Yesterday to travelled to Washington, DC and testified at the Cannon House Office Building before the House Committee on the Budget. The Chairman was Jodey Arrington, the Ranking Member was Brendan Boyle, and many other members of the Committee on the Budget were there for the very important topic “The Fiscal State of the Union.” I was pleased to offer my assessment. I have testified many times in the past fifteen years before both the House Budget Committee and the Senate Budget Committee, and I drew on some of those conclusions in my testimony. A video of the whole hearing (with a shorter version of my written testimony) is here https://www.hoover.org/research/john-taylor-testifies-house-budget-committees-fiscal-state-union.
In a Bloomberg TV interview today, Romaine Bostick @romainebostick and Scarlet Fu @scarletfu asked me great questions about the just-released inflation rate and the implications for Fed policy. During the interview, which goes for about 7 minutes from 3:50 to 11:13, I argued that the Fed was not done, that they needed to raise the Federal Funds interest rate some more, and that they should not give up on their 2% inflation target.
I referred to the book –“HOW MONETARY POLICY GOT BEHIND THE CURVE AND HOW TO GET BACK”–that has the proceedings of a conference we held a year ago, when the funds rate was only 25 basis points. The message of the conference was that the Fed was behind the curve. Well, a year later they have raised the funds rate, and they are much less behind the curve. The question now is “how to get back, and that will be the focus of our next conference.
We just reached a big anniversary: “Economic Policy Working Group Reaches 15-Year Milestone in Providing Rigorous Policy Analysis and Solutions for American Prosperity,” as the Hoover Daily Report headlined in a just-published article. Here is the article https://www.hoover.org/news/economic-policy-working-group-reaches-15-year-milestone. It provides a beautiful summary of the people, seminars, working papers, and, of course, the books. And the “Rigorous Policy Analysis” and the “Solutions for American Prosperity” are key, and we have always emphasized the international benefits to the world. Here is the list of books, starting with the latest:
How Monetary Policy Got Behind the Curve–And How to Get Back, 2023
Choose Economic Freedom: Enduring Policy Lessons from the 1970s and 1980s, 2021
Strategies for Monetary Policy, 2020
Currencies, Capital, and Central Bank Balances, 2019
Structural Foundations for Monetary Policy, 2018
Rules for International Monetary Stability, 2017
Central Bank Governance and Oversight Reform, 2016
Making Failure Feasible: How Bankruptcy Reform Can End “Too Big To Fail,” 2015
Frameworks for Central Banking in the Next Century, JEDC, 2014
Across the Great Divide: New Perspectives on the Financial Crisis, 2014
Government Policies and the Delayed Economic Recovery, 2012,
Bankruptcy Not Bailout: A Special Chapter 14, 2012
Ending Government Bailouts as We Know Them, 2010
The Road Ahead for the Fed, 2009
And we are just getting started: Last Wednesday at the Economic Policy Working Group (EPWG), Peter Henry talked about “The Global Infrastructure Gap: Potential, Perils, and a Framework for Distinction,” and next Wednesday Michael Bordo will speak about “Muddling Through or Tunneling Through: UK Monetary and Fiscal Exceptionalism During the Great Inflation,” and then on February 15, 2023 Ellen McGrattan will speak about “On the Nature of Entrepreneurship,” and the following Wednesday Erik Hurst will talk about “The Distributional Impact of the Minimum Wage in the Short and Long Run”
The Working Group’s meetings are now on a virtual platform. As the article states: “the level of participation from policy makers and scholars across the nation and the world has grown substantially.” And we will have another big conference on May 12, 2023. It is so important to keep up the work.
This week, on January 4, 2023, John Cochrane, Mickey Levy, Kevin Warsh & I spoke by Zoom at a policy roundtable on the increase in inflation and possible causes at the Hoover Economic Policy Working Group. It was an important follow-up to a meeting we held a year ago on January 5, 2022. Each of us covered similar ground: Cochrane talked about the fiscal side, Levy about inflation measures, Warsh about regime change, and Taylor about the big deviations in policy from standard monetary policy rules. Many of us had written about these issues since the last group session in January 2002. The aim was to give different perspectives on a common theme: that recent high inflation over the past year was brought about by an extra low policy interest rate, the high money growth, or the big balance sheet expansion.
I talked about how the Fed got into this difficult situation, and I hope that brought back memories of the 1970s where the critique was similar, but also different in important ways. All agreed a year ago that the Fed was behind the curve, and the question was when and how rapidly to get back on track. This was also the title of the Hoover Institution book entitled: “How Monetary Policy Got Behind the Curve — and How to Get Back,” published in May 2022, and edited by Michael Bordo, John Cochrane and John Taylor.
During the past year the Fed had indeed tried to get back on track, and it increased the federal funds rate from near zero to a bit over 4 percent. Some–including most of the speakers and participants–said that more was needed. The event again had many commentators and guests–including monetary experts such as Mervyn King, Andrew Levin, Bob Hall, and David Papell, who spoke out on this theme from different perspectives.
The book is entitled HOW MONETARY POLICY GOT BEHIND THE CURVE — AND HOW TO GET BACK and is based on conference held on May 6. The conference is described here: https://economicsone.com/2022/05/08/monetary-policy-got-behind-the-curve-how-to-get-back/ The book on the conference has many insightful papers, great commentary, and excellent press coverage. Current and former Federal Open Market Committee Members gave critical assessments and debated with Fed watchers from the markets and academics.
The stock market reaction to the Kansas City Fed meeting in Jackson Hole today was not so pleasant. The Dow Jones Industrial Average was down over 1,000 points or by over 3 %. The S&P 500 was down 3.4 percent. The markets started to fall with Chairman Powell’s speech in which he said “We must keep at it until the job is done,” and he emphasized credibility almost as if in a full policy rule-like mode.
But the emphasis of the market commentary was not much on the benefits of credibility of monetary policy. Rather it was that the Fed will simply keep raising the federal funds rate until we really see inflation coming down.
The year 1982 was so much different than the year 2022. Inflation had been high for 15 years in 1982, not 15 months as today, and inflation had set in. The wage price spiral was in full bloom. It took a big change in monetary policy too bring inflation down, and that is what had happened. But today inflation is not so entrenched as it was in the 1970s when higher interest rates caused big recessions. An expectation of a credible disinflation policy will prevent pass through to wages and other prices. The emphasis should be on credibility and expectations, and on a clear understanding of how different policy and the economy have been recently compared with the 1960s and 1970s. Yes, the Fed has to adjust the interest rate some more to bring inflation down to levels consistent with the the 2 percent target. But a more credible Fed policy will make the adjustment much smoother and with the main impact on inflation, not on the real economy.
A beautiful book, edited by Robert King and Alexander Wolman, https://www.richmondfed.org/-/media/RichmondFedOrg/publications/research/goodfriend/essays_marvin_goodfriend.pdf with original essays in tribute by Alfred Broaddus Jr., Donald Kohn, William Poole, Kartik Athreya and Stephen Williamson, Ben Bernanke, Michael Bordo and Edward Prescott, Douglas Diamond, Michael Dotsey, Andreas Hornstein, and Alexander Wolman, Huberto Ennis and John Weinberg, Vitor Gaspar and Frank Smets, Mark Gertler, Robert Hetzel, Athanasios Orphanides and John Williams, Charles Plosser, Sergio Rebelo and Pierre-Daniel Sarte, Thomas Sargent, Lars Svensson, John Taylor, Mark Watson, Michael Woodford, Robert King and Yang Lu