Greg Sargent Declares Fed's "Evans Rule" a Liberal Victory

     I know Krugman regularly reads Sargent's The Plum Line, I don't know about Scott Sumner. Sumner, Bob Murphy, and company are always kvetching that Krugman won't talk about any conservatives he thinks are worse reading but does Sumner read Sargent?

    If he does, I'm not sure he'd appreciate this spin by Sargent on the Fed's new Evans Plan-where the Fed increased Treasury bond purchases by $45 billion per day with a target of 6.5% unemployment and 2.5% inflation. This had a number of implications. Chicago Fed President Charles Evans had been calling for such an explicit target for a while.

     What it also did was implicitly raise the inflation target from 2% to 2.5%. What's more, Bernanke indicated that meeting the targets wouldn't immediately lead to monetary tightening. So we could have inflation over 2.5% and no tightening even if unemployment were at 6.5%.

     However, Sargent has declared this move a victory for liberal economics:

     "In the “elections have consequences” department, add today’s announcement by the Federal Reserve that it will not only tolerate somewhat more inflation, but will do so until unemployment drops below 6.5 percent. It’s a decision that pushes the Fed more and more in the direction of liberal economists who have supported monetary policy designed to encourage economic growth, not fight inflation. (See Mark Thoma’s explanation of the new policy.)"

     "Or, to put it another way, it’s a sign that the current Fed board is increasingly taking the “dual” part of its dual mandate — to seek stable prices and full employment — a lot more seriously than it seemed to earlier in Barack Obama’s presidency."

     http://www.washingtonpost.com/blogs/plum-line/wp/2012/12/12/feds-big-decision-is-victory-for-liberal-economics/

     The election he has in mind though is not 2012 but 2008:

      "And so today’s decision is a consequence of an election, but not the one we just had — it’s a consequence of the November 2008 election, which allowed Obama to appoint and a Democratic Senate to confirm members of the Fed Board of Governors; he’s now appointed six of seven, all of whom voted for today’s policy."

      "Republicans, meanwhile, have moved in the other direction, with many of them rejecting entirely the Fed’s responsibility for improving the economy in favor of having it worry only about inflation. In fact, just last week, Marco Rubio implied that he may adopt that as a key position in his possible presidential campaign. Yes, that’s right: it didn’t get that much attention during the recent campaign, but many Republicans believe that (at least when it comes to monetary policy) the United States has been paying too much attention to jobs and not enough to fighting inflation."

      "Of course, there are no guarantees that the new Fed policy will work. But after a very slow start, in which Obama was slow to nominate new people to the Fed and the Senate was slow to confirm those he did nominate, at least Democrats are now implementing the economic policy that many liberal economists support. And thanks to Obama’s re-election and Democratic gains in the Senate, they’ll be able to keep doing that for some time into the future. Elections have consequences!"

       Sumner had criticized Obama a lot for not filling the Fed vacancies-wondering if Obama appreciated the importance of who's on the FOMC. But this phrase "a victory for liberal economics" might stick in Sumner's craw a little. Doesn't he see it as a victory for Market Monetarism? He'd probably say that is too much to say yet but at lesat he'd see it as a move in that direction. Then too how much credit does Bernanke himself get? Of course, the new members may help him get what he wants: Bernanke has wanted looser policy for awhile. even early in Obama's first term.

      Morgan Warstler now has accepted NGDP targeting as the one Royal Road to thwarting the ambitions of spend thrift liberals. Yet Sargent sees it as a victory for liberals. I just think it's interesting, the varying interpretations of it.

      As a liberal I see it as a positive development as well. The person who deserves the most immediate credit is, of course, Evans.

      Sargent's interpretation is quite reasonable. Certainly if you look at liberals as simply Democrats and conservatives as simply Republicans then certainly by default the Democrats are the party of a more activist Fed. The Republicans have become enamored of "hard money" policies the last 4 years-Ryan himself has called for a return to a gold coin standard-much more than just a gold standard.