The Fed met and made it pretty clear that its monetary policy no longer is aimed at a severe recession, a double dip, or declining economic conditions. Now it says it will step in and buy even more government assets and try to push interest rates lower to support the economic recovery. Hmmm -- now that is news. That muddies the water precisely enough so that the Fed has now lost and remaining credibility.
Since "to support the economic recovery" has never been defined it leaves open a much more active and aggressive policy for the Fed -- and the chances of overdoing it. I know -- there were words in the latest statement about stabilizing inflation and inflation is subdued right now. But notice how the Fed has changed its language about policy -- starting with a near-depression moving to declining growth and now to economic recovery. Is the Fed addicted to expansionary policy? Will the next stage include rationalizing expansionary monetary policy so long as the economy has not reached its previous peak level? Or maybe they will keep pushing in money until economic growth averages the rate it takes to gain full employment? Where does it end?
Why would I care? For two reasons -- the current policy is going to make things worse now and will lead to higher inflation in the future. It will make things worse now because it creates more uncertainty for investors without any remedial value. The patient is getting better but the doctor wants to give him even more drugs because he isn't healing fast enough. Interest rates are very low -- does the the Fed really think that pushing them a little lower is going to cause us to go out and buy a new car? Will firms suddenly run to the bank to borrow money so they can build more plants? I don't think so. This new policy message would make me wonder if the economy is ever going to recover. I'd continue to save, pay off debts, and drink cheap whiskey. It will create more inflation down the road for obvious reasons. There is no way that the Fed is going to pull out money quick enough given the huge volume outstanding.
Why did the Fed make this statement this week? What good might it have accomplished? I simply don't get it. Do you?
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Larry, you keep looking for economic reasons for political actions when you should be looking for political reasons for economic actions.
ReplyDeleteLook at commodity prices (and gold if you consider it a commodity). They are going up, but slack demand simply means lower profit margins not price increase.
The real problem is slack demand and, IMHO, the only real solution is more jobs. Peeps will not buy stuff if they are afraid of bad things happening.
Since obama does not seem able to create jobs he is flashing shiny mirrors in our direction to try and keep us from seeing the real problem.
I am an economist -- not a political scientist. If that's the wrong approach then I wasted about 40 years of my life. My post was not about Obama -- it was about the Fed and their poor policy choices. That's what I do -- I comment on macro policy. While I am guilty of sometimes spraying spurious sequences about policymaker motivation -- that is mostly JD speaking...
ReplyDeleteIf you only wasted only 40 years then you are doing better than I am doing; cuz I probably have wasted 64 years.
ReplyDeleteBut enough about me and back to the subject at hand. I know the Fed is suppose to be independent, but it seems to me their actions are getting to be more political at the expense of good economic policy.
I suspect we are really basically in agreement about lots of economic stuff, but I tend to be rather cynical and put in jabs at the powers that be when maybe discretion would be the better part of valor.
It all depends on what you mean by political. Obama likes Bernanke because he is a macro policy activist -- he believes that monetary policy can be used to fine-tune the economy. Bernanke is not so much trying to get votes for Obama -- they just agree on how to use monetary policy in the current situation. They are singing from the same hymnal. Unfortunately, it isn't my religion. And yes, I agree the Fed has lost a lot of independence in this whole affair and I don't see Bernanke as the one who will yang it back. It is easy to be cranky and cynical right now. But you never know what's around the corner. Remember 1979 and 1980? Those years seemed horrible and it was next to impossible to imagine how much better things would get in the next two decades. So long as they don't raise taxes on folks who drink JD, I am going to be hopeful.
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