Is the Fed Committed to a Stable Growth Trajectory?

Does the Fed have full confidence in long term growth potential? Alas, it is difficult to know for certain, since their decision to opt for an average inflation targeting policy, does not include a commitment to a level growth trajectory. Instead they opted for what amounts to a more discretionary approach, after a lengthy period of open discussion in this regard. Something I have found myself wondering as well: When it comes to long term growth potential, could the Fed's reluctance to commit to a nominal level target, also illustrate a degree of uncertainty about the recent dominance of intangible capital as a source of wealth?  

At the very least, the Fed is now willing to take bygones into consideration for the first time, as David Beckworth noted. That's a good first step. Nevertheless, the Fed lacks specifics how they intend to go about the process, and it's a shame they did not provide more clarity. As to the level of discretion they instead chose, Tim Duy lamented - "You can drive a truck through the holes in the average inflation targeting policy." 

While market monetarists certainly have cause for encouragement, the Fed's vagueness as to how the new framework will function, is still concerning. After all, this would have been a good opportunity for the Fed to embrace NGDPLT, and had they done so, we might all have a greater degree of certainty about near future prospects and economic stability. Insofar as their willingness to make up for earlier shortfalls, George Selgin wonders, how far backward is the Fed willing to consider? For that matter, Marcus Nunes is concerned the Fed's continuing inflation framework may end up resembling that of the last three decades. After reading opinions which dissented even more than those expressed by market monetarists, I questioned whether the Fed's desire to maintain a high level of discretion, might have undermined some of the goodwill they sought to gain from market observers and the public in general.

Perhaps the Fed's worries about employment issues prevented them from taking more decisive action. Future employment uncertainty is also affected by the recent dominance in intangible capital. And even though intangible capital exacerbates existing inequalities, by no means is that the only problem. Unfortunately, these organizational patterns also function as an economic divide between prosperous regions and everyone else. In a recent post, Michael Spence explains how a pandemic economy further supports the dominance of intangible capital in relation to labour. He stresses that even though markets do a good job of matching expectations for real returns to capital,

When it comes to measuring the present value of labor income, there simply is no comparable forward-looking index. In principle, then, if there is a significant anticipated economic rebound, the outlooks for capital and labor income could be similar, but only capital's expected future would be reflected in the present.

But there is more to the story. Market valuations are increasingly based on intangible assets, not least the ownership and control of data, which confers its own means of value creation and monetization. According to one recent study of the S & P 500, stocks in companies with high levels of intangible capital per employee have recorded the biggest gains this year, and the less intangible capital per employee companies have, the worse their stocks have performed.

In other words, incremental value creation in markets and employment are diverging. And while this was true even before the pandemic, the trend has now accelerated. 

Let's hope the Fed can keep the faith and not worry too much about things outside of their control. Again, what is needed is a strong real economy response to ensure sustainable forms of employment, well into the future. And chances are, we would have an easier time of recreating reliable sources of tangible wealth, than attempting to bring intangible organizational patterns to small communities and towns. Ultimately, the real economy needs new patterns which make tangible wealth creation a possibility for all communities. Just the same, the Fed will need to do their part through steady and sure monetary representation, so that real economy potential is not needlessly lost.