be insured, and that's ultimately what businesses care about anyway, is the risk to consumer spending and the real economy. So if you can insure the consumer better, and again have lots of guard rails and to limit the Fed's reach into this area, that's imminently doable. And then you can deliver… And it's monetary. Ultimately something like this is a contraction in the money supply and the credit channel working in reverse, it's very disinflationary, deflationary. The Fed's goal is to reflate to consumers. So that's the idea.

Bell:  And Julia, it strikes me that one thing coming out of this crisis, I can imagine Fed staff or Fed officials being like, "We'd rather give that Coronado idea some legs," versus having to set up a permanent municipal facility or...

Coronado: Yeah, right.

Bell:  It would be interesting if this experience makes them more wanting to do this based on... Yeah. Based on where they have ended up. I don't think they are happy about where they've ended up in terms of all the things they are-

Coronado: I can imagine they are not.

Bell:  -engaged in. David, do you have reaction to this? Or...

Beckworth: Well, I have a similar proposal as Julia's. I mean, very similar in spirit. I will invoke my few chances you've given me just bring up nominal GDP targeting again, only a few times, but I'll bring it up now. So I like Julia's idea and I agree, only in emergencies with guardrails, with sign off from Treasury secretary, all the proper checklist, I think helicopter drops tied to something like a nominal GDP level target. So again, we're doing this, but in a systematic fashion to the point, and we keep doing it until we reflate and restore incomes to where they should be, not just a one-time shot. That's the problem with what we solve, these checks that were sent out. It's a one-time shot, depends on the mood of Congress, the president. We want a systematic and whole process in place. So yeah, I'm very sympathetic to what Julia has outlined.

Bell:  What about your colleagues, Scott? I think he would say, "Forget all that. Just keep buying stuff. Buy everything that Treasury puts out there, you can buy it all up. And when you get done with that, you buy every single corporate issuance. And when you're done with that, buy whatever else paper is around." Is there a distinction there?

Beckworth: I can't speak for him, but what I would probably say is, and I would agree at this point, just having a level target in place could go a long way. So it may not be enough, but having a level target so you're putting the proper guardrails in place. But you could do a thought experiment, which this is not very practical. Again, I would refer to the more operationally sound stuff with Julia suggested. But you can do a thought experiment where if the Fed could do this, why not buy up the whole planet?

Beckworth: At some point we would see inflation and demand kick in, but there are political constraints that kick in. There are assets supply constraints that kick in. And so I think there's probably a practical limit, but you can see the logic of the argument. But like Julia, I propose what I think is a middle ground, a practical middle ground, where... And I like the way Julia frames. The Monetarist in me likes to think in terms of quantities and what she's proposing is increasing the monetary base to the point that the economy's reflating.

Coronado: And Sam, I will say to add to that, again, given what we know and what we're seeing in terms of the distribution of wealth, reflating asset prices just doesn't get the job done anymore. And we'd already seen that before this crisis hit. The wealth effect on consumer spending, which in the nineties was a big thing. And I was at the Fed in the late '90s, early 2000s, we ran our consumer forecasting models based on the wealth effect. It was three to five cents of every dollar would go into the economy over the following six quarters, or come out of the economy in terms of wealth losses. And it died. It actually absolutely died.

Given what we know and what we're seeing in terms of the distribution of wealth, reflating asset prices just doesn't get the job done anymore. And we'd already seen that before this crisis hit.

Coronado: If you run these models now, the wealth effect is zero because wealth is so concentrated and wealthy people save less and are less responsive. They buy what they want to buy regardless of sort of the fluctuations in their wealth. So that wealth effect on consumer spending is diminimous. And it doesn't matter if you break it out into housing wealth or financial asset wealth, it's basically zero.

Coronado: And so, it's already broken down. I think right now what the Fed's doing, it works very asymmetrically. It prevents a negative feedback loop. We all know that if asset markets were collapsing and the treasury market was seizing up, that would be unambiguously bad for the outlook. But now that we've got the S&P 500 at new highs and Tesla up, whatever, 6000% in a month, does that actually predict growth? No, it doesn't actually. So it's the impact of their policies through these asset price channels is very asymmetric and that's just not desirable over the longer run. I think we need to have a bigger, bluer sky discussion about tools.

Bell:  What do you think, Skanda?

Amarnath: Yeah, I think that Julia's ideas for sort of being able to do sort of functional helicopter drops, I think this is where institutional frictions really do matter just by increasing the amount of bank reserves in the system alone. That doesn't necessarily translate into more spending in the economy, right? There's more to the causal chain that goes missing. So I think when you heard the Fed two years ago, the sort of party line was, "Well, okay, we'll be at the zero lower bound. That seems kind of scary, but we also have forward guidance, we also have the ability to buy treasuries and agency mortgage backed securities, and we're going to kind of hope it's fine and maybe we need to do this sort of framework review. Sort of like a way to kind of buffer inflation expectations, and then we'll have lower real rates when we're at zero lower bound. That's going to be the solution."

Amarnath: This is wholly inadequate for this kind of crisis, right? And that's why we also have CARES act authority that's in place to allow the Fed to lend broadly, get more directly to businesses, to state and local governments to some extent, right? So now they actually do have some authority. It's probably not and optimal form of authority. I think direct payments to households will probably be both the more neutral and more broad based. So it seems like that's probably more optimal tool.

Amarnath: You have seen that the Fed… there's just this comfort level with thinking about things purely in interest rate terms, that they think about it as the models are all designed around what is the optimal interest rate that kind of gets you to full employment or gets you to whatever u* is, whatever sort of is, it gets you to the inflation target or whatever goal you have in mind, that the interest rate is kind of the key metric to toggle with. And the Fed just seemed very comfortable that sort of thing.

Amarnath: The discussion moves to tools, it feels political. It feels greasy, and they don't really want to get their hands dirty, but this is actually the thing that mattered the most. So I think there is room for robust discussion of the income target versus having an average inflation target versus an income target versus a different sort of framework. I think that's a really big part of this, but also the tools that make this all possible. It’s just sort of striking to me that the Fed spent so much effort on this when we really should be talking about what kind of tools helped to achieve those goals too. And I think the Fed just got very comfortable with that.

So I think there is room for robust discussion of the income target versus having an average inflation target versus an income target versus a different sort of framework. I think that's a really big part of this, but also the tools that make this all possible. It’s just sort of striking to me that the Fed spent so much effort on this when we really should be talking about what kind of tools helped to achieve those goals too.

Amarnath: And it seems just a little bit dissonant when like Jay Powell is talking, this is right in the middle of a recession. We're in the middle of a pretty big crisis and Jay Powell asked to kind of explain sort of New Keynesian macroeconomic modeling about how we're going to get the real rate low enough to get the inflation expectations are going to sort of change if we commit to higher inflation, but we're not going to really commit. This is all very arcane stuff. It's not really clear that they [understand] how arcane the discussion is. It's actually as powerful as sort of it's being hyped up to be.

Bell:  We make sure we're somewhat responsive to the comments in our YouTube chat. So Ernie Tedeschi, some guy on the internet. For those who don't know, Ernie is a friend of everyone on the program and the shadow Fed whisperer.

Coronado: And we cannot live without his labor market analysis.

Bell:  And we can't live without him or his labor market analysis. And he asked, "Do you all think U-3 based NAIRU is now dead as a policy metric, or will it live on? Or will it be replaced by a broader measure or a basket of measures?" And this is, I'll take the-

The Future of NAIRU as a Policy Metric

Coronado: Like Yellen’s dashboard.

Bell:  Yeah. Yeah, so Yellen had a dashboard, it's clear that from day one Powell sort of hated NAIRU. I think it was clear from day one. His first speech was about take taking aim at the stars. And I think he's been really dismissive, both in congressional testimony and his press conferences, about past estimates. But it's a very interesting question, what replaces it, if anything? So I'm curious. Yeah, I'm curious for everyone else to weigh in.

Coronado: Skanda has an idea, right Skanda?

Amarnath: I hope that u* is dead in terms of at least how it's functionally used in… I think you can make an argument that there's always an u* that's always that always exists if we have inflation too low, that means u*… We're not there yet. If you have inflation high, that means you passed u*. I have a post hoc analysis of what the natural rate of unemployment is.

Amarnath: But just functionally being the Fed, Jay Powell talks about this in his speech and I really enjoyed this part, which was these estimates kind of move grossly quickly, so we just kind of move them up and move them down really slowly so that the natural rate of unemployment, it's supposed to be the amount of structural unemployment and the economy or everything, it's not super bullish. And yet, this thing just moves around and we kind of just know what after the fact.

Amarnath: So then how much usefulness is there in saying, "Well, we know that the natural rate of unemployment is within... It's 5%." And then, oops, we actually find out later it's not. I find this to be a very backward way of thinking about maximum employment, right? And I think the changes suggest that the Fed's going to really think about employment from a standpoint of, there's obviously a problem when we have depressed employment when we do see these sort of asymmetric shocks and we need to address that. That requires addressing and I think that's all very good.

Amarnath: I think what's really weird about the last five years of 2010's expansion was that the Fed was talking about how unemployment is at risk of going too low, that we're actually going to have ... We need to get unemployment rate back up. And these are people who are historically considered more dove-ish, people like Eric Rosengren, Charles Evans, even ...

Coronado: John Williams.

Amarnath: … even into this direction that we've got to be worried about low unemployment because there is this sort of story that's been told.

Coronado: Bad things happen when unemployment gets too low.

Amarnath: Don't you see that we got unemployment really low in 1968 and '69? And then you started to see core inflation creep up and that's actually why you got the 1970s Great Inflation. Obviously, there are plenty people who disagree with that narrative, but it's a pretty powerful one within the Fed and within the institution about sort of the risks of keeping employment too high. And I think that they're getting rid of that, both in terms of politically, if the Fed wants to sort of maintain some political independence, I think that's important to kind of stamp that out, but also it's a very grim and incorrect view, I think, of how this is supposed to work. So I do think it's a positive. Whether it actually means the end of U-star, I think J. Powell is more dove-ish on this question than, say, the staff is. I think the Fed staff is more into the idea that we still have to find some sort of U-star to make these models work. And so ...

Coronado: It all comes back to the models.

Amarnath: Yeah. So I do think that it'll still exist in Fed models. It's not going away, but I think there's going to be more willingness to think dynamically about, okay, U-star is ...

Coronado: Oh, yeah. Inherently, the makeup strategy that comes in is a dynamic thing. Right? And so we've stepped decisively away from a Taylor rule, which even a forward-looking Taylor rule is kind of a spot estimate. Right? It's not as dynamic as thinking about things over the cycle. So we've stepped in that direction. I think, if you think about practically how the policy conversations are going to change with a de-emphasis of U-star I think we do start moving in the direction of talking about income and wages because what do we care about? How do we know where we are? And Powell was the one ... I mean, again, all kudos to Janet for starting this movement in this direction. And then Powell took it and that was the metric he said, like, "Look, we don't know what it is, but we'll know based on wage growth."

Bell:  You have to see the heat to call it hot.

Coronado: Huh?

Bell:  You have to see the heat to call it hot.

Coronado: You have to see the heat to call it hot. And so we're moving in the direction of our income target de facto, if you think about how this manifests itself in terms of policy decision making. When you're at the table and you're talking about, "What do we need to do to the setting of policy?" Well, where are we on the U3, the U6 participation, all the metrics on the dashboard and, at the end of the day, wage growth? And is it keeping up? Is it going beyond productivity? I mean, we never really got there in the last cycle. We were just starting to get there, not even really getting there. And so I think that the practical implication of stepping away is going to be powerful over time.

Beckworth: I hope you're right. And I think, again, going back to what's been said, it's difficult to know what these stars are in real time. I mean, you're playing God here. No one really knows these measures and that's another argument for nominal income or nominal GDP targeting. You kind of take a hands-off approach in the near term, but over the long run, you're still aiming for some kind of price stability, some kind of nominal anchor over the long-term, but in the short term, you say, "Look, we simply don't know. And we're just going to focus on stabilizing nominal income growth."

It's difficult to know what these stars are in real time... You're playing God here. No one really knows these measures and that's another argument for nominal income or nominal GDP targeting. You kind of take a hands-off approach in the near term, but over the long run, you're still aiming for some kind of price stability, some kind of nominal anchor over the long-term.

Amarnath: Yeah. I think this is sort of the market side of Powell showing up, as well, and that he is more mistrustful of latent variables ... That's what the whole 2018 Jackson Hole speech is about, "How am I supposed to know where any of these stars are?" And the kind of person who wants some price confirmation or some kind of evidentiary confirmation to say, "Okay, this is where the stuff is. So okay, if you want to keep your U-star and R-star-oriented models, it's fine, but there has to be some kind of check in real time for how we decide this stuff."

Amarnath: I hope the narrative that – the concern from Julia -- comes to fruition, I think, it'll be interesting to see how the Fed, as the personnel is involved in the Fed, what staff, FOMC members, whether they really take that to heart, whether they take it to heart that there is more to maximum employment than a low U3. There is more to maximum employment than a low U6. There is wage growth. There's all sorts of other measurements to sort of fold in. I think that, if we're really thinking about business cycle analysis and actually what totrack in real time, it hopefully will move towards something that's more like income targeting. Right?

Amarnath: That's a lot more reliable guide for where things are going in a way that ... I'm just afraid a little bit of, when we have this discussion, are we discussing wage growth or are we discussing income growth or are we going to end up discussing, well, cell phone prices, the methodology changed and all of a sudden go down that road. It can be a real false flag for what we should be focused on here. But it's very possible that all these sort of moves end up taking us to a much more constructive place. Hopefully, as I said, if we can get to de facto income targeting, that would be a big plus because the proof is in the pudding there.

If we can get to de facto income targeting, that would be a big plus because the proof is in the pudding there.

Bell:  All right. We're coming to the end. I want to ask one question that's a little bit more specific. So if you look in the strategy doc that the Fed put out, they have basically ... Well, let me back up. There's this thing called the divine coincidence, which basically says we'll get price stability when we close the output gap. There's no conflict between our goals around labor market growth and price stability. And the Fed says, "Well, that's not always true." So I'll just read here. "The committee's employment and inflation objectives are generally complementary. However, under circumstances in which the committee judges that the objectives are not complementary, it takes into account the employment shortfalls and inflation deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate."

Bell:  So here's my question and I'm particularly interested in David and Julia's answer. So we're going to take into account deviations and we're going to balance these kind of equally. We only have a target for one, not the other. How does that work? I guess, I'm curious, how should a layperson understand, when those two things conflict, how the Federal Reserve, which is this hugely powerful institution, sort of balances them against each other? Any thoughts on that question.

Balancing Inflation and Employment Objectives

Coronado: So it's trickier. I mean, obviously, that was one of the appeals of the sort of loss function framework that they basically had in words in the statement before was, "When they conflict, we will weight them equally and we'll calculate the loss and we'll weight it equally and a number will be set out as to which one." And that's the appeal of having a framework like that and that's the appeal of the modeling and all of that. It's much, much harder to not have those goalposts, but there's a reason we're stepping away from them. They led to mistakes. They led to significant policy mistakes and U-turns that hurt the Fed's credibility. And so there's no perfect solution to this. I think it's just...

It's much, much harder to not have those goalposts, but there's a reason we're stepping away from them. They led to mistakes. They led to significant policy mistakes and U-turns that hurt the Fed's credibility. And so there's no perfect solution to this.

Bell:  We're back to Chairman Deng sort of crossing the river by feeling the…

Beckworth: Yeah. I guess, following up on what Julia said, it depends on personalities, how they interpret this. And Sam, as you mentioned to me in an earlier exchange, 2021 is going to be a big part of this story. Right? The person who is going to end up at the Fed. Who's going to be chair? I mean, all of this discussion today could be for naught if they get some different personalities, but we hope there's continuation and progress on this front, but people do play a role. This is the real world. Politics are real. So we have to keep that in mind when we think about it.

Coronado: Yeah, absolutely.

Bell:  David, do you have parting thoughts for us on the framework, Powell's speech, anything else?

Beckworth: Yeah. I will quote the classic line from Dumb and Dumber. "So you're saying there's a chance." There's a chance for nominal GDP targeting. Again, this is a step, in my view, in the right direction. I think it would be hard for the Federal Reserve to do something really radical, like what I want, but I think we can make incremental moves in that direction. It's all about credibility in getting there.

Bell:  You have five years to get New Zealand to not only adopt an NGDP target, but actually see it work out successfully.

Beckworth: I don’t know about that, Sam.

Bell:  Julia, do you have any parting thoughts.

Coronado: I think that the next time that a congresswoman or man asks Chair Powell, "Do you have all the tools that you need to get the job done?" I think he should say, "Actually, I think a review of our toolkit would be a fabulous idea, not just an internal review, but a congressional review," and maybe some kind of commission or whatever and really, really think outside the box because I don't think that, in the world we live in of slower growth and lower inflation and all of this, that achieving their mandates is going to be easy with the toolkit that they have.

I think that the next time that a congresswoman or man asks Chair Powell, "Do you have all the tools that you need to get the job done?" I think he should say, "Actually, I think a review of our toolkit would be a fabulous idea, not just an internal review, but a congressional review," and maybe...think outside the box because I don't think that, in the world we live in of slower growth and lower inflation and all of this, that achieving their mandates is going to be easy with the toolkit that they have.

Bell:  You heard it here first. The February Humphrey Hawkins is going to have fireworks.

Coronado: It's going to be lit.

Bell:  Yeah. Skanda, closing thoughts?

Amarnath: Yeah. There was something David said earlier about the Fed playing God with some of these different major variables and we're going to talk about Congress' role in all of this. I mean, it does seem to me, while it seems like Congress isn't itching to get into any of these discussions, itself, it does seem like a part of what does a proper review look like of the Fed's goals and framework… should have some congressional and White House input.

Amarnath: It seems to me they have not really shown much interest in getting engaged in this discussion. I think there's a tendency to just defer to the Fed. Sometimes it's a good thing and sometimes it's not a good thing, but it seems like part of the process here, there is something a little bit ... If you look at other countries and how they go about reviews, this process isn't something that is done in a vacuum. The central bank just operates completely in a vacuum in deciding these goals.

Amarnath: And especially on things like the divine coincidence, is there just a point where, if we're at the inflation target, we're also at full employment? Is that actually how this stuff works? That's something that models have already predefined for you, but it seems like that's also inherently a political question, too. Right? So I do wonder what is the ... whether we see Congress try to say more, politics are going to change one way or another after this election. So that probably will color sort of what is the political feeling around what the Fed's done and whether the Fed needs to do more things in sort of any direction.

Bell:  Okay. Those are great thoughts. I've really enjoyed this. And I thank Julia and David in particular for coming on. We're always interested in new ways we can communicate and new forums we can host. So if you have ideas, I think the best thing it to tweet at us. @EmployAmerica is our handle. And I hope everyone has a good rest of the week.

Photo by Eric Baradat via Getty Images

David Beckworth
Calendar Date: 
Sep 2, 2020
Podcast Series: 
Publish to Announcements page?: 
Publish to The Bridge?: 
Libsyn Podcast ID: 
The Fed recently announced its movement towards an average inflation target, but despite being a step in the right direction, it may cause problems for the central bank’s credibility.

Sam Bell and Skanda Amarnath on Gross Labor Income Targeting

David Beckworth: Our guests today are Sam Bell and Skanda Amarnath. Sam and Skanda along with Kim Stiens are part of a new organization called Employ America, a new research and advocacy organization that aims to get better labor market outcomes. Sam was also known on FOMC Twitter as an influencer when it comes to nominations for the Board of Governors, we'll come back to that in a bit. And Skanda is a former hedge fund economist and a New York Fed research economist. Welcome Sam and Skanda. 

While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to

Skanda Amarnath: Thank you. 

Sam Bell: Thanks for having us. 

Beckworth: Yeah, it's a real treat. Of course, we know each other through Twitter, online. I've actually interacted with Sam in person many times before. 

Beckworth: First time to have Skanda here in person, so it's great to have you on and you guys have a great story to tell. Before we get into the great economics we want to talk about today though, I noticed something else that we have in common besides Fed and economics, is a love of basketball. 

Beckworth: And I know that was Sam and I have talked before, we both played varsity basketball, we both liked to play pickup basketball in our old age still and we follow the NBA. And I think that's true for you too. Because in fact your handle on Twitter was Irving Swisher, right? Which is a play off of Irving Fisher, correct? 

Amarnath: Yes, yes. I’m a big NBA head, I am. 

Beckworth: Okay. Well I know we're supposed to talk about economics today, but can I ask who you guys are rooting for in the championship game, NBA? 

Amarnath: I'm rooting for the Warriors. 

Beckworth: Warriors? 

Bell: I'm rooting for the Raptors. 

Beckworth: Okay. 

Bell: Kawhi… Fred VanVleet is a beautiful player and I encourage all the young listeners out there to model your game... Even if you don't have the athletic prowess of Draymond Green or Kawhi Leonard you can just take some hope in Fred VanVleet who makes all the right plays and is by no means an athletic specimen. 

Beckworth: Okay, well I'm going to have to go with Sam. I apologize Skanda. But I live in Texas for five years and I was big Spurs fan. There's two Spurs with Toronto, so Danny Green and Kawhi Leonard. So any event, fun series. And let's move back to the economics and the Fed. Now you both are part of a new organization called Employ America. So tell our listeners, what is Employ America? What are you trying to do? 

Bell: So cast your eyes on the horizon, David, and just imagine tight labor markets stretching out as far as you can see. 

Beckworth: Nice. 

Bell: And that's our north star is, better labor market outcomes, so more employment, higher wages, better quality jobs. And we are doing research, we'll talk about Skanda’s paper, we're doing advocacy. At present, we’re interested in, focused on Fed nominations. Obviously personnel is hugely important. But we want to get involved in fiscal policy. You've had other guests talk about automatic stabilizers. Hopefully there'll be some legislation on that in the coming years. And all things labor market. I think we also want to be a hub for there's this boisterous, diverse crew of people on Twitter and elsewhere who are interested in better labor market outcomes. 

Bell: And we sort of want to be one of the hubs, one of the homes for those folks channeling some of the great ideas, some of the great discussion papers, et cetera. So North Star, tight labor markets. 

Beckworth: Okay. Very nice. And you have another colleague, Kim Stienswho’s not here, but she's a part of the organization as well, I want to mention her. And so you've got projects already. We'll mention Skanda's research project here, his proposal for new target, which probably many of you have seen already, but we'll get to that in a minute. And just briefly, Skanda you also testified to Congress yesterday is that right? 

Amarnath: Yes, so at least for subcommittee, we presented on sort of what the Feds currently reviewing through its framework review and the conference in Chicago. And comparing that with how the Fed probably ought to be held accountable, especially on labor market outcomes. So especially in terms of how they've defined maximum employment, how that's changed over time. So we were presenting there yesterday. 

Beckworth: Yeah. So one of your pushes I think is to take the dual mandate seriously, right? Not just one part of it. Right. So, yeah. Okay. Very nice. Well, let's go back to you guys individually. Sam, let's start with you and I'd like to hear about your career path to becoming FOMC Twitter influencer for governor nominations. And for listeners who don't know, Sam has been pivotal in dethroning some nominations along the way and I think Greg Ip called you a national treasure one time because of all the... Tell us what you do because it's a really interesting process you go through in terms of checking up the background of these nominations. 

Bell: Okay. Well, so I guess I'm not a trained macroeconomist, but I got really interested in macro issues after the Great RecessionObviously we had an unemployment crisis. It got me trying to figure out how is this happening and what can we do about it. And so I got really engaged on Fed policy debates. And in 2016, I started working halftime helping the ”Fed Up” campaign with some research. And in December of 2016, I went to Hoover event that included Kevin Warsh. And this was obviously after the election and I was talking to somebody who was sort of singing Warsh’s praises. And I said, well my understanding is he actually had a pretty hawkish record during the early years of their recovery. And since then, and this person who I respect greatly sort of wasn't clued into that. 

Bell: And over the following months, I got the sense that people who were gunning for Fed chair appointment, were going to be evaluated on the whole, I mean, the conversation seemed to be more about what are their current views of policy and who do they know, where do they sit? Are they close with Mike PenceAre they supported by Wall Street? And for me, it started with Warsh. I really wanted to make sure people were paying attention to the past record of nominees. So in the summer of 2017, I wrote a huge long piece about Kevin Warsh and his record through the years, what he was saying in 2009 about inflation coming and his objections to quantitative easing. And anyway- 

Beckworth: Was that in Politico? 

Bell: No, that was on Medium. You can find it at “Jared Kushner for Fed Chair on Medium. It got a little bit of coverage. Paul Krugman retweeted it and- 

Beckworth: Right, I remember it. 

Bell: Adam Tooze did a blog post about it and the FT featured it. Anyway and actually it got around Wall Street a bunch because there was for all of these nominees there's a huge demand for information about them, when there's news, oh, Kevin Warsh is going to meet with president Trump. There's a huge all of a sudden demand. 

Beckworth: Sure. 

Bell: But there's few people who have the time or inclination to actually have chased down all the information about, well, what was their record? And so that's sort of the public service. I don't know if I have any influence, but to the extent I do, the public service I'm trying to provide is what's the record and specifically around what I feel is like a great crisis that we had in this country around unemployment in '09, '10, '11, '12. 

Bell: So my process is very straightforward, read everything. I'm in DC, so I can go to the Library of Congress and get every media clip, they have the databases. So I can read every media clip, read every paper, read every speech. And- 

Beckworth: Is that where you do most of your research at the Library of Congress or do you do some from my computer in an office or? 

Bell: Yeah, for each I mean, I've been engaged on three nominees in particular. So Warsh, Marvin Goodfriend, who was nominated in 2017 for one of the open governor positions. And then Stephen Moore who was rumored to be nominated, but was never actually nominated. And yeah, for each of those I spent a good deal of time at the Library of Congress, but I also watched the whole Stephen Moore CSPAN archiveSo I did that late at night and while I was making dinner… 

Beckworth: So if someone works at the Library of Congress and they see you walk in, they say, Oh, someone's been nominated to the Board of Governors, huh?” 

Bell: Yeah, well, I don't know the folks at the Library of Congress that well, but yes. Yes. 

Beckworth: Okay. Now you were pivotal, at least somewhat important in like Marvin Goodfriends failure to get passed the Senate. Is that fair? 

Bell: I don't know if I was in particular, I mean, on two past shows David, you've said that Rand Paul was actually responsible for blocking… 

Beckworth: You listen too well to the show. 

Bell: I listened to all the episodes and I want to correct the record. So Rand Paul was opposed to Goodfriend on the issue of negative interest rates. Goodfriends long time written about negative interest rates, how would you make it feasible. But Rand Paul has only voted, in his entire Senate career, he's voted for a single Federal Reserve nominee, Randy Quarles. So of the whole board right now, he's only voted for Randy Quarles. 

Bell: So if you need Rand Paul's boot and you're a Fed nominee, you are- 

Beckworth: Already in trouble. 

Bell: A lot of trouble. 

Beckworth: Okay. 

Bell: So basically yeah, not a lot of attention was paid to the nomination. Marvin Goodfriend, he's not Eric Trump's golfing buddy. He's a serious scholar. But when you look at his actual record and what he was saying in 2009, he was already saying the Fed should be thinking about interest rate increases. In 2011 he gave Wall Street Journal interview where he says inflation scares are going to be a much bigger thing. The Fed has already sort of too easy. The thing that really I focused in on was when the Evans thresholds were announced. And to me the Evans thresholds were already sort of a lukewarm proposal. I mean the conversation at the Fed started with NGDP targeting actually in November, 2011 and they said, well, we're not going to switch to that yet. 

Bell: Maybe we should do these thresholds that Charlie Evans was talking about. And then they watered them down a little bit more because originally the thresholds were more like, I think five and a half [percent] unemployment, three percent inflation, ended up being six and a half [percent] unemployment two and a half [percent inflation]. Anyway, so I think it was a useful policy intervention. I'm not sure it was like the most aggressive thing they could have been doing, especially in retrospect. But Marvin Goodfriend went on Bloomberg and just blasted the Evans thresholds. This is irresponsible. Even if they by some heroic effort, got unemployment to seven percent. He said, we can't be sure that that's not beyond NAIRU. In other words the natural rate of unemployment may be above seven percent, which to me is like just a major failure in judgment. So a lot of the senators use the stuff I'd uncovered in the confirmation hearing and he never sort of explained himself. He never said, Well, in retrospect I was wrong. That's not true, he did say in retrospect I was wrong, but he never really explained himself. 

Beckworth: Well, I think, yeah, it was the tone, the way he carried himself, just a little bit of humility goes a long ways, right? 

Bell: Totally. 

Beckworth: Yeah. I mean just saying, “Look, I messed up. You're right. I messed up. And I think he didn't seem prepared in general for that. So maybe he was his own worst enemy in some ways. But the point is you brought to the surface these comments he had made and everyone was aware of what he had said during this period. 

Bell: Yeah. And I think, I mean, the thing that was in my view was really encouraging about the hearing was for so long the congressional hearings, the dynamic was people yelling at Ben Bernanke and Janet Yellen for doing too much, taking too many risks with inflation or trying too much in the way of stimulating the economy. And it was like the first hearing where the members were coming back at a Federal Reserve official or potential Federal Reserve official and saying, why were you so conservative? Small c conservative. Why are we so hawkish on this? Which I think is part of a more general mood in Congress these days. But from where I sit was encouraging that that was the direction. 

Beckworth: Okay. Well, let me ask this question then. So there were several people you've been involved with, you mentioned Stephen Moore, which was a great roller coaster ride while it lasted. But, have any of these people ever like, reached out to you and said, “Hey, give me a break, or have you got any blow back, maybe indirectly even. 

Bell: Oh yeah. I mean not folks directly but friends of people saying... A few categories of complaints, I mean, one is we could do so much worse than the person you're sort of tweeting about. Right? So why are you giving Marvin Goodfriend a hard time? We could end up with Stephen Moore, right? A Trump crony or something. Right? So that was one category of complaint. Another category of complaint is don't you ever, like, does everyone have to agree with you? Isn't there space for people to have been wrong but still be good nominees? In which case, and Skanda and I were just talking about this, but we have an example of someone who did that well, Narayana Kocherlakota who was very hawkish, maybe the most hawkish person on the committee in '09, '10 and the facts didn't end up justifying his position. 

Bell: So he changed his position. So we're embracing of converts, we are embracing of people who changed their mind with the data and we were the last people to say we have all the answers. So that was the second one. And then I guess the third one was around like, is this just a partisan exercise? In which case don't you just hate all of Trump's nominees? But I think Richard Clarida is doing a lot of great things. I didn't do a whole tweet storm about his nomination because even though there were pieces of it where he objected to Fed policy in ways that I didn't think were right on, overall, his body record was like really solid and I thought he was a good nominee. So those were the three sort of categories of complaints people had about my tweeting. 

Beckworth: Okay. One thing I remember about Richard Clarida from you is that he's a singer. I wouldn't have known that he has this entire recording album. He has an album. So listeners out there- 

Bell: We’re hoping for the Bank of Jamaica-Richard Clarida mash-up on inflation. 

Beckworth: No kidding. Just tell our listeners what that means if they don’t know the Bank of Jamaica. 

Bell: The Bank of Jamaica has a very creative communications strategy of making YouTube videos where reggae performers are basically singing about inflation targeting. And we're hoping that the outcome of this Fed review is also like a new Richard Clarida album where we get some monetary policy content. 

Beckworth: Okay. We'll look forward to his next album. Alright, let's go to you Skanda. Let's talk to you for a bit and before we get into your proposal, just, you worked on Wall Street during much of this period we've been talking about, the weak recovery, the slow growth. What was your sense of what the Fed was doing? Was your sense the Fed was being too timid? Was it being too cautious? What was your take because you were an economist from the frontlines. 

Amarnath: So, as you said, I worked as an economist at hedge fund, and I recently obviously joined Employ America, but I worked there for four years. But I've been following this pretty actively probably since sort of the fall of 2007 or something, or summer of 2007. And I think the bias that I think you've had that a lot of people have a lot of different stripes have had correctly was that this has been too slow of recovery. The errors have been one sided in terms of hawkishness, in terms of not pushing for stronger growth. Not recognizing the jobs crisis of 2009, '10, '11, '12 that we had really low rates of nominal and real growth and that we could've been doing better. 

Amarnath: Obviously there have been times that monetary policy has really stepped up to the plate, but there have also been other times that maybe have not been as keenly focused on where monetary policy could have done better. And so in that sense this has been one long story in sort of policy not quite getting it right and it's all been in one direction. It hasn't been a case of there've been times when the Fed was two dovish versus too hawkish. I think it's been a pretty systematic error at this point. 

Beckworth: Yeah, I completely agree with that. And of course I get push-back but I think over a decade, and I go before 2012 when I look at the inflation record because implicitly they were targeting two percent before then. And so to be generous, be charitable from the recovery to the present, it’s been close to 1.5 percent inflation. And the people were like, well, what's 50 basis points? Well to me, 50 basis points compounded as a symptom of short fall of demand growth, which, hysteresis effects, all kinds of effects in the labor market. So I do think this is an issue and I'm glad you guys are kind of maintaining attention on it, but I want to go back to kind of Wall Street view. So you got it. But in general, did Wall Street get it? I mean are economists and traders on Wall Street, are they as cognizant of this issue? 

Amarnath: So my previous role at a hedge fund, was sort of a hybrid role, is market economist and strategist. And so my job is to guess what the Fed will do. Right? And when you get into the game, and from the Wall Street perspective, there's a sort of, it's fun in the sense of trying to anticipate what the Fed's going to do. You look at their framework, you look at what they say, and then you just say, okay, financial conditions are here are the unemployment rate versus NAIRU is here. Okay, this is their bias and they're going to try and normalize here. That's a different set of questions than what they should do, right? So when you get really focused on getting the call right, there's a certain set of muscles you don't exercise either. 

Beckworth: So you lose sight of the big picture, then. 

Amarnath: Yeah. Or you're focused on your P&L day to day, which is important obviously, because that's how you get paid. But it's not necessarily the most important from the standpoint of actually criticizing the Fed, market participants are always going to complain, “Oh you misled me. You told me this, you did that.” But from the Fed's perspective, they're supposed to get things right for society, get things right for businesses and workers just as much or moreso than for market participants themselves. 

Beckworth: So the incentives aren't there to kind of have this big picture thinking, discussion. I mean some people do, but day to day you're focused on- 

Amarnath: From what I observed of sort of sell side economists in the early parts of the recovery there was the split of those who are really focused on inflationary pressures from QE, from a big balance sheet. 

Amarnath: And I think obviously that stuff didn't play out the way people were predicted. And then there were those who I guess like Goldman Sachs econ research group, those highlighting [that] there's a lot of slack in the labor market. And so in that sense they proved to be right in terms of the fact that Fed policy was easier. There was no inflationary pressure. More recently, especially at the hedge fund, it's been a different set of sort of failures in terms of the calls that this is the moment when we're going to see the inflation and the wage growth because unemployment rates have gotten so low, like there's clearly no more slack. Even if I do U-6, it's still very low. And yet those predictions have been also false. And I think now is also the time for a reckoning on that side too, which is that we need to update our priors and rethink the specifications by which labor markets and inflation to the extent they are related, how are they related? So this is an opportune time for that as well. 

Beckworth: Okay. Well that's a nice segue then into your proposal because you have a new proposal, new target for the Fed. And it's very interesting because it does kind of look at labor markets in a way that the Fed isn't currently doing. So tell us, what's the name of it and tell us all about it. 

Amarnath: Yeah. So I guess by a Twitter hashtags is FloorGLI. The idea is to put a floor under the gross labor income growth rate. Gross labor income refers to every employed person’s compensation cumulatively in this country, so the nation's paycheck. And so this is, I guess in some ways a variant on sort of national income. But it's focused on labor income, one because of the dual mandate since maximum employment is part of the dual mandate. 

Amarnath: And then also because it's actually pretty easy to measure. We get core PCE each month and we obsess over the different components and what they're doing. And is this transitory, is it not? And there's some really important information that's also in that same release that tends to not get played as much, which is a compensation of employees received, which is gross labor income. So the proposal is to really focus on putting a floor under that growth rate. That would be a better way to actually pursue maximum employment. So it really addresses that part of the mandate. I think it ends up being a much more robust indicator than inflation itself. So while we don't say don't look at inflation there's a time and a state of the economy where inflation sensitivity is important. In terms of robustness of indicators, inflation has the lag. 

Amarnath: Inflation's not very cyclical. Inflation methodology is always changing. And so in that sense you want to pick actually things for policymakers to focus on that are robust, right? That are things that are sensitive to the business cycle in real time. 2008, inflation was rising, 2011, inflation was rising. It was proved to be false signals in this grand scheme of things. We saw a pretty serious economic deterioration in 2008. And gross labor income growth was showing that in real time, month by month, same thing in 2011 and would have given them more timely signal for policy response as opposed to inflation, which a lot of people were getting sidetracked by. So this sort of obsession with inflation in some ways is, it sort of matters in a big picture sense. I don't want to minimize the costs of inflation, but we need to be very clear about, from a policymaker's perspective, what are robust indicators to look at for the purposes of calibrating policy. 

Amarnath: And then finally I'd say the floor aspect of it is also meant to really appreciate the asymmetry of policy and the political constraints. I had a discussion with Scott Sumner, I'm not sure he remembers is it now, but in 2011, one of the points he made that really stuck out to me was the superiority of nominal GDP targeting over inflation targeting when you're at low rates of nominal growth, which is.. it’s politically superior to say I want a faster output growth, faster income growth than it is to say I want higher inflation. 

Amarnath: So this takes it sort of the next step, which is to say what are the sort of politically superior targets and nominal anchors for different states of the economy?” So the way we've placed it as sort of a state contingent, nominal anchor. In low rates of nominal growth, you should be shooting for higher GLI growth. 

Amarnath: In high rates of nominal growth, you're shooting for sort of making sure the inflation target is met. So one of the criticisms obviously sometimes if nominal GDP targeting is, what if we have the late 90s scenario where we have high nominal growth but also higher real growth, right? Inflation was rather tame in '99 and 2000. We don't want to be tightening in that scenario. 

Amarnath: I know you guys have a reason for why that still makes sense, but from our perspective, we want to make sure that the costs of different states of the economy are appropriately considered. So it's a low nominal growth state. You want to focus on making sure that you're pursuing faster job growth and wage growth. In high nominal growth states, you want to be more sensitive to inflation, which may or may not show up and you kind of take it case by case, but it's still you're always sensitive to some nominal anchor, but it's a little bit more state contingent. 

Beckworth: So your proposal has two elements in it. It has inflation if the economy gets too hot, inflation gets more weight, it gets picked up, right? But it also has labor income or maybe it's wages, right? Kind of an aggregate measure of total labor income earned, right? And that provides the floor, if that gets too low, that takes more weight. And is that right? 

Amarnath: Actually, right. So especially we've been in a low nominal growth state for the last 20 years, really, or since maybe about 2000, 2001. That was when we've really seen that nominal growth rates have consistently shifted down for a variety of reasons, but that also puts more emphasis because that will inevitably imply you're going to have lower interest rates, you’re going to be closer to the zero lower bound. That naturally takes up more sensitivity. The '70s were marked by a period, obviously, of strong labor income growth, strong nominal output, nominal spending growth as well. 

Amarnath: In those environments obviously inflation makes sense and you're going to be in a different state of the world where that sensitivity makes a lot more sense. And from the political communications perspective, right, if the Fed needs to get new tools that have traction at the zero lower bound, because I think there is a decent amount of debate about how much traction they're going to have next time around when some of the things- 

Beckworth: Absolutely, yeah. 

Amarnath: -What's the better argument for having those tools? Is it that you're trying to pursue faster income growth, faster job growth, faster wage growth or is it that you're trying to pursue higher inflation? I think even for, whether the Democrats or Republicans, I think that message is probably going to be more politically effective that you're actually pursuing sort of the maximum employment side of that mandate in that circumstance as opposed to the academic exercise of we need to get inflation expectations anchored and that's why we need higher inflation itself. It's a technical argument, but it's a different one. 

Beckworth: Yeah, it's hard to tell people who have already lost their jobs, there’s uncertainty in the economy. Hey, we want to get inflation up. It's good for you. And they're like, “What? 

Amarnath: Yeah, we want a higher- 

Beckworth: “What are you smoking? And then Ben Bernanke saw this in Congress, right? In 2010, I believe 

Amarnath: Exactly. 

Beckworth: He got grilled because he said we can't get inflation up. In fact, he's using low inflation to justify QE2. 

Amarnath: Yeah. 

Beckworth: And he couldn't get anywhere. Okay. Very nice. So again, I may butcher this, but it's kind of a labor income target that it kicks in varying degrees based on the state of the economy, right? 

Amarnath: It's asymmetric in nature, right? 

Beckworth: A symmetric labor income target. 

Amarnath: Yes, so one of the things that I know people who've been at the Fed who have said, well, if you target wages, well, what happens when wage growth is strong? And our answer is okay, fine, but that's when you should look at inflation, right? That's when you should look at the costs of a high pressure economy, right? That it actually reflects the bad stuff of each economic state. Right? 

Amarnath: That's a state of the world where we should be sensitive to inflation. It may or may not show up. In the '70s it did show up in the late '90s it did not show up I would say. So that's where trying to balance those in a way that is easy to communicate I think the other thing that's hopefully advantageous about gross labor income is that it's reasonably straight forward to understand. It is the cumulation of each person's paycheck. Inflation is actually a very complicated beast. 

Beckworth: No, it is. It's all these and there's lots of debates around it. Right. Because you mentioned and lots of cynics out there too, like shadow stats and others it's open to misinterpretation and stuff where this is not. 

Amarnath: Yes, I and I understand why the BLS and the BEA are making the changes they're making. They're trying to capture something economically consistent, but the state of the world is constantly changing that how much is my unlimited data plan worth for telecommunications prices, once you quality adjust them, there's a lot of sources of error and variance that you add in. 

Amarnath: I think from a policymaker's perspective, the question is how much should I be fixating over that? I feel bad for Jay Powell when he has to sort of explain the, oh, we think these components are transitory and these ones maybe there's something to them. It's getting so much into the weeds that I'm not sure it's effective from a monetary policy strategy. 

Beckworth: Right. When you get really low inflation, you do get hung up on these what's the relative change in this or that. So what has been the reception of your proposal? You've talked to people I know a lot, so what have they said? 

Amarnath: So I think that generally the feedback's been positive so far in terms of glaring errors, we haven't been pinned down of any sort. But I obviously people who are more experienced to have seen more naturally have a little bit more skepticism are trying to feel out some of them. 

Amarnath: There's a lot to sort of digest. We put a lot into the article he published and it's hard to capture everything all at once. So we're going to try and in various ways communicate these ideas differently hopefully in a little more digestible format. We wanted to make sure everything was all in one place. But now it's also about having sort of proper paper or having sort of slide decks to actually cover the communication strategy. But generally speaking, most of the concerns were about is this going to be a symmetric GLI target? There was some concern about whether this was actually sort of too asymmetric in nature because there's no sort of focus on sort of what do you do when you're in high rates of GLI growth? 

Amarnath: So I think generally speaking, we're pretty encouraged by the response we've received. It's a little, there's some complications when you're trying to talk about state contingency. And so the communication is always challenging. That's just the nature of monetary policy though too. So we're hopefully trying to keep it simple enough but appreciate the nuance. 

Beckworth: Okay. 

Bell: If I could add one thing? 

Beckworth: Sure. 

Bell: We've started the conversation with Congress as well. So we started talking to members yesterday and I'm relatively encouraged as Skanda said about the ease with which members can really wrap their because people are already asking Jay Powell about wages. If you watch a Humphrey Hawkins hearing, people are not asking about the inflation target, they're asking about jobs and wages so this sort of framework I think is going to be, I think, easy for members to sink their teeth into. 

Beckworth: Let me ask this question, why not just have a pure GLI target where you say, look, we're going to target gross labor income at a certain rate. And if it goes above it, we tie in and goes below. We tighten. Why have inflation and labor income? 

Amarnath: Yeah, so this is where I bring up the late '90s example. I think it's a little, and this is one that I've heard from, especially when I was an analyst working for economists at the New York Fed. And that's where I definitely heard it for like why the nominal GDP targets were a little bit... We've treated a little bit more lukewarmly in terms of a lukewarm manner, was that the late '90s example of where you have high nominal growth but also low inflation. Is that really in an environment where we want to tighten? The Fed actually did tighten in that environment too. 

Amarnath: So maybe that's a misgiving that in practice as an end up occurring. 

Beckworth: I see your point though. 

Amarnath: But it's like who are we to take away sort of potentially real growth in that process because inflation is lowShould we be pursuing a deflationary strategy when we have high nominal growth? We haven't had this search. This is an area last for very long. So it's- 

Beckworth: Of an academic question. 

Amarnath: More of an academic question. I do think it helps from the communications perspective, if the Fed wants better tools, the Fed should also be thinking of political positioning. I realized that they're politically independent, they are operationally independent, but they also don't exist in a political vacuum. And if they want to be able to communicate their policies clearly and not be accused of sort of shortchanging the labor market or even the past where it's about inflation itself, that they're clear with their communications about why they're tightening and why they're easing. And each macroeconomic variable does have certain value judgments embedded in them. We want faster output growth, we want faster income growth. We don't want faster inflation generally speaking, outside of economists, probably at the Chicago conference. 

Beckworth: Well let's go a little bit more on the politics. So you mentioned the political appeal of your proposal. Sam, you follow the politics closely. You've already touched on this a bit and you mentioned earlier how they are now questioning at least Fed nominees about whether they were too hawkish, but in general, what has changed in the Senate and in Congress? How has the tone changed since like President Trump? I had Adam Ozimek on the show. I remember you had a follow up comment. One things Adam said on the show was maybe Trump will make Republicans less averse to like an inflation overshoot or more flexible inflation targeting. And you were a little skeptical, but is there any change you see? 

Bell: Yeah, I think I do see a change. I mean, well first of all, 2017 Republicans held the House, the Senate and the presidency. And if you had been watching monetary policy hearings in 2011, '12, '13, you would have thought that the day that the Republicans got unified control, they would pass the format, they would legislate the Taylor Rule, they would take discretion away from the Fed. And that didn't happen. And I think it didn't happen. I don't know quite why it didn't happen. I don't think it's totally Trump. I think that's clearly a part of it. But there's very striking about face from many members of Congress. I mean, I'll point you to perhaps the most striking, which was in April the Senate Banking Committee chair who was pretty hawkish. I mean, he voted against Yellen because she was too dovish when she was nominated for chair in 2013 and this is Mike Crapo and he's had strong questioning of Bernanke and Yellen and he's, he's also like small c conservative in the sense that he's just... But in April he called for a 50 point rate cut, which I was shocked. 

Bell: And if you look at, or if you track Senator Shelby who was often one of the great Fed critics and you look at what he was saying in February he was celebrating Powell and not criticizing the pause. And at the same time you don't have Democrats. Well anyways, so I think Republican Party has switched big time with maybe the exception of Pat Toomey and maybe they exception in the Senate and maybe the exception of Andy Barr in the House. But I think overall there's been a pretty noticeable shift. 

Beckworth: One with their shift on deficits, it seems like. 

Bell: Yeah. One thing on the politics. I mean, I'm not sure how long we'll have both parties sort of pointing in the same direction for more dovish policy. But my hope with the review, I mean, one of the reasons I was excited about the Fed review happening and it coinciding with this dovish turn, right, where Republicans have shed some of their hawkishness and we haven't seen Democrats, for example, we didn't see in February, Democrats criticizing Powell for the pause. Right? So both parties more dovish this is the time for the Fed to stake out the ground it needs. So in the next downturn it can say, “Well, you guys already signed on to this. We had the Fed review. You didn't object. That's why we proposed these aggressive tools. That's why we updated our framework. Now's the time to claim that ground so you can use it later. So I hope the Fed realizes that the politics have shifted and that they- 

Beckworth: Now is the time to act. 

Bell: ... Opportunity, yeah, yeah. Really. 

Beckworth: Well, just to be clear to our listeners who don't know, I know many do, the Fed is doing a yearlong review of its strategy, tools, communication, and we're six months in. In fact, this is called the listening stage and right now as we speak, they're finishing up a conference at the Chicago Fed has been mentioned already and this conference is kind of a culmination of various papers, academics, practitioners talking about tools, communication strategies. So six months of listening and then the next stage is six months I guess of internal debate. They're going to come out more, I guess talking about their different views. And so I want to ask, what is your take you just said this is a great opportunity for them to be bold, right? This is a great politically, and I'll just remind our listeners in 2011 you mentioned this earlier too, they were thinking similar questions, nominal GDP level targeting. I got real excited back then and I was disappointed. And they decided to go with an inflation target. 

Beckworth: And the concern back then is we're coming out of a deep recession, we're kind of implicitly, we're doing inflation targeting. We don't want to do something to radical because the economy is unstable. Fair point. But now we're in a very different environment, now politically, economically, all the stars are aligned for some change to take place. And what is your take? Can we be hopeful of some kind of meaningful change, either of you? 

Bell: Well Skanda is the big cynic, so I'll let him be cynical. I think it's good that the Fed is doing the review. And I think there are a number of both Powell and Clarida have questioned the Fed's models, predicting inflation. Clarida has been talking about different aspects, labor share, et cetera, which I think are good. I think the narrow conversation about price level targeting versus average inflation versus status quo feels too narrow to us. I don't know if you want to say more on that score, but. 

Amarnath: Yeah, I think that it's narrow. I second Sam's thoughts though on the fact that it's good to have the review. It is a good opportunity for the Fed to think strategically about really if we have another recession for some exogenous reason, what's the Fed going to do? How are they going to have enough policy space to respond as it is, we are not that far from the zero lower bound and even now after 10 years of recovery after some "normalization" nevertheless their policy space is constrained. Inflation outcomes have undershot. 

Amarnath: I think inflation outcomes of undershot for a variety of reasons. Some of them are within the Feds control, some of them are without. But bigger picture nominal growth has still remained very low and that I think is where the focus should really be, which is we should be trying to solve that problem and the human costs that are associated with not solving that problem now. 

Amarnath: I think the discussion has been too narrow in the sense that we've been talking mostly about average inflation targeting. If you think about the papers that are presented in terms of their focus I would have hoped they'd been a little more ambition, at least in terms of how they more critically think about maximum employment. How they think more critically about pursuing more ambitious goals on the maximum employment side where I think they have generally focused instead on the fact that it's only 50 basis points of difference. How do we get that 50 basis points up in a manner that is sustainable? I think that's sort of too narrow and not really describing the problem well. 

Beckworth: Yeah. So I'm going to share with you a tweet by our friend Ryan Avent who's a columnist for The Economist magazine. He's been on the show a few times. He's also a big fan of nominal GDP targeting. And so he went on Twitter recently to commemorate the conference. And he starts with this tweet. I'll just read the first one and the second one. He goes, “Let's all take a moment to applaud the Federal Reserve for hosting a conference this week at which various experts will offer a critical look at the Fed's monetary policy framework.” And his next tweet, “This conference comes a mere 20 years after it became clear the zero lower bound might present difficulties for central banks, 10 years after the zero lower bound began to bind in the US and only just after the Fed inverted the yield curve with short rates under 2.5 percent. 

Beckworth: So good to see responsible technocrats responding with their appropriate urgency to serious problems. It's a very cynical take. I won't go that far and be that cynical. And in fact I replied, I said, this is far better than what the Fed did with the Great Depression. I mean it was Ben Bernanke in 2002 who said, we screwed up. We made a mistake. So on timescales is actually a vast improvement. But so where I'm concerned is that I see kind of a baked in outcome already. I think average inflation targeting is where they're going. It seems to be that the most of the discussions surrounding it, am I being fair or do you think something more ambitious will come along? 

Amarnath: That is consistent with my sources as well that average inflation targeting is the clear front runner for now and that this has been a bit of a race that feels like it's already been run behind the scenes. 

Beckworth: Yeah. And I understand politically why they might go to average inflation targeting. It's an easy next step. It's not that different if they go to Congress they can say, hey, we're still doing inflation targeting, but gives them the opportunity to make it. But I agree the lack of boldness maybe going outside the status quo thinking. 

Bell: I think there's an interesting... I was at an event recently where Sam Fleming from the FT asked Ben Bernanke why the recovery was so slow and he was defensive about it and sort of defended the pace at which there were job gains and in a way that was a little painful for me to hear because I wanted a stronger, quicker recovery. At the same time, I think it's useful to step back. And if you're in Ben Bernanke's shoes think about like, where were all of you in 2011 where I was just taking incoming fire and it felt like all the political forces were, maybe not all the Twitter forces, but all the political forces that he was up against were pushing the opposite way and that's part of why we're starting Employ America. 

Bell: Like we never want to be in a situation again where we have that sort of unemployment crisis and the political dynamics and the broader atmospherics are “”Oh, the debts out of control. Oh, the Fed's doing too much. Oh, this and that.” Because I have some sympathy for Bernanke now that we're down below four percent unemployment saying well, being a little defensive about it because we're in a different situation now politically and the atmospherics than we were in 2011. So at the same time, I think the Fed is too defensive about the recovery and I would just like them to make the simple statement that we could have done better on jobs and incomes. 

Beckworth: Well, we have to maybe wait a few decades based on the Great Depression. 

Amarnath: Yeah, I mean just to follow up on Sam's point, as far as 2011, obviously it was a time when there was a lot of political conflict and in terms of how Democrats, Republicans perceived the Fed and now is actually a moment when incrementalism should not be sort of satisfactory, I think. Right? This is the time when the political moment is ripe. You've had plenty of time to evaluate the recovery, the Fed's own performance, how their forecasts have had to deviate, how their estimates of different parameters have changed. So that's I think the bigger picture. This is a moment they could really seize. And they might still seize it, there's plenty of time in terms of their review, but we hope they do well. 

Beckworth: They got six months still so Employ America needs to get to work in the next six months. As you know I've been beating the drum here, Macro Musings and other places as well. Let's go to the present and in step back from this discussion about this review and talk about what they are actually doing in real time. So last December they raised rates may think it was a mistake in retrospect. The yield curve appears to be inverting and now there's more talk about the Fed possibly cutting rates pretty soon. At this conference, Jay Powell gave a talk where he used the phrase to act as appropriate that the market's interpreted it as we're going to be their support. 

Beckworth: Here's an article from Bloomberg. It says, Fed Inches Toward Rate Cut as Trade War Frays Patience. Do you see the Fed becoming more nimble, more agile, is it something that we should be thankful for? I mean even if they don't make a big radical change in strategy, are they becoming more sensitive to market conditions, to developments around them? 

Amarnath: I mean I think that if to the extent they do, and I think they are doing that now to some extent that's a positive development. It's also you can have the strategy and the framework, but ultimately it's about practice. It's about the actual implementation. So they can't really afford not to be negatives there, but they can't afford to sit on the sidelines here. Growth is slowing at least by a lot of different metrics. And in this situation you're seeing enough indicators to suggest that risks are emerging and the Fed has only limited policy space. So error on the side of caution is what I would- 

Beckworth: Be very explicit, explain to the listeners what you mean by limited policy space. We've touched on this several times, but explain like in concrete steps. Why are they limited? 

Amarnath: Yes. So I would say conventional policy space and by conventional policy, I'm talking about the Fed funds rate and where they feel comfortable lowering it. 

Amarnath: They feel comfortable lowering it to zero to 25 basis points. And beyond that negative rates are not a discussion for the Fed. For a variety of reasons that I can appreciate that it's a lot. There are a lot of other costs that might emerge in terms of pursuing a negative rate policy and even in terms of QE or forward guidance, these tools are, it's not quite clear how well they work. The reliability is just not as obvious as it is for lowering the Fed funds rate itself. 

Amarnath: So when you get to these more unconventional tools, obviously use them at to the extent you can, but it is obviously a much more straightforward question of what does 50 basis points mean to economic activity than it does how many assets you buy or how much you make in terms of a promise to keep rates low for a given period of time. 

Amarnath: Helpful policies but harder to calibrate. So conventional policy space is pretty valuable from that standpoint, but it's only valuable to the extent you also use it and use it efficiently. So I would say if there is a side to err on. I think the side to err on is the side of dovish business because let's say that they cut rates, but really the economy's fine. We really misjudged things. The room to actually raise policy rates back again because we have some surprising inflation that deserves some tightening is a reasonably straightforward calculation. 

Beckworth: Lots of space. 

Amarnath: Lots of this infinite space on the upside. But if, the Japanese mistake, which is one where you do not move fast enough to the downside is a pretty costly one because it's not clear even now, what's the sufficient set of tools that gets you out of this state of the effect of lower bound. So without those sorts of tools available, I think that at least until we have a sense of how to get out of that and Europe is now struggling with that as well as the Eurozone also has rates low for a very long time now. Until we figure that side of that out, I think the risks are asymmetric. 

Bell: Agree with all that.  


Beckworth: Okay. 

Beckworth: So in short, what you're saying is the Fed typically lowers it short term interest rate as a way to stimulate the economy whenever there's a recession. And usually it's around five percentage points. It has usually cuts and we're close to 2.5 percent. So it's going to run out of ammo pretty quick. And so that's kind of a crude way of saying it. It doesn't have much traditional ammo left in its weapons, guns. So we are in a bind that resort to QE faster and one of my fears resorting to quantitative easing faster is going to start taking out a lot of important Treasury securities that serve as collateral for the financial system. Let me ask this question. So I'm a little critical of the Fed for the December rate hike and I know in real time it’s hard to know what's right, what's wrong making these decisions and now we're seeing what looks like a sustained inverted yield curve. 

Beckworth: And what role did the Fed play in that? And I bring that up because the Fed itself was talking up inverted yield curve, no big deal last year. John Williams was kind of dismissing it out of hand even Governor Lael Brainard suggested it was okay. 

Beckworth: And if you look at the summary of economic projections, it kind of implied one. Obviously the yield curve inverted today has to do with the trade war most recent developments. But the Fed itself I think has some guilt in the yield curve inverting. Am I being too harsh? 

Amarnath: No in the sense that the Fed obviously controls one side pretty clearly of the yield curve, which is the short end through its policy rate. In the end, the term structure is meant to game out the expected path of policy. So right now we're anticipating cuts are on the horizon and day by day bringing in the time horizon for those cuts. 

Amarnath: I think that naturally will happen regardless of like whether the Fed decides to tighten or not. If market participants anticipate that growth's going to slow down, whether for reasons related to the Fed or otherwise. We've gotten to this lower growth state or we're seeing growth slowdown for a variety of reasons. 

Amarnath: Some within the Feds control, I'd say some may be a little more exogenous in nature. So I think that naturally happens, but the Fed should pay attention. I think that's the point you're making is we've seen this actually multiple times now where the yield curve inverts. They take an estimate based on a level slope term, premium model and say, oh, well this is all risk premiums and actually expected policy. Once you take into account the risk neutral rates, which is saying the expected path of policy, once we remove all this other noise is actually not inverted, right? The curve is not actually inverted. This is some exogenous…in a 2006, it was about all the sort of money flowing from petro, from oil states in the Gulf. They're the ones who are buying Treasurys. The Chinese are buying Treasurys, they're suppressing the long end of the curve. Otherwise we wouldn't have an inverted yield curve. So there's all these stories we say each time. 

Beckworth: It's different each time. Right? 

Amarnath: It's different this time our estimates show otherwise, but in the end, the market's actually just telling you that they're anticipating that the Fed's going to have to cut or the Fed has a preference to cut. I think he's a little bit of both in this case, right, that they're getting more open minded about the reaction function and the environment does look a bit ominous right now. Maybe not financial crisis level, but it's like financial conditions are still tightening in the sense that credit spreads are widening. We are seeing that signs of risk premium are sort of showing some of that stress a little bit. 

Bell: Now one thing about the December 2018 hike. I think it's interesting to think back to what you were saying earlier in the conversation about the Fed being nimble. I think one of the challenges is in 2018, I mean it seemed like we had the stars aligned for overheating. I mean many Fed officials were talking about the risks of overheating earlier in the year and even into the summer, trade tensions, synchronized global growth, loose fiscal policy, low unemployment. 

Bell: It seemed like... I mean Lael Brainard was talking about a year or two more of hikes. I think she gave that speech in April 2018. So it's a hard pivot to go from that seven months later to actually where we're pausing, right? But I think hopefully the Fed gets that and that's the sort of nimble, I mean, maybe there's a lesson to be learned about predetermining overheating and whatever, but even if you accept that that was a legitimate story, I think there's maybe a lesson and being nimble and being willing to flex between stories. 

Beckworth: Okay. And the time we have left, I want to go back to the Chicago Fed conference. They're having papers presented. It's kind of a who's who of American central banking there. If you been watching the live feed since I'm not there, that's what I've been doing, watching the live feed. I see my colleague Scott Sumner somewhere sitting in the back. 

Beckworth: But I'm here in DC with you guys watching the live feed. Maybe we should go to a sports bar and make it a thing. 

Bell: Yeah. 

Beckworth: In fact I have to mention our listeners Sam is organizing an FOMC watching event at some local bar at some point. The next meeting, right? 

Bell: Yep. The next meeting, I think it's June 18th or 19th. DM me if you're interested, it's going to be an interesting press conference. Maybe they'll cut rates, maybe they won't. But either way it's going to be entertaining. And I figure we all watch it anyway at our computers. Why not be together watching it and talking about it and digesting it together. 

Beckworth: Yeah. We all have that interest in watching FOMC live and doing so together, breaking bread and fellow-shipping. So well going back to the Chicago Fed conference, they've had a number of papers presented and again, you've heard my cynical take on the whole thing. But with that said, there's been some papers presented. Anything of interest that strikes you Skanda about the conference papers? 

Amarnath: Yeah, I think so on a big picture take away while there were some focus on maximum employment and Katherine Abraham's paper itself, I found it interesting. Still I think the focus has been on price stability to the point of there was a paper by Stock, Eberly, Wright about how the Fed could have tried to be more ambitious, but the ability to actually move inflation and inflation expectations would have still been challenged. 

Amarnath: At the same time I think when I said we could have you in certain sort of counterfactuals they wouldn't really have moved the inflation rate, but they could have achieved at least more labor market gains in terms of for a few tenths of a percentage point on the unemployment rate. And it's kind of viewed as a sort of like small thing in the grand scheme of the paper because it's not raising inflation expectations sufficiently. 

Amarnath: And to me to sort of, the mission of our organizations, that's actually still a big deal, right? That you could still get gains in terms of jobs, in terms of people who are earning labor income. That's still a win, right? That's still something that's important to highlight. I'd say obviously one of the other papers is from Lars Svensson is focused on the validity of sort of different inflation targeting approaches. How do you make up for past misses? And again, these strategies are very focused on inflation as if obviously they're all focused on the idea that Fed needs to get inflation up to target and keep it at target to get expectations two percent. I feel like we're still again missing the maximum employment side. We’ve had the Fed persistently and cyclically, I'd argue, bring down their long run unemployment rate projections. 

Amarnath: So the natural rate of unemployment keeps moving down in a rather cyclical manner. So we think about the estimates of structural unemployment are actually moving cyclically. I think that's something that the Fed does need to address. And it's not just a question of a parameter problem. There is some kind of specification problem at play here when you make these kinds of cereal errors. There's not really been much discussion of that. There's some discussion to maximum employment but I think there's still more room for discussion there that I wish we could have had at this conference. 

Beckworth: And that is why we have Employ America. Am I right? 

Bell: That's right. 

Beckworth: All right. Well, our time is up. Our guests today have been Sam Bell and Skanda Amarnath. Gentlemen, thank you for coming on the show. 

Bell: Thank you for having us. 

Amarnath: Thank you for having us. 

Beckworth: Macro Musings is produced by the Mercatus Center at George Mason University. If you haven't already, please subscribe via iTunes or your favorite podcast app. And while you're there, please consider rating us and leaving a review. This helps other thoughtful people like you find the podcast. Thanks for listening. 

David Beckworth
Calendar Date: 
Jun 17, 2019
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A Macro Musings Transcript