The case for NGDP targeting

A better way to do monetary policy

(Photo by Jim Lo Scalzo - Pool/Getty Images)

The Ever Given has mercifully been freed from the clutches of the Suez Canal.

But back when the ship was stuck, I read a CNN article that briefly mentioned the idea that “a spike in prices could force the Federal Reserve to hike interest rates sooner than expected.”

When you think about it, this is a crazy idea.

1. A ship gets stuck in the Suez Canal.

2. That means other ships need to detour around the Cape of Good Hope.

3. That means they burn more fuel, so shipping costs go up.

4. The higher shipping costs lead to higher consumer prices.

5. To fight this, the Fed raises interest rates.

6. The higher interest rates lead to job losses in interest-sensitive sectors (housebuilding, etc).

7. Higher unemployment leads to cheaper oil (more unemployment equals less commuting) and less consumer demand for durable goods.

8. Prices settle back at their pre-blockage level.

Why would you react to a ship being stuck in a canal by trying to get construction workers to lose their jobs?…