Long time readers know that I don’t believe in long and variable lags. I view the stance of monetary policy in terms of NGDP growth expectations, and in my view a change in NGDP growth expectations leads to a fairly quick change in current NGDP.

I’ve also argued that there might be long and variable leads, if you define the stance of monetary policy using metrics such as the money supply or the fed funds rate (instead of NGDP growth expectations). We saw this in the Great Depression, when NGDP soared after March of 1933 in response to actions that didn’t affect the current money supply, but were expected to increase its future growth rate.

A change in the future path of monetary policy affects current financial conditions, which affects near-term NGDP growth.

At today’s press conference, I saw a few hints that Jay Powell is edging in the direction of embracing long and variable leads:

There was an old literature that made those lags out to be fairly long. There’s newer literature that says they’re shorter. The truth is we don’t have a lot of data of inflation this high in what is now the modern economy. One big difference is that it used to be you would raise the federal funds rate. Conditions would react and that would affect economic activity. Now financial conditions react well before in expectation of monetary policy. That’s the way it has moved for a quarter of a century, in the direction of financial conditions, then monetary policy. Because the markets are thinking what is the central bank going to do.

There are plenty of economists that also think that once financial conditions change that the effects on the economy are faster than they would have been before. We don’t know that. I guess I would say it’s highly uncertain.

My only quibble is that it’s always been true that there were long and variable leads, it’s just that mainstream economists are finally beginning to discover that fact.

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