Monday, October 23, 2017

Duy's FedWatch: In Defense of the conventional Wisdom

by Bill McBride on 10/23/2017 02:05:00 PM

From Tim Duy at FedWatch: In Defense of the conventional Wisdom. Excerpt:

Altogether, looking at the history of the past sixty years or so, I think it is reasonable for a policymaker to conclude that while they may not yet have a perfect model to guide policy, they have a reasonable approximation to a perfect model that delivers outcomes that are generally consistent with their mandates. Moreover, are the potential gains of adopting a new framework such as, for example a nominal GDP target, worth the potential costs of abandoning the conventional wisdom? I think that is a reasonable question.

In short, while many, including myself, have criticized the Fed for living in the past and continuously re-fighting the inflation wars of the 1970s, I can argue that those criticisms fail to acknowledge the improvement of outcomes since the 1970s. We argue about 50bp of inflation, for example, when the real gains were made in the first 500bp. This issue is worth considering before dismissing the validity of the conventional wisdom among monetary policymakers. They have good reasons for maintaining that wisdom.