Contradictions

From a recent AP Survey:

The best cure for the economy now is time.

That’s the overwhelming opinion of leading economists in a new Associated Press survey. They say the Federal Reserve shouldn’t bother trying to stimulate the economy — and could actually do damage if it did.

The economists are lowering their forecasts for job creation and economic growth for the rest of this year, mainly because of high oil prices. A batch of bleak data over the past month has suggested that the 2-year-old economic recovery is slowing.

The economists now expect the nation to create 1.9 million jobs this year, about 200,000 fewer than when they were last surveyed eight weeks ago. They expect the unemployment rate, now 9.1 percent, to be 8.7 percent at year’s end. Before, they expected 8.4
percent.

Despite their gloomier outlook, 36 of the 38 economists surveyed oppose any further efforts by the Fed to invigorate growth. The Fed has already cut short-term interest rates to near zero. And it’s ending a program to buy $600 billion in Treasury bonds to keep
longer-term rates low to help spur spending and hiring.

The economists say another round of bond-buying wouldn’t provide much benefit, if any. And some fear it could make things worse by unleashing high inflation and disrupting financial markets.

At the same time you say that forecasts are getting bleaker – a repeat of what happened in
the first quarter as indicated by this nice Macroeconomic Advisors graph – you “wash your hands” and posit that only time can do the healing!

For a long time monetary policy has been “guided” by inflation targeting and Taylor Rules.
John Taylor thinks we have to get back to his namesake rule way of conducting policy;
otherwise things will only get worse!

In this great post, discussing the DeLong – Grant debate on the need for “QE3”, David
Beckworth brings Milton Friedman to the fore. In his “The Fed´s Thermostat” (see
Suggested Readings on the right) Friedman ends:

The accumulation of empirical evidence on monetary phenomena, improved understanding of monetary theory, and many other phenomena doubtless played a role. But I believe they were nowhere near as important as the shift in the theoretical paradigm. The MV=Py key to a good thermostat was there all along.

 Which sits perfectly well with Nick Rowe´s recent post on the monetary transmission
mechanism where he argues that:

New Keynesians have this precisely backward. Interest rates are neither necessary nor sufficient for the monetary policy transmission mechanism. Money/velocity is both necessary and sufficient.

The panel below shows the evidence accumulated over the last 50 years. Surely, nominal spending stability (stable growth along a level target path) – The Great Moderation – is the result of a monetary policy conducted according to the principle that money supply should offset changes in velocity, thus keeping nominal spending evolving close to a level growth path.

The next picture (shown for the hundredth time) indicates the precise time that the “Thermostat was lost”. It also clearly indicates what the “target” should be to get the economy back on it´s feet!

To wrap it up, in David Beckworth´s comment section, Andy Harless has this “advice”:

The Fed should be isolated from the real economy and only adjust the supply of money to the demand given a target path for nominal spending. “QED”.

Update: This is the “nihilist” view about economic policy that´s becoming prevalent:

I can’t get enthused one way or the other about Ed Balls’ call for a temporary cut in VAT. This is because of a more general point – I’m not sure just how much good or bad any feasible macroeconomic policy can do.

Update 2: I just came across “Taylor Rules and the Fed“, which shows just how misleading TR´s can be (despite what John Taylor thinks about them):

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