Christina Romer speaks sooth to Ben Bernanke:
Ben Bernanke Needs a Volcker Moment: Volcker… believed that… backing up his commitment to lower inflation with a new policy framework… would break people’s inflationary expectations…. Bernanke needs to steal a page from the Volcker playbook…. [H]e needs to set a new policy framework — in this case, to begin targeting the path of nominal gross domestic product…. The Fed would start from some normal year — like 2007 — and say that nominal G.D.P. should have grown at 4 1/2 percent annually since then, and should keep growing at that pace. Because of the recession and the unusually low inflation in 2009 and 2010, nominal G.D.P. today is about 10 percent below that path. Adopting nominal G.D.P. targeting commits the Fed to eliminating this gap….
By pledging to do whatever it takes to return nominal G.D.P. to its pre-crisis trajectory, the Fed could improve confidence and expectations of future growth….
Even if we went through a time of slightly elevated inflation, the Fed shouldn’t lose credibility as a guardian of price stability. That’s because once the economy returned to the target path, Fed policy — a commitment to ensuring nominal G.D.P. growth of 4 1/2 percent — would restrain inflation….
The Fed would need to take additional steps. These might include further quantitative easing, more forceful promises about short-term interest rates, and perhaps moves to lower the exchange rate…
Note that if the Federal Reserve did commit to returning nominal GDP to its pre-2007 growth path within the next three years, it would be aiming for 8%-9% per year of nominal GDP growth--which would carry with it a (temporary) inflation rate of 3%-4% per year. If Ben Bernanke did not have buy-in for such a (temporary) inflation rate from a solid majority on the FOMC, he should not undertake the proposed policy. Note that if the Federal Reserve did commit to returning nominal GDP to its pre-2007 growth path within the next three years, it might well have to buy more than $2 trillion of long-term dollar-denominated securities in the next several months (or it might find that it might need to sell up to $800 billion of its current bond holdings: we really don't know). If Ben Bernanke did not have buy-in for such a tremendous expansion of the Federal Reserve balance sheet from a solid majority on the FOMC, he should not undertake the proposed policy. Note that if the Federal Reserve did commit to returning nominal GDP to its pre-2007 growth path within the next three years, the dollar might well fall by 10% or more more-or-less immediately. If Ben Bernanke did not have buy-in for such a large move in the dollar from a solid majority on the FOMC, he should not undertake the proposed policy.
Those are the only three possible reasons I can think of for not announcing on Monday that level targeting of the nominal GDP growth path is now Federal Reserve policy, and that the quantitative easing asset purchases that may be needed to support that policy will start immediately at the rate of $50 billion a day.
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