Abstract
Abstract. The monetary aggregate M2 increased from $15,473 billion in February 2020 to $19,670 billion in February 2021, or by 27.1%. Real M2 (M2 deflated by the CPI) increased similarly by 25.3%. This monetary acceleration, unprecedented outside of wartime, is apparent in a longer-run perspective. From the trough of the last business cycle in June 2009 through February 2020, annualized monthly growth rates for M2 averaged 5.9%. Over the interval March 2020 through June 2020, they averaged 65.6%. Although diminished, rapid M2 growth continued, averaging 12.9% from July 2020 through March 2021. Milton Friedman famously said that inflation is always and everywhere a monetary phenomenon. If he is right, should not this bulge in money lead to an undesirably high rate of inflation? Section 1 summarizes what the Fed must do to avoid an undesirable increase in inflation. Section 2 lays out the argument in terms of a need for procedures that ensure monetary control. Section 3 describes the Fed’s new monetary policy called “flexible-average-inflation targeting” (FAIT). It highlights how radical a departure FAIT is from the policy of the Great Moderation as a consequence of making the unemployment rate an independent goal rather than using its changes as an indicator variable for whether the economy is growing unsustainably fast or slow. Section 4 draws out the parallels between FAIT and the monetary policy followed in the 1970s. It makes the argument that unless the FOMC reinstates the policy of preemptive increases in the funds rate guided by the necessity of unwinding the 2020 bulge in M2, it will inaugurate an undesirably high period of inflation. Section 5 argues that in many ways with its dismissal of money FAIT resembles modern monetary theory (MMT) adapted to exploitation of the trade-offs promised by a Phillips curve. Section 6 contends that money remains at the heart of any serious conceptual framework for discussing the powers of a central bank. An appendix provides a more formal quantity theoretic framework using the New Keynesian model.
Keywords. Pandemic bulge, Money cause, High inflation.
JEL. C71, H56, D74, J51, J52, D39.References
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