Some commenters have pushed back on my “no tight money” claims by pointing to a slowdown in NGDP growth over the past year. I am not persuaded.

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Under any sort of rational policy regime, you should try to come back to the trend line after a steep decline caused by special factors. NGDP fell extremely sharply in mid-2020 (due to very special factors), and hence it was appropriate that NGDP rose extremely rapidly over the following year. That’s the implication of level targeting, but also average inflation targeting and even the Fed’s vague “dual mandate”.

But once NGDP got back near the old trend line, it was appropriate to slow NGDP growth to a rate consistent with the Fed’s 2% target, which implies an NGDP growth rate of roughly 3.5%. Instead, NGDP growth has averaged 9% over the past year. Even if that’s a bit slower than the rate during the bounce back from COVID, policy is actually becoming more expansionary in the sense that we are now moving further and further above the optimal target path, instead of merely recovering to the previous trend line (which was appropriate). It’s not enough to think in terms of growth rates, you also need to consider levels.

I understand that concepts such as easy and tight money are subjective, so let me make my point using different terminology. I believe that the Fed’s policy error over the past 12 months has been even worse than the mistakes made in 2021. Policy in 2021 was too expansionary (at least late in the year), but the policy in 2022 is even worse, far too expansionary.

It’s possible that policy has recently become a bit less expansionary, but it’s certainly not a tight money policy by any reasonable definition. Forecasts for 4th quarter NGDP growth remain quite high. Every month of overshooting makes the subsequent correction even more painful. Stopping high inflation in 2023 will be more painful (or less effective) than it would have been if we’d bitten the bullet and brought NGDP growth down more sharply this year. Nominal wage growth has developed a lot of upward momentum, making it much harder to control.

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