Voting against the policy was Thomas M. Hoenig, who judged that the economy continues to recover at a moderate pace. Accordingly, he believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted and will lead to future imbalances that undermine stable long-run growth. In addition, given economic and financial conditions, Mr. Hoenig did not believe that continuing to reinvest principal payments from its securities holdings was required to support the Committee’s policy objectives.
Fisher 2014 (imbued with the spirit of Hoenig)
“I fear that we are feeding imbalances similar to those that played a role in the run-up to the financial crisis,” Mr. Fisher said in the text of a speech prepared for delivery in Mexico City. “With its massive asset purchases, the Fed is distorting financial markets and creating incentives for managers and market players to take increasing risk, some of which may result in tears,” the official said.
“The economy continues to operate considerably short of these objectives,” Ms. Yellen said during a ceremonial swearing-in event held more than a month after she took over as Fed chief. “I promise to do all that I can, working with my fellow policymakers, to achieve the very important goals Congress has assigned to the Federal Reserve.”
That´s very unlikely with the ‘crew’ she has. And the delays in swearing-in Board members sure doesn´t help.
Yellen´s promises sound hollow. After all, the Fed has had several opportunities to ‘correct course’, with the clearest (and easiest) being in mid-2008. Unfortunately they were focused like a laser on headline inflation! The sequence of QE´s certainly avoided an even worse fate, but were clearly too weak to propel the economy (spending) up. Inflation has been going in the ‘wrong’ direction and employment still has a “hole” to fill.
The charts illustrate.
The next chart indicates that the Fed has accomplished exactly what it wanted!. It accelerated spending growth in 2009-10 and then kept it stable around 4% for the past 3 years. It seems that if it wanted it could have accelerated spending much higher early on to try to close at least part of the gap, and then brought growth down to something closer to 5%.
This is not just conjecture. The Fed has done it before, and in a much less dire situation. The next charts reproduce the ones above for the 2001-05 period. In 2003, when the gap was widest and inflation below target, the Fed introduced forward guidance (promising to keep rates low for an ‘extended period’). It worked!
The next chart shows how the Fed increased spending growth to push the economy towards trend and then ‘throttled’ down to keep it on target.