I have for some time had the idea that Federal Reserve thinking in the second half of the 1980s and the early part of the 1990s was dominated by a view that in many ways resembles Market Monetarist thinking. Here especially Wayne Angell and Manuel “Manley” Johnson played an important role. Johnson was on the Fed’s Board of Governors from 1986 to 1990, while Angell served on the Board of Governors from 1986 until 1994. Both had been appointed by President Reagan. You can think of them as the original Supply Side Monetarists.
Like Market Monetarists Angell and Johnson believed (and still do as far as I can judge) that the best way to judge the monetary policy stance is by observing the price action in financial markets. Angell particularly stressed commodity prices as an indicator of monetary policy, while Johnson advocated looking at a broader range of financial markets – ranging from commodity and equity prices to the exchange rate and the yield curve.
Johnson explained his unique take on monetary policy in his excellent book Monetary Policy, A Market Price Approach, which he co-authored with Robert Keleher. See more on Keleher’s and Johnson’s thinking here.
The Angell rule
A couple of days ago I came across an interesting paper by Wayne Angell from 1991. In the paper – “Commodity Prices and Monetary Policy – What Have we Learned?” from 1991. In the paper Angell spells out his thinking about commodity prices as forward-looking indicators of the monetary policy stance. Angell is quite clear that both interest rates and monetary aggregates are quite imperfect indicators of the monetary policy stance.
While reading the paper I got the idea that Angell not only spelled out an idea about how to conduct monetary policy, but maybe he was also describing actual US monetary policy during the years while he was at the Fed. In his paper Angell basically is saying that the Fed should ensure price stability and to achieve that should use commodity prices (among other things) as an indicator of future price pressures.
Hence, effectively Angell was suggesting that the Fed should follow a rule for the money base where the money base is increased or decreased dependent on the development in commodity prices.
Looking at the development in the money base during the time Angell was at the Fed it surely looks like this is effectively was the policy the Fed actually followed. Just take a look at the graph below.
You don’t need advanced econometric studies to see that there is a pretty clear relationship.
As commodity prices (the CRB Index) drop the Fed reacts within some quarters by expanding the growth rate of the money base. This is for example the case from 1984 to 1987 and again from 1989 to 1993.
Hence, the Fed de facto seems to have changed the monetary policy stance based on the signals from financial market data. This is pretty much in line with general Market Monetarist recommendations. However, it should of course be remembered that while Market Monetarists advocate NGDP level targeting Angell effectively favours Price Level Targeting (“Price Stability”).
Furthermore, this is also the period in Fed history where the Fed move toward what Bob Hetzel has termed a Lean-Against-the-Wind with credibility policy. Angell again and again has stressed the need for a rule based monetary policy rather than a discretionary monetary policy.
The lesson we should learn from the Angell rule is not that we should reintroduce the the Angell rule – at least not in the sense that we should use only commodity prices as an indicator of the monetary policy (Angell never argued that), but that market prices are excellent indicators of the monetary policy stance. This is of course also why we need a proper NGDP futures markets, which the Fed could utilize in the conduct of monetary policy.