This Fed worship is more religious than scientific. The past 10 years should be enough to convince anyone with an open mind that the Fed’s power over the economy is quite limited and tenuous.
More at the link. Pointer from Scott Sumner, who takes an opposing view. As you know, my views align with Grier’s.
I agree with Grier as well. He likens their influence to being like a religion which is accurate, but I also think in terms of poker. They keep themselves busy bluffing us (I guess religion would be fooling themselves) that they have the power to change the general direction of the economy in a significant way. Well, when we have the next downturn maybe their bluff will get called.
Speaking of the next downturn, it’s worth remembering that it’s already been over seven years since the official end of the last recession. The longest gap ever was 1991-2001, so it kind of feels like waiting for the San Andreas to shake.
I like to think that the Fed owns a brake, but no gas pedal. They might be able to get off the brake entirely and if there’s any momentum there, the economy will heat up.
This guy here tries to blow away the whole idea of the natural rate of interest. Wonder what our host might think of this?
http://www.fresheconomicthinking.com/2016/05/the-mysterious-real-interest-rate-of.html
>Let me summarise. First, standard theory has machines earning incomes and ignores the system of property rights it attempts to model. Second, once you incorporate a system of property rights these right have values, and the value of these rights must be added to the cost of machines to calculate the economic (opportunity cost) of capital. Third, once you have done this, changing the nominal interest rate (or even nominal rate minus inflation) changes no investment incentives, as all property rights holders immediate gain the value, which becomes a cost of investment. Finally, other factors that effect the cost of delaying investment by owners of property rights probably have a larger effect on investment, and in fact decreasing interest rates decreases the cost of delaying investment.
>This is not to say that there may be some effect of monetary policy through other channels, such as decreasing interest costs of borrowers, allowing them to increase spending. But if this is the dominant effect, without an investment incentive, than loose monetary policy may primarily inflate asset prices, and not economic activity. This prediction gels with the reality of the past decade.
Umm, Volcker.
Umm, Zero Lower Bound.
The Fed’s ability to affect the economy can be incredibly profound. That ability is reduced as interest rates are reduced. Lack of demand reduces interest rates. Without rising demand, there is no chance we are going to get off low interest rates.
This is not hard. Even for non economists.
Arnold Harberger: Is growth yeast or mushrooms?
Timothy Taylor looks at Arnold H. from 1998.
http://conversableeconomist.blogspot.co.uk/2016/10/arnold-harberger-is-growth-yeast-or.html
Real econ growth is usually more like mushrooms.
Maybe with Pres. Clinton we’ll have more gov’t gridlock, resulting in very slow growth, which avoids the booms & busts which so many economists say they want to avoid. I’d prefer a bit more boom even if there was a bit more bust later; but of course I wouldn’t my own job to be busted.
The Fed really should try printing money to pay for a gov’t deficit without increasing debt, and increase their money printing until they reach the 2% inflation target they say they have — altho it might be that Treasury needs to actually print the money? Which makes money printing a fiscal policy?
If money printing isn’t a “monetary policy” that the Fed controls, what does it really control other than the internal interest rate?
It is also possible to take an intermediate view that they have some power when it comes to higher interest rates or as lender of last resort in preventing collapse while having limited power when up against the lower bound and swapping assets. Can anyone seriously believe the economy is neutral to 20% interest rates? Can anyone seriously believe real asset prices don’t respond to lower interest rates? It is hard to look at the uniformity of the recovery rate and conclude this indicates they are powerless even if not all powerful.
I think Dr. Kling coined the term “low density causal field”. Where there are many factors affecting the observable outcome. And temporal delays. And factors vary in importance depending on the current state which is not entirely observable. And…
Perhaps more enlightening to think of the Fed as one factor in the low density causal field rather than think by analogy in terms of a steering wheel v. religion.
Maybe sailing is a better analogy. The Fed may have a hand (one of many?) on the trim-tab tiller (is it the only tiller?) but if the wind doesn’t blow…or the currents are unobserved…or…the sexton was thrown overboard…or…
You get the planner’s computation problem again.
Timothy Taylor highlights a paper from Gagnon et al What else can central banks do that concludes, basically, “a lot”.
As a layman relying solely on common sense, it seems to me that 8-10 years of a the FED’s artificially low interest rates, QE, etc., and the parallel sub-optimal economic growth might just inspire one to re-examine his premises to see if, in fact, the first-mentioned tactics foster or enable the last rather than curing it? In addition, or alternatively, one might question whether a strategy of artificially low interest rates, etc., is an effective means to counter growth-stifling laws and regulations imposed during the same period, or whether, in fact, it merely compounds the effects of a suffocating regulatory environment?
Or perhaps in my ignorance I am simply foolish to ask the questions.
Omid Malekan writes at Forbes:
http://www.forbes.com/sites/realspin/2016/09/27/does-quantitative-easing-hurt-more-than-help/#a6fcc4b55fd1