Taxing Money: The Goodfriend Approach To Monetary Policy

At a time when the inflation rate has been consistency been well below the Federal Reserve Board’s 2.0 percent target, Donald Trump has nominated Marvin Goodfriend to fill one of the Fed’s vacant governor positions. Goodfriend argues that the Fed’s major policy failing has been that it has inadequately convinced the public of its commitment to fighting inflation.

This seems more than a bit otherworldly, but in the era of Donald Trump, anything is now possible. In Congressional testimony given last year Goodfriend complained:

“If in years past the Fed had been fully committed to price stability as embodied in an inflation target, retirees would be in a much better position today. Years ago, households would have been advised and willing to hold a significant share of their lifetime savings in long-term nominal bonds paying a safe nominal rate of interest. Households could have counted upon the fact that the nominal return would have been locked in purchasing power terms. The promised nominal interest rate, having incorporated a 2% inflation premium to offset the steadily depreciating purchasing power of money at the Fed’s inflation target, would have delivered a safe long-term real return upwards of 3% per annum.

“Instead, the Great Inflation called the Fed’s commitment to price stability into question as it decimated the real return on long term nominal bonds. Responsible households have since steered away from saving in long-term nominal bonds to protect themselves from inflation risk. To avoid inflation risk, households have shortened the maturity of their interest-earning savings and reached for more return in equity products, forced to accept the risk of ultra-low short-term interest rates and volatile equity prices in the bargain.”

This one is worth stepping back from and taking a deep breathe for a moment. We have just gone through a long period following the Great Recession in which the unemployment rate was needlessly kept higher than necessary primarily due to lack of adequate fiscal stimulus, but also a monetary policy that was less aggressive than it could have been in trying to boost demand.