American Economic Policy, as told by Martin Feldstein at Harvard University: Lecture 7, Monetary Policy: Business Cycles and Inflation

Today we are continuing to talk about monetary policy. We have been discussing the issue of how the Federal Reserve Bank should respond to the extent of slack in the economy: when there is high unemployment, the Fed should be increasing aggregate demand, but at full employment more aggregate demand would lead to inflation. It is a difficult problem to find this balance because of lags in the process and host of measurement issues.

Bureau of Labor Statistics Economic News Release February 5 2016
The first Friday of the month is the usual release date for statistics about the previous month’s employment situation. (Click on image to see the full release.)

On Friday  the Department of Labor  of released its monthly report. What did we learn? Here we are at the Fed trying to make sense  of the data. [Professor Feldstein is referring to the February 5, 2016 release by the Bureau of Labor Statistics.]

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American Economic Policy, as told by Martin Feldstein at Harvard University: Lecture 5, Monetary Policy: Business Cycles and Inflation

I’m going to start talking about monetary policy today, and continue with it in the next lecture, and again next week.

So think about the Federal Reserve, and their decisions directed to monetary policy. They have just met, and decided not to change anything, but they are looking ahead to March to see if they will raise rates as they did in December.

They know where the economy is, and where it has been, and infer where it is going in order to decide to do something to nudge it in one way or another. So I have handed out a sheet, a bit of information certainly used by the Fed, and the investment community in trying to decide what are they going to do.

Martin Feldstein Excerpt from Handout on GDP preliminary estimates American Economic Policy
Excerpt from class handout (click on image to enlarge).

Table 1 on the left hand side of the sheet shows what happened to GDP and its components in the last two quarters, based on what was released on January 29th. Table 2 on the right hand side shows the contribution of each component to the change in GDP.

The Fed likes to say that they have a plan, but what they actually do is data dependent and they are adjusting policy accordingly. Here is one example of new data, and we have to recognize that there are problems with actually measuring real GDP.

What do I learn from these numbers? And if I were at the Fed I would have to recognize measurement problems in trying to interpret them.

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