Scott Sumner: What Can Asset Prices Tell Us About The Great Recession?

The Federal Reserve’s dual mandate is to promote price stability and full employment. The Fed describes this on its website:

The Congress established two key objectives for monetary policy–maximum employment and stable prices–in the Federal Reserve Act. These objectives are sometimes referred to as the Federal Reserve’s dual mandate. The dual mandate is the long-run goal for monetary policy, and the Congress also established the Federal Reserve as an independent agency to help ensure that this monetary policy goal can be achieved. The independence of the Federal Reserve in conducting monetary policy is critical to guaranteeing that monetary policy decisions are free from political influence and focused exclusively on achieving the Federal Reserve’s dual mandate. For example, a problem experienced in many countries without an independent central bank is that elected officials have put pressure on monetary policymakers to follow policies that boost the economy in the short run even if doing so would result in high levels of inflation later on. The Federal Reserve’s dual mandate and the provisions for the independence of the Federal Reserve are two key factors that help guard against such outcomes in the United States.

As the US is well short of full employment and the economy is at a low ebb, there has been considerable discussion about what the Fed should do, especially given the lack of fiscal support for the economy. I have a view here, but I am not expressing it in this post. I may at some future date. Rather, I want to highlight a view that I think is gaining currency. Bill Gross says that the Fed is going to target nominal GDP. This idea is something that Scott Sumner and David Beckworth have been promoting for some time. Other economists like Brad DeLong are getting onboard now.

I suggest you watch the video of Scott Sumner below to understand some of the thinking behind this policy prescription because it is something we could well see the Fed taking on.

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Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.