Thread by @dampedspring

Challenging times for Fed dual mandate 101. This thread discusses what policy is appropriate for stagflation. Tl;dr that answer is easy if true stagflation is present. If it's the mild and or transitory kind then the Fed should do exactly what they are doing and react if

Persistent high inflation with below trend growth occurs. When inflation expectations are set as far as the eye can see at 2.5% the Fed does not have a problem. Inflationistas can scream all they want about the current high inflation and how it is not going to be transitory but

the Fed deals with real problems that are actually happening or are certain to happen in the near future. Stagflation doesn't matter exist at the moment. Paul Volcker would bust a gut if he read the stuff people are saying about stagflation today. Stepping back.

Central banks do not exist to change the direction of an economy. Their job is to make the journey less bumpy and to provide economies time to heal during extraordinary stress to avoid unneeded pain. Think seat belts and speed limits. Not choosing a different direction.

Economies go on a particular path for reasons unrelated to central bank policy. Some paths are dangerous and without seat belts and speed limits many cars would go off the road and kill the occupants. Like it or not central banks over the long term allow economies operate safely

Central banks are counter cyclical but don't prevent cycles. That said their actions can also perpetuate problems and create distortions. It's a tough job. The world could operate without any central bank presence but I believe that over a century without a central bank our

economy and society would have seen significantly less growth and standard of living improvements. Fiscal policy has stolen growth and standard of living improvements from future but that's a different thread. Only in 2020 has coordinated fiscal and monetary policy been a thing.

Over the last 35 years strong deflationary headwinds have been in place as has falling trend growth rates. These conditions would have resulted in lower interest rates regardless of the feds actions. The Fed has a dual mandate which is to support employment and fight inflation.

But inflation has not been a problem so policy could focus on jobs and growth. This is not a thread on their mistakes and the responsibility they have for various societal problems. This is a thread about what their mandate is and what they will do.

Today after the global economy was shut down and then reopened and now continually challenged by an ongoing virus risk. Inflation has been pretty high but again Volcker snickering in the background.

And growth has been robust. A combination of 6% annual inflation and 5% annual growth is not stagflation. It's an economy on fire that no longer needs accommodation. The feds dual mandate is not in unbalanced conflict

Balance. That's the word. For three decades inflation was not a factor and there was no need to balance the priorities of the dual mandate. Today the dual mandate looks like inflation is slightly more important than employment. Not nuts out of balance as inflation is anchored

The question at hand is what is the appropriate monetary policy for stagflation. Stagflation is not 2.5% long term inflation with trend growth. Stagflation is 10% inflation with below trend growth. Volcker taught us how the appropriate monetary policy for that.

Stagflation is explicitly when inflation is the dominant priority. The fed can raise rates and sell down its balance sheet to fight it. If it is clear that inflation is dominant it is possible that the Fed will be unwilling politically to fight it. It wasn't easy for Volcker

Lots of people experienced lots of pain during the battle. But the question what is appropriate is not really a question.The question is what will the policy makers do. I can't answer that. But they have the tools and knowledge you just have to figure out if they have the will

But today. We are not yet experiencing stagflation and though the mandate is slightly out of balance due to hot recent inflation and still not healed labor participation the dot plot and the markets pricing seems like the right path. Stagflation appropriate monetary policy

Is not even close to appropriate at the moment . If it becomes appropriate we all know what it will look like