Scott Sumner on Alternative Approaches to Monetary Policy

Episode Summary

Executive Summary: David Beckworth interviews Scott Sumner about his retirement from Mercatus and his upcoming online book, Alternative Approaches to Monetary Policy. Sumner revisits his case for level targeting, NGDP futures markets, and market-based policy discipline, arguing the Fed and ECB often misread monetary conditions during shocks. He frames monetary-policy ideas as cyclical, shaped by inflation and interest-rate regimes.

Main Topics: Sumner's retirement and Mercatus legacy (Priority: 5/5): Sumner announces he will retire from Mercatus next week at age 67, reflecting on the Monetary Policy Program's origins, collaborators, conferences, and the role of the podcast in elevating the program. Why Sumner joined Mercatus and his research trajectory (Priority: 5/5): He explains that blogging during the Great Recession helped him voice concerns about policy mistakes, leading to Mercatus support and a full-time focus on monetary-policy reform after decades of teaching. The case for market-based monetary policy and asset-price signals (Priority: 5/5): Sumner argues the Fed should have recognized late-2008 tight money by reading market indicators—TIPS spreads, commodity prices, stock prices, the dollar, and commercial real estate—rather than relying on backward-looking data. Level targeting versus discretionary policy (Priority: 5/5): He defends nominal GDP level targeting as the best regime because it stabilizes expectations, gives policy traction at the zero lower bound, and reduces the importance of day-to-day Fed missteps. Nominal GDP futures contracts and guardrails (Priority: 5/5): Sumner describes a proposed Fed-run NGDP futures market where the central bank takes long/short positions to keep expected NGDP within a band, using market discipline as a warning system. Alternative Approaches to Monetary Policy book project (Priority: 4/5): The upcoming book is an online, evolving, free, and interactive project that clarifies what monetary policy is and critiques interest-rate targeting, MMT, and libertarian monetary theory. Historical cycles in monetary-policy schools (Priority: 4/5): Sumner argues policy fashions shift with the macro environment: old Keynesian thinking when rates are near zero, monetarism during high inflation, and New Keynesian models during stable moderate inflation.

Key Arguments: Sumner's move to Mercatus was driven by frustration with Great Recession policy errors and a desire to advocate monetary-policy reform full-time after years in academia. Late 2008 offered strong market evidence of tight money: falling inflation expectations, crashing commodities and equities, rising dollar, and weakening real estate—signals the Fed should have acted on. The Fed's 2008 mistake was not just about the level of rates; it was about expectations and the regime, especially the lack of level targeting and the signaling of future hikes. Nominal GDP level targeting is superior to price-level targeting because it better accommodates supply shocks while keeping aggregate demand and nominal spending stable. A NGDP futures market would give the Fed a real-time warning signal and create financial consequences for being off target, improving accountability and policy discipline. The book aims to clarify conceptual confusion about what monetary policy is by distinguishing interest-rate, money-supply, and price-of-money approaches. Historical episodes like the Great Depression and 1930s experimentation show that low interest rates do not necessarily mean easy money and that policy indicators can be misleading. MMT and other ideas tend to rise and fall with the macro environment; policy schools are often adopted when they appear to fit the prevailing inflation and rate regime. Average inflation targeting worked initially in the COVID recovery but became too dovish because it was not truly symmetrical and allowed overshooting. The ECB may be repeating past mistakes by focusing on headline inflation and risking tightening into a supply shock and potential recession. Market forecasts are a better guide than economist forecasts; Sumner repeatedly emphasizes inferring policy signals from markets rather than making his own point forecasts.

Data Points: Age at retirement: 67 - Sumner says he will retire from Mercatus next week after turning 67 this month. Mercatus start date: Around the beginning of 2016 - He recalls joining and helping build the Monetary Policy Program after teaching at Bentley University. Midas Paradox publication year: 2015 - Sumner references his earlier book on the interwar gold standard and the Great Depression. The Money Illusion publication year: Last year - The transcript notes his most recent book on market monetarism and the Great Recession. Great Recession timing: Late 2008 - Sumner says market indicators were already clearly signaling contractionary policy in the second half of 2008. Fed policy rate: 2% - Beckworth notes the Fed cut rates through April 2008 and then held them at 2% through October. Potential NGDP target band: 3% to 5% - Sumner's example of a corridor system where the Fed takes long/short positions around NGDP growth. Average inflation target: 2% - Discussed as the Fed's goal that should be pursued symmetrically, not with a dovish bias. Nominal GDP trend line: 4% - Sumner cites a 4% trend line when describing level targeting and late-2021 overshooting. Inflation expectations: Below target in late 2008 - He cites falling inflation expectations and TIPS spreads as evidence of tight money. Forecasted long-run inflation: Slightly above 2% - Sumner notes markets are forecasting inflation a bit above 2% for the next decade. ECB possible rate move: 75 basis points - Beckworth references market expectations for a large ECB hike amid hawkish rhetoric. Book structure: 5 chapters and 3 appendices - Sumner describes the upcoming online project as relatively short and expandable. Book release timing: Later this year - He expects the online publication to begin later in the year.

Pivotal Quotes: "I'll be retiring from Mercatus next week." — Scott Sumner: His big announcement at the start of the interview. "good economists don't forecast, they infer market forecasts" — Scott Sumner: He explains his preference for using markets rather than personal macro forecasts. "the Fed could have done a lot more stimulus in 2008" — Scott Sumner: His core critique of the Fed's response to the financial crisis.

Implications: The episode reinforces Sumner's case that central banks should anchor policy in market-based expectations and level targets, not ad hoc judgment. It also suggests the current inflation era may push central banks toward a more hawkish, regime-focused approach, making the design of future frameworks crucial.