SCOTT SUMNER ON NGDP TARGETING

I can see a scenario in the coming 6-12 months where the Fed will be pressured to take more action.  The current hot thing in economic circles is NGDP targeting.   This essentially involves the Fed targeting a level of NGDP and implementing monetary policy to attempt to achieve this level.  It would essentially involve massive QE with a definitive direction in setting market expectations.  I think there is a very real potential that we could see a bit of disinflation in the first half of 2012 as the motor fuel comps become increasingly difficult and put a bit of downside pressure on YoY inflation data.  This could be the Fed’s excuse for further monetary easing.    My guess is that the idea of NGDP targeting will have been digested by this point and the Fed could implement it.   Of course, there’s a lot of moving parts in this thinking, but this idea is gaining a great deal of traction so the Fed needs any excuse to implement it.

I am working on a big piece on NGDP targeting, but I’ve been swamped in recent weeks and just haven’t been able to wrap it up.  In the meantime, you might be interested in this excellent interview with the WSJ’s Kelly Evans and Scott Sumner who is widely regarded as the leader of the NGDP targeting movement.   If you followed my endless coverage of QE2 you can likely guess what I think about this program….Regardless, reader thoughts are always welcome.

Source: WSJ