The title of Ryan Avent´s post: “Unconventional policy forever” for some reason, maybe because of the word ‘forever’, reminded me of the Burt Bacharat/Dinne Warwick 1960s hit “I say a little prayer”. It seems so should we:
THE Federal Open Market Committee concluded its two-day meeting today with a nothing-burger of a statement. Very little changed in its wording on the state of the economy, and both asset purchases and interest-rate guidance remain as they were before. Things continue on as they have. New economic projections released with the statement suggest the Fed expects a bit less output growth and a bit less inflation than it previously did over the next few years, with the unemployment moving toward its long run range (between 5.2% and 6.0%) a little bit faster. Nothing to see here.
A good part of the explanation for that miserable showing can be summed up in three words: zero lower bound (ZLB). Since December of 2008, when the Fed cut the fed funds rate target to roughly zero, the FOMC has been scrapping to try and boost recovery without its favoured tool. It has had some success. But the recovery has obviously been much, much weaker than anyone would have preferred. And one can conclude, from this performance and from Fed statements, that the weak recovery is rooted in the fact that the Fed is less convinced of the benefits of the unconventional tools it has been deploying and more concerned about their risks, relative to normal interest-rate policy.
We are living the consequences of the ZLB and the Fed’s best estimates have America right back in the same hole when the next recession hits. If the Fed is simply waiting for academia to sort things out, that’s really disconcerting. Alternatively, if the Fed is actually pretty comfortable using unconventional policy and not particularly worried about rolling it out again during the next downturn then one has to ask why it isn’t doing much more now to address unemployment.
The answer doesn’t have to be a higher inflation target. It can be a commitment to treat the current target more symmetrically (that is, to err above as often as it errs below). Or it could be a switch to an NGDP level target. But right now, the Fed’s answer seems to be: get used to nasty recessions and insufficient monetary responses, suckers. At least until academics tell us it´s safe to try something new.
In academia there´s a ‘protocol’ to be followed. What the heck, they´ve had had seminars and papers on “Conducting monetary policy in a low inflation environment” since the late 1990s. For an academic ‘consensus’ to emerge it takes forever. In real life many times you have to ‘go with your gut’. And it´s not that Bernanke would be ‘going in blind’. After all he gave all sorts of unconventional advice to Japan 14 years ago!
Update: Scott Sumner has a post on RA
HT Bill Woolsey