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American Focus > Blog > Economy > Conor Sen on Fed policy
Economy

Conor Sen on Fed policy

Last updated: October 8, 2024 5:49 pm
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Conor Sen on Fed policy
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Matt Yglesias recently shared a thought-provoking tweet by Conor Sen regarding the necessity of further rate cuts. While Sen’s point may have merit, it raises concerns about the Federal Reserve’s policy focus on the unemployment rate over the GDP growth rate. This approach has historically led to instability in monetary policy, as seen in the inflationary period of the late 1960s to 1981.

The key issue lies in the lack of a nominal anchor for monetary policy. Without a clear reference point, such as nominal GDP (NGDP) growth, policymakers risk misjudging the natural rate of unemployment and output, leading to potential inflationary spirals. By targeting NGDP growth, policy errors are minimized, as it sidesteps the need to estimate the elusive natural rate of unemployment.

During the period mentioned, estimates of the natural rate of unemployment steadily increased, indicating a shifting economic landscape that policymakers struggled to navigate. By focusing on NGDP targeting, the Fed can avoid such pitfalls and make more informed decisions based on demand shocks rather than unreliable inflation data influenced by both supply and demand factors.

While Sen’s suggestion of balancing inflation and unemployment in monetary policy is a step in the right direction, prioritizing NGDP as a target provides a clearer and more effective strategy for stabilizing the economy. By acknowledging the limitations of traditional indicators and embracing a more encompassing approach, the Fed can better steer the economy towards sustainable growth and stability.

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