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Why the Fed overstimulated the economy | TheHill – The Hill



In recent months, it has become clear that the Federal Reserve’s monetary policy is too expansionary to achieve its policy goals, as the Fed was too slow in ending quantitative easing and raising interest rates. In the fourth quarter of 2021, nominal spending throughout the U.S. economy rose at an annual rate of 14.3 percent, pushing aggregate demand well above the pre-COVID-19 trend line. The rapid growth in spending helped push inflation well above the Fed’s 2 percent target.

So where did the Fed go wrong?

In 2020, the Fed adopted average-inflation targeting (AIT) to avoid the mistakes made during the 2010s, when an insufficiently expansionary Fed policy kept the money supply tight and allowed the economy to stagnate for years, with high unemployment making it especially difficult for younger workers to find jobs. To its credit, the Fed’s much more aggressive approach to the COVID recession did allow for a very fast recovery in the job market. Even with the recent high inflation, the economy is doing better than in the early 2010s. 

Nonetheless, the Fed could have done even better. Like a general fighting the last war, it has traditionally pivoted too slowly when one problem is addressed and the opposite problem moves to the forefront. Under average-inflation targeting, a bit of overshooting during 2021 was appropriate after the 1.3 percent inflation of 2020. Unfortunately, inflation soared to 5.7 percent in 2021 and looks likely to be far too high again in 2022. 

I see at least three reasons for the Fed’s policy mistake.

One was too much focus on closing the so-called “output gap” between actual real GDP and potential GDP, which is exceedingly difficult to estimate. Throughout 2021, employment remained depressed well below pre-COVID levels, suggestive of a weak economy that needed more stimulus. But the large estimated output gap was an illusion. In fact, COVID had sharply reduced labor force participation, leaving employers with increasing difficulty finding workers despite the below normal level of employment. 

Because real output gaps are so difficult to estimate, the Fed should focus on variables such as nominal GDP (NGDP). By that criterion, it was clear by the second half of 2021 that policy was becoming too expansionary. An NGDP growth rate of roughly 4 percent is consistent with the Fed’s 2 percent inflation target. Recently, growth in NGDP has been far above that rate.

That brings us to the second reason for the Fed’s mistake. At a press conference last month, Fed Chair Jerome PowellJerome PowellBiden Fed picks get boost from dozens of economists A new role for central banks post COVID-19? Inflation: Where do we go from here? MORE was asked if the Fed should aim for less than 2 percent inflation after a period of excessively high inflation in order to bring the average back down to the long-term target. Powell forcefully rejected that suggestion, directly contradicting the Fed’s new AIT policy. If the term “average” is to have any meaning, there must be times when the Fed aims for above or below 2 percent inflation. Powell seemed unaware that aiming for below 2 percent inflation might be required.

Market participants pay close attention to Powell’s comments, and surging prices in late 2021 may have partly reflected a number of his public statements implying that the Fed would not “take away the punch bowl” before the economy overheated.

This does not mean the Fed is unaware of the inflation problem. Indeed, several Fed officials have acknowledged a need to tighten policy at some point in 2022. But why wait so long? Why set a target interest rate of zero and continue quantitative easing when the economy is booming and inflation is running near 6 percent?

The Fed’s sluggish response to economic overheating points to a third reason for its mistake: Officials were frightened by the market’s “taper tantrum” in 2013. As a result, they now prefer to signal policy changes very gradually. But the “tantrum” was not actually caused by an abrupt tightening in policy. Rather, markets reacted to an inappropriate tightening of policy when unemployment was still at 7.5 percent. In contrast, policy tightening today would be appropriate. The longer the Fed waits, the more painful it will be to bring inflation back down to target. 

Fed officials seem to assume that financial markets want as predictable a path for interest rates as possible. What markets actually want is the assurance of a stable outcome for the economy. It does no good to hold interest rates at zero for an excessive period if that causes the broader economy to overheat. 

To summarize, the Fed needs to target nominal variables such as inflation and NGDP, not difficult-to-estimate real variables such as output gaps. It also needs to focus on stable economic outcomes, not on stabilizing the interest rate. Finally, when it announces a new policy rule, such as average-inflation targeting, it needs to stick to it.

Scott Sumner is the Ralph G. Hawtrey Chair of Monetary Policy with the Mercatus Center at George Mason University and a professor emeritus at Bentley University.

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Potential of Seaweed on Economy Being Explored in Upcoming Webinar – VOCM



A webinar on the potential of seaweed as an economic driver is coming later this month.

The webinar, put together by The Laurentic Forum Consortium, will look at how coastal communities can use an abundance of seaweed to boost the economy, as seaweed is being used as fertilizer, diet supplements, bioplastics, animal feed, pharmaceutical products, and much more.

Webinar moderator and the executive director of the Canadian Centre for Fisheries Innovation, Keith Hutchings, says seaweed farming could provide opportunities in Newfoundland and Labrador.

He says if utilized correctly, communities and regions can add one more industry to help sustain them.

The webinar is taking place May 19.

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Charting the Global Economy: Growth Prospects Continue to Dim – BNN



(Bloomberg) — Sign up for the New Economy Daily newsletter, follow us @economics and subscribe to our podcast.

Prospects for the world economy are growing bleaker as Russia’s war in Ukraine takes a toll on European businesses and consumers, China employs a heavy-handed approach toward Covid-19 and US financial conditions tighten, according to the Institute of International Finance.

Central banks around the world continue to boost interest rates to counter a surge in inflation. In the US, the closely watched consumer price index showed inflation remains well-elevated. The squeeze to household budgets is also being felt in the UK and France. 

Here are some of the charts that appeared on Bloomberg this week on the latest developments in the global economy:


The world economy will essentially flatline this year as Europe falls into recession, China slows sharply and US financial conditions tighten significantly, according to a new forecast from the IIF, which counts more than 450 financial-services firms as members. The group forecasts 2.2% global GDP growth this year, markedly lower than the International Monetary Fund estimate of 3.6% on a purchasing power parity basis.

The gasoline market is starting to run out of control — just like diesel before it. US buyers are already sucking in more supplies from Europe as the summer driving season — which increases demand — gets underway. Add to that a loss of so-called secondary feedstocks from Russia that are critical in the production of the road fuel.


Americans got little respite from inflation in April, as prices for a range of necessities and discretionary-spending categories continued to climb at some of the fastest-ever rates. While annual measures of consumer prices cooled slightly from March — signaling a peak that economists expected — the details painted a more troubling picture as monthly figures advanced more than forecast.

US homebuyers are increasingly turning to adjustable-rate mortgages as overall borrowing costs soar. ARMs — which carry variable interest rates that reset based on the market at predetermined times — accounted for 10.8% of total home-loan applications last week. That’s up from 3.1% of activity at the start of the year and is the largest share since 2008.


The French government pledged to increase social benefits and issue food vouchers to the poorest households as freshly re-elected President Emmanuel Macron seeks to avert panic over a cost-of-living crisis before legislative elections next month. 

The UK economy unexpectedly contracted in March as the cost of living squeeze forced consumers to cut back on spending, throwing doubt on the Bank of England’s ability to keep hiking interest rates and piling pressure on Prime Minister Boris Johnson’s government to respond.

For many of Sweden’s highly indebted consumers, the Riksbank’s sudden interest-rate increase at the end of April marks the start of a new squeeze that officials have long fretted about.  


China’s exports and imports struggled in April as worsening Covid outbreaks cut demand, undermined production and disrupted logistics in the world’s second-largest economy.

Japan’s household spending climbed in March for the first time in three months as virus restrictions were lifted across the nation, offering some support for private consumption at the end of a bruising quarter for the economy.

Emerging Markets

Malaysia’s central bank unexpectedly raised its benchmark interest rate in an effort to head off price pressures, while authorities in Argentina boosted borrowing costs for the fifth time this year.

Latin American central banks will likely extend their monetary tightening campaigns beyond what was originally expected after inflation surged past forecasts in April, with steep increases in food and fuel costs stinging policy makers.

South Africa is headed for a record year of power cuts if the rate of station breakdowns fails to improve, particularly at coal-fueled plants. Africa’s most industrialized nation was already on track to exceed the annual record for energy shed from controlled blackouts, a practice locally known as loadshedding that’s used to prevent the grid from a total collapse.

©2022 Bloomberg L.P.

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Biden's Midterm Hopes Bedeviled by Signs of Economy in Distress – BNN



(Bloomberg) — President Joe Biden’s hopes for a political reset have been overwhelmed by an unrelenting series of economic setbacks, adding to the challenges Democrats face as they court exhausted voters ahead of the crucial midterm election in November.

US gasoline prices are at historic highs. Inflation in April exceeded consensus forecasts. Technology stocks have plummeted, taking retirement accounts with them. A record low portion of Americans think it’s a good time to buy a house.

On top of it all, a shortage of baby formula has left parents in the world’s wealthiest country scrounging empty store shelves to feed their children. The crisis is drawing bipartisan condemnation on Capitol Hill, with lawmakers accusing the administration of moving too slowly after an Abbott Laboratories factory in Michigan was shut down over safety issues.

Cast against the backdrop of Russia’s war in Ukraine and the ongoing pandemic — the US surpassed 1 million Covid-19 deaths this week — it’s little wonder the nation’s mood is grim. Biden’s inability to assuage Americans’ growing unease was highlighted as a US consumer sentiment measure released Friday hit its lowest reading since 2011, a six-point decline from April that was worse than any forecast in a Bloomberg survey of economists.

The nation’s economic struggles and the administration’s tepid response are striking at a core promise of the Biden presidency: that he would return competence to the White House. And there are clear signs Americans hold their president accountable. Just 38% approve of the job Biden is doing, according to a Monmouth University poll released Thursday. 

Most respondents in the survey said it’s currently difficult to pay for essentials like gas, grocery bills and health insurance deductibles. 

“We understand there are challenges you’re dealing with every day,” White House Press Secretary Jen Psaki told reporters on Friday. “Costs are too high. It is too expensive to fill up your gas tank. Food is too expensive at the store. And our focus right now is on taking every step possible to address those issues.”

Yet Biden has often sought to shift blame. He’s said gasoline and food cost too much because of “Putin’s price hike,” in reference to the Russian president who ordered the Ukraine invasion, and he said this week that the Federal Reserve is primarily responsible for combating rising prices.

The baby formula crisis presents a particularly acute political risk. Democrats have looked to reorient their midterm strategy to wooing back female voters after the leak of a draft Supreme Court opinion that would overturn the landmark Roe v. Wade decision establishing abortion rights nationwide.

But Biden — a practicing Catholic whose congressional career was dotted with votes restricting federal abortion spending — has for now acted as a reluctant messenger, preferring sweeping legal and philosophical arguments for maintaining Roe rather than explicitly espousing his support for abortion rights. 

Less than two weeks after the leak, television coverage has shifted to stories of mothers struggling to find the baby formula they need to feed their children.

“It’s pretty amazing that with all the focus on global and economic insecurity, a life challenge so personal and individual could cut through — but it has,” said Republican pollster Frank Luntz. “When young families think about whether they are better or worse off under Biden, life challenges like this make life more difficult for Democrats.”

White House officials have argued that troubling indicators of an economy in distress should be weighed against other data that show strength. Payrolls beat consensus estimates in the past month, and unemployment is just 3.6%, offering a strong jobs picture. Year-over-year earnings were up 5.5%, and gross domestic product has grown at its fastest rate since 1984. And despite the recent stock market swoon, the S&P 500 remains up more than 5% since Biden took office.

Still, White House aides acknowledge that many Americans feel the costs of inflation more viscerally than news suggesting the overall economy is healthy — and that some trends are unfavorable. That explains why Biden in recent days has stepped up his efforts to shift responsibility for some of Americans’ leading concerns.

Following Wednesday’s inflation report, Biden called inflation “unacceptably high” but added that action to lower prices “starts with the Federal Reserve.”

Biden has also sought to ratchet up pressure on Republicans. In a speech Tuesday at the White House, Biden said he understood Americans’ frustration so much that he could “taste” it — but said the opposition party has yet to present a concrete plan to tackle high prices if the GOP captures Congress in November.

He has also said Republicans are pursuing an “ultra-MAGA agenda,” referring to former President Donald Trump’s “Make America Great Again” slogan, though Biden hardly ever uses his opponent’s name. 

And he’s tried to spotlight a GOP proposal, written by Florida Senator Rick Scott, that would require all Americans to pay some income tax, including families that don’t earn enough money to owe taxes now, and that would require reauthorizing all federal legislation after five years. Democrats say that would imperil entitlements like Social Security and Medicare.

Other Republicans including the Senate minority leader, Kentucky’s Mitch McConnell, have distanced themselves from Scott’s plan, and the Florida senator has said in response to Biden’s attacks that the president should resign. 

But Biden has also acknowledged the political vulnerability he faces.

“It’s going to be hard, because inflation is going to scare the living hell out of everybody,” he told Democratic donors in Chicago on Wednesday. “We have a problem we have to deal with. In the meantime, we can’t take our eye off all that could happen if we do not prevail.” 

©2022 Bloomberg L.P.

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