A growing contingent of economists think it is time for the Federal Reserve to take its foot off the gas.
A National Association for Business Economics policy survey, released Monday, found that 44% of economists questioned said the Fed’s current monetary policies are “too stimulative,” a sharp jump from the 26% who took that stance in a September 2012 poll.
The central bank “remains confident that it has the tools necessary to tighten monetary policy when the time comes to do so,” Mr. Bernanke said.
It´s a fact that central bankers are only perceived as ‘working’ when they talk about “tightening”! Otherwise, they are usually ‘too stimulative’.
It´s good that views such as those of Mike Darda (via James Pethokoukis) get aired:
If the Fed were to prematurely tighten (which in our view makes no sense after a huge NGDP/velocity shock and the high unemployment and low inflation that has followed) long rates would probably fall as expectations of future growth weakened. This has happened countless times in Japan over the last 12 years, one of the key reasons Japan’s debt/GDP ratio has continued to march ever higher. Along these lines, it is worth pointing out that in countries with their debt funded in local currency and with their own central banks, long rates are a reflection of expected future short rates, which are driven by expected future NGDP and the central banks’ reaction function thereto.
One way to observe this is to look at the tight linkage between the velocity of money in the U.S. and the level of long rates (correlation 0.93 out of 1). Critically, long rates in the U.S. bear no relationship either to the fiscal deficit (as a fraction of GDP) or the debt/GDP ratio. In other words, comparing countries without their own central banks or local currency debt (i.e., euro zone PIIGS or the dollar linked Asian/Latin countries in the late 1990s and early 2000s) to the U.S., U.K., Japan, etc. is akin to comparing apples to oranges.
Weak nominal GDP growth is a surefire way to make a debt problem a whole lot worse. Just ask Europe.