NGDP Targeting Fiesta 

Kind of a rambling, free associating post.

NGDP Targeting and Sustainable Growth by Andy Harless

The Fed's Dark Age Communications Strategy by Nick Rowe

The Fed is Talking About a Nominal GPD Target by David Beckworth

(via Thoma)

My thoughts are evolving on this issue. In normal times the Fed can bring the U.S. out of recession by lowering the short term rates.

Bill Clinton complained about being hemmed in by the bond market and parred down his original budget because of it.

On February 17, 1993, in a nationally televised address to a joint session of Congress, Clinton unveiled his economic plan. The plan focused on deficit reduction rather than a middle class tax cut, which had been high on his campaign agenda.^[14] (Clinton was pressured by his advisers, including Robert Rubin formerly of Goldman Sachs, to raise taxes on the theory that a smaller federal budget deficit would reduce bond interest rates

...

One of Clinton's major policy initiatives in his first term was on the American economy. Clinton's economic plan included a major expansion of the existing Earned Income Tax Credit, aimed at working class families just above the poverty line, which helped ensure that it made sense for them to work rather than seek welfare. John F Harris, argues that "this would be prove to be one of the most important and tangible progressive achievements of the Clinton years".^[40]

A major problem with the economy at the time was the issue of the massive deficit and the problem of government spending. In order to address these issues, in August 1993, Clinton signed the Omnibus Budget Reconciliation Act of 1993 which passed Congress without a single Republican vote. It raised taxes on the wealthiest 1.2% of taxpayers, while cutting taxes on 15 million low-income families and making tax cuts available to 90% of small businesses.^[41] Additionally, it mandated that the budget be balanced over a number of years and the deficit be reduced.^[42] This was to be achieved through the implementation of spending restraints.

But when the economy is in a liquidity trap and short term rates are up against the zero bound, the Fed needs to pursue unorthodox measures which may not be as effective and draw political heat. Fiscal help for the economy will help. In an emergency, the Fed becomes the lender of last resort, while the government should become the buyer of last resort, or the supplier of missing demand.

Ideally the Fed should adhere to its mandate of price stability and keeping unemployment low. It has failed to this since unemployment has been high for two and half years and shows no sign of decreasing. Why isn't there an outcry that the Fed isn't doing its job? Its forecasts have been wrong regularly.

If since 2009 the Fed had been targeting a trend NGDP level - perhaps a little lower than the housing boom years - it would obviously be failing. Press conference and media reports would focus on how it is failing. Growth of GDP is not catching up to trend, but merely growing enough to avoid deflation. To outward appearances this seems to be what Bernanke and the FOMC want the economy to do. Its seems they want 2 percent inflation and 9 percent unemployment.

Two Fed Presidents, Evans and Rosengren, have suggested that higher inflation - 3 percent - and lower unemployment 7 percent - should be the target and argue we should step on the gas until this is achieved. This would be the same as targeting a higher NGDP level than what they appear to be targeting now.

If the Senate wasn't blocking Obama's Jobs Act, perhaps the Fed wouldn't need to do as much.

As I understand, I think it can work on the expectations level. If the Fed says it will do whatever it takes to get to 3 percent inflation and/or 7 percent unemployment people will spend and save with the view of that occurring in the near term. This will add demand to the economy and hopefully provide catch-up growth. What the Fed will do is continue its quantitative easing - buying assets like MBS - to take risk out of the market. If inflation ticks up, it will make deleveraging happen more quickly. It will also spur people to spend as I have said.

Ezra Klein interview with Joe Gagnon from August

Gagnon says the Fed got nervous in the Spring because core inflation went up to 2.5 percent, whereas he said he'd get nervous at 3 percent.

Looks like Obama may go with Gagnon and Bill Gross's idea about Fannie and Freddie backed mortgage rates being lowered, but you need the go ahead from the head of the housing agency which overseas them.

From the end of the interview:

EK: One criticism you hear of the Obama administration is that there are two open seats on the Fed board. If the White House had filled those seats would things be significantly different today?

JG: Well, if they had put me and someone else on the board and we would be out there dissenting on the other side from the inflation hawks, but I’m not sure we could have swayed much policy. I don’t know that two votes is decisive. People overstate the influence of the hawks. They are a permanent minority. They’re really off on their own. There is a core of centrists that Bernanke could lead wherever he wants.

EK: On the same subject, what would their role be in the policy you lay out? The Federal Reserve can bring mortgage rates down, but that doesn’t repair the housing market on its own. It creates an opportunity for the administration to do more to repair it, right?

JG: The Fed should create an opportunity and the Obama administration should take advantage of it. The Obama administration has the power to really extend the universe of homeowners who can take advantage of lower rates. Fannie and Freddie announced programs over the last two years saying if you already have a guaranteed mortgage, even if you would not normally be able to refinance, now you could. But they put on too many conditions. They said you needed to use your normal servicer, for instance. They also made Fannie Mae and Freddie Mac raise their standards on borrowers, which is scaring the banks.

They need to break those restrictions. I agree that new borrowers should require downpayments and so forth. But if you have an existing loan, it’s a win-win for the government to help you refinance, because if you can refinance, you’re less likely to default. There is a loser here, but it’s China and rich investors who hold these loans. And why should we be protecting them?

So according to Gagnon, Bernanke is really in charge and two more rational voices on the FOMC wouldn't matter that much.