Wednesday, January 25, 2012

The Fed sets a nominal target

Well, it looks as if the FOMC read my post about the importance of setting a nominal target, as they have decided to adopt an inflation target of 2%. This is not my preferred policy, but it constitutes progress in my view. How so? Now that the Fed has a nominal target, curious minds will begin to wonder, "why 2%? why not 3%?", or "why inflation? why not nominal GDP growth?", or "why a growth target? why not a level/path target?", etc. Stick those in a blender, and suddenly the financial press will be wondering, "why not a 5% nominal GDP level/path target?". Once that question comes on the radar, the Fed will have some 'splainin to do.

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