Anatole Kaletsky reviews proposals for central bank action in “Central Bank´s Final Frontier?”:
Have central bankers run out of ammunition in their battle against deflation and unemployment? The answer, many policymakers and economists writing for Project Syndicate agree, is clearly No.
“Monetary policymakers have plenty of weapons and an endless supply of ammunition at their disposal,” says Mojmír Hampl, Vice-Governor of the Czech National Bank. The real issue is not whether more powerful monetary instruments are still available, but whether using them is necessary – or even threatens to do more harm than good.
And he goes on to consider all the different “calibers” of ammo Central Banks have at their disposal, from interest rates, including the negative variety, QE and Helicopter Money (HM), not forgetting the fiscal help that could be extended by the Treasury Departments.
But what is the use of having “weapons & ammo”, be it QE, negative rates or HM, if there is no goal or target to “point and shoot” at?
In other words, if you don´t have a goal or target, i.e. a destination, how can you “steer” the economy?
For the 1990 – 2007 period, the Fed managed to keep NGDP growing quite close to a trend level path. Maybe that was the implicit target. There were misses, sure, but they tended to be corrected and were nothing that compares to what happened in 2008.
Throwing the economy into a recession that became “great” and quickly turned into another (or ‘lesser’) depression was, I believe, the work of extremely bad monetary policy that had become “fanatically concerned” with headline inflation.
All the “ammo”, or “strategies”, adopted and ‘talked about’ have succeeded only in keeping NGDP growing at a rate below the previous trend and have not made any attempt to get NGDP closer to the previous trend level. But that would only be possible if the Fed had an explicit NGDP level target.
Since mid-2014, in fact, it appears that NGDP growth is falling even further behind, which is consistent with the tightening bias the FOMC has shown since the end of QE3 was in sight.
The target the Fed has, the 2% IT, has not only lost credibility but mostly works to constrain any attempt that might be made to get spending up, because the “2% target cannot be breached”!