Fed on potential GDP

The Fed Chair Should Be a ‘Principled Populist’ By STEPHANIE KELTON and PAUL MCCULLEY

McCulley: I think it should be a collaborative venture between the Fed and Congress. Yes, I used the word “collaborative,” which I think applies in a more general way to the relationship between Congress and the Fed.

The Fed’s operational independence is grounded in the thesis that the legislature cannot be trusted with monetary policy, as the electoral process is inherently biased to inflation, of overstimulating the economy with too much spending relative to taxation, running inflationary budget deficits.

That simply has not been the case for a long, long time. Yes, we’ve had large deficits, but inflation has been too low, not too high. Thus, I’m not convinced by the argument that strict Fed independence is always and everywhere needed to discipline the fiscal authorities’ inflationary bias.

Kelton: What about policy today?

McCulley: If President Trump wants to try to boost real growth from 2 percent to 3 percent, there is no reason that the Fed should actively push back. That doesn’t mean that the Fed shouldn’t or wouldn’t respond if such an acceleration in growth were to finally drive unemployment low enough to generate a loud wage and inflationary response.

My point is that there is no reason for the Fed to prevent the “experiment,” if Mr. Trump and the Republican Congress want to run it.