The Fedfail Index
THE CONSCIENCE OF A LIBERAL
PAUL KRUGMAN
Ben Bernanke’s testimony today, as expected, lacked all sense of urgency. Hey, the economy’s a bit disappointing, and maybe someday we might think about doing something about it.
In my view, the Fed is too optimistic. When Bernanke says that
"Most FOMC participants expect real GDP growth of 3 to 3-1/2 percent in 2010, and roughly 3-1/2 to 4-1/2 percent in 2011 and 2012."
he’s telling the truth — but haven’t those forecasts already been overtaken by events? Less than 3 percent growth in the 1st quarter; probably only around 2 in the 2nd; to make more than 3 we’d have to see accelerating growth from here on, and all signs point the other way. Not to mention the fact that stimulus is going into reverse.
But forecasts aside, we really have to bear in mind that the Fed is failing in fulfilling its dual mandate, price stability and full employment. I thought it might be convenient to have a simple measure of just how big the failure is; let’s call it the Fedfail Index. It’s related to the Taylor rule, but instead of offering a rule of thumb for the Fed funds rate, it measures how far unemployment and inflation are from their presumed targets.
The rule I’ve chosen takes its coefficients from the Rudebusch version of the Taylor rule; 1.3 times the deviation of unemployment from 5 percent + 2 times the deviation of core inflation (CPI) from 2 percent. So it’s 1.3* ABS(unemployment – 5) + 2* ABS(core inflation – 2). You can make up your own version; I don’t think it will look very different.
Here’s what you get:
What this little exercise conveys is that the situation is deteriorating, not improving: unemployment is down slightly, but we’re drifting closer to deflation.
Bernanke’s answer to all this seems to be that the Fed is doing a lot. But it’s obviously not enough — the central bank is supposed to deliver results, not get an A for effort. And those results aren’t coming.
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