When a plane crashes at sea, investigators usually consider the possibility of pilot error. But what will happen to inflation? When inflation is high, should we consider the possibility of an inflation-targeting pilot being bad?

Pat Horan The NYT recently cited the Fed as a possible cause of high inflation in its most recent opinion poll:

We should not stop this surveillance as NYT is a “dumb” newspaper. They are, of course, leftists, and they often misinterpret economic stories. But NYT is not dumb. Below this post I have a Google screenshot showing many recent stories indicating that the Times understands that the Fed is responsible for controlling inflation.

In addition, if you survey professional economists about the causes of the current high inflation, I am sure that many of them will not name monetary policy. (I suspect that excessive financial stimulus and supply shocks may be frequently cited.)

During the long slow recovery from the Great Recession, I used the Fireman / Orsonist analogy to explain why the policy was so far away. Both the media and the economy view the Fed as a kind of fireman who comes to solve spontaneous economic problems. People don’t usually blame firemen for starting a fire. Fed critics like me see the Fed as a firebrand that causes volatile NGDP growth.

Ideally, the Fed would be seen as an airline pilot, without the goal of keeping NGDP growing steadily. When pilot errors occur, such as Air France Flight 447 from Rio to Paris, it often occurs in response to some kind of external shock. In that case the ice crystals interfere with the text of the instrument. However, the pilot’s fault has been identified as the cause of the plane crash. Similarly, errors in Fed inflation targets do not usually occur in the void, but rather they occur during periods when the economy is also plagued by non-financial shocks. Nevertheless, if the NGDP is too low (as in 2008), or too high (as it is today), the Fed should be seen as the cause of the problem.

Probably a factor as to why they’re doing so poorly is because of the poor Fed policy. Even better, think about whether the principle is too simple or too tight for which we can all agree on a simple and unambiguous metric. What might that policy indicator look like?

How many times would we have to live with a policy error that could have been avoided if the Fed had focused like a laser? Level of NGDP?

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