Is Monetary Policy Aging?

Azhar Iqbal

Published: March 2021

This article proposes a framework to quantify the magnitude of monetary stimulus offered during a recession. We estimate that, over the past 30 years, the Federal Open Market Committee (FOMC) offered larger incentives and for a longer duration during a recession than in the past cycle. Furthermore, each recession drained the FOMC’s resources and left the Committee with ‘less ammunition’ to fight the next recession. Therefore, our work suggests that monetary policy is aging. To de-age monetary policy, we propose 4% as a long-term target for the nominal FFR. Some of the major benefits of our proposed framework include: helping market participants gauge magnitude of accommodation; anchoring market participants’ expectations; reduce time spent at the zero lower bound; lessen dependence on balance sheet expansion; ensure that the real federal funds target rate will be positive when the FOMC meets its interest rate and inflation targets.

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Characterizing Stagflation into Mild, Moderate and Severe Episodes

The study proposes a new framework to classify stagflation into mild, moderate, or severe episodes based on the magnitude and duration of high inflation and low-output growth. It uses the CPI and PCE deflators as inflation measures, real GDP as output growth measure, and a time-varying benchmark for growth and inflation to account for the changing nature of the US economy. The article identifies 13 episodes of stagflation from 1947 to Q1-2024, with five mild, four moderate, and four severe cases. The current episode (Q2–2021 to Q1-2024) is severe and the second-longest in history. The findings use Bloomberg’s consensus projections to estimate the end of the current stagflation episode by Q1–2024, and discuss the policy implications and lessons from past episodes.

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This article presents a new approach for estimating the optimal nominal interest rate and labels it the appropriate-FFR. The analysis suggests that the US Federal Reserve is behind the curve in the present cycle and also predicts a hard landing using both the FOMC and Blue Chip consensus forecasts. Given the historical accuracy of our method, we caution decision makers to consider the possibility of a hard landing in the near future.

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Diversity and Inclusion
Author: Azhar Iqbal

This study employs the natural unemployment rate as a benchmark to characterize the state of the US labor market by race and gender. In our analysis, we find that the COVID recession produced asymmetric economic damages to some segments of the population and that the pace of recovery from the recession is slower for some races and gender than for others. This pattern matches similar trends of asymmetric damage and recovery seen over the prior three business cycles. The Black labor market was affected most by recessions and experienced the slowest pace of recovery; in particular, Black women’s pace of recovery was the slowest among any race and gender. Of all segments examined over this 30-year period, only the Black labor market never achieved full employment, making the past three business cycles “recovery-less” experiences for Black Americans. This finding, that one race never achieved full employment, suggests that policymakers should incorporate “diversity and inclusion” into their efforts to confront recessionary periods, rather than the current tradition of one-policy-fits-all. Our work proposes a new policy goal of full employment for every race and gender, which we believe would be a start to ending the “recovery-less” experience for Blacks. Typically, policymakers rely on and respond to the aggregate economic numbers; however, we believe there must be policy tools specifically focused on the race/gender-defined labor markets. Our analysis suggests that a faster recovery in the Black labor market would boost the pace of national recovery and that focusing on the Black market would also help the aggregate market. As a result, incorporating the race and gender data would help to design policies to benefit all. In other words, full employment for every race and gender should be the policy goal going forward.

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