Friday, July 26, 2019

Does New York Fed President John Williams Even Understand Basic Math?

John Williams
On Wednesday, I published an exchange I had with New York Federal Reserve President John Williams at the Strategies for Monetary Policy conference at the Hoover Institute that took place in May of this year (SEE: Wenzel Questions the New York Federal Reserve Bank President On Inflation Targeting).

I published the exchange without comment because I wanted it to stand on its own and I have a feeling it will be something I will want to reference in the future.

That said, I now want to point out a serious problem in part of the response Williams made to my question concerning how far above the current Fed target rate he believed the inflation rate should be allowed to go. The part of his response that I want to feature is this part:
I think that some of the worries around average inflation targeting is, are you going to aim for three or four percent during good times? In fact, at least, based on the historical experience, you’re talking about a relatively few tenths. Let me give you a concrete example. Last ten years, core inflation in the US has been running about 1.6% on average despite the worst recession of our lifetimes. So, that gives you an idea that even in that case, inflation, the miss on inflation isn’t that huge, even in that sense.
But, Willaims ' average inflation prescription calls for price inflation to be allowed to run above target to "make-up" for past "deficiencies" in price inflation.

Aside from the questionable concept of target inflation (see the first part of my question to Williams), the "make-up" inflation is far more than "a relatively few tenths." 

With core inflation running below a 2% target at 1.6% over 10 years, that is a miss of 4/10 of a percent per year or in total a miss of a full 4 percentage points.

Thus, based on the way Williams has presented his make-up inflation, without out specifying any time frame, it is possible to reach the conclusion that Williams over a one year period would be fine with 6% price inflation (2% target plus 4% in make-up).

And that is the basic math.


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