Ryan Avent on the case for NGDP level targeting.

This is a sort of upside-down view of what the new policy is designed to achieve. Low rates are not a policy goal; they are a means to an end: growth as stable as the Fed is capable of delivering. One criticism of inflation targeting is that it does this at an unnecessary one-step remove; rather than directly targeting macroeconomic stability, the Fed aims for stable inflation in the hopes that this will deliver stable growth. NGDP targeting cuts out the middleman by having the Fed directly target the broadest possible nominal aggregate. My colleague worries that this is a relatively ineffective way to influence interest rates, and I don't particularly disagree. I'm just not sure why that matters.

I agree. The Fed hasn't delivered much in the way of growth over the past 4 years. It took 15 quarters to get back to the pre-recession GDP peak, the worst performance since the Great Depression. If we had a decent free press, they would ask Bernanke about this today at his third press conference.

It's like the Fed is afraid growth is going to pop up out of nowhere and all of the sudden we're growing at 5, 6, 7 percent and inflation rears its head. But it hasn't happened and probably won't happen unless the Fed makes an concerted effort.

The problem is that during the crisis the Fed did a lot, but did too little. It's hard for people to wrap their heads around that seemingly contradictory notion.

This is mistaken; the Fed's forecasts strongly support my view of the crisis. In October of 2008, the Fed forecast an unemployment rate of around 7.5% in 2009. That's well above the natural rate of unemployment. Why didn't the Fed do significantly more to support the economy, such that its forecast was for something close to full employment? The numbers tell the tale; the Fed projected that inflation in 2009 would be between 1.5% and 2%—pretty close to its implicit target. NGDP, by the way, was forecast to rise at between 1.5% and 3%—well below the approximate 5% trend growth we'd expect. At the scheduled October meeting, the Fed reduced its fund rate target 50 basis points, to 1%. That's like throwing a snowball at a raging inferno.

It gets worse as the crisis continues. By January of 2009, the Fed is forecasting an unemployment rate for that year of near 9%, and a GDP contraction of up to 1.3%. Despite this major deterioration in the forecast, the Fed opted merely to maintain its planned asset purchases, which amounted to about half a trillion in mortgage-backed securities and agency debt. Not until March did the Fed opt to signficantly scale up its purchases and begin buying Treasuries. Of course, we can't just blame the Fed's costly timidity here on the choice of target. The Fed forecast 2009 inflation of around 1% for 2009. That's substantially below target, and it suggests that the Fed was constrained by an attack of excessive caution at the worst possible time. It's worth pointing out, however, that NGDP was forecast to be roughly zero or slightly negative. Different target; different sense of urgency. But what the forecasts clearly show is that the Fed consistently did too little, and would consistently have felt pressure to do more given an NGDP target.

Avent just went up in my book.