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Fed Chairman Jay Powell had a very interesting talk today at the Jackson Hole conference. I am writing up a piece on the speech that should be out early next week at the Bridge. For now, I want to share something that I dug up in writing up this piece.
One of the challenges outlined in Powell’s speech is the difficulty of determining the stance of monetary policy when the ‘guiding stars’ of monetary are no longer reliable. Specifically, it is hard to navigate the economy when the all-important r-star and u-star seem to be changing a lot. My initial reaction–and the point of my response–is that maybe this uncertainty is a sign that current approach needs to reconsidered.
A much simpler approach is to target the growth path of nominal GDP (NGDP). No need to know r-star or u-star. Just keep nominal demand on its targeted growth path. Anyways, this thinking led me back to a short note I wrote a while back on how to measure the stance of monetary policy via deviations of NGDP from its expected growth path. The estimation details are in the note, but what I do is construct expected growth paths for NGDP using (1) a weighted measure of forecasted NGDP from the Survey of Professional Forecasters and a (2) full-employment measure of NGDP.
The results below show the deviation of actual NGDP from these two estimated benchmark paths. Among other things, they suggest monetary policy is only now returning to neutral after a long run of being effectively too tight.
