A Benjamin Cole post
“What is it about the Fed and raising rates? They are addicted to it like a junkie is addicted to cocaine as the one answer to every situation other than outright depression.”—A letter received by Bob McTeer, former Federal Open Market Committee (FOMC) member, as revealed on his blog.
The portrayal of the FOMC as interest-rate crackheads is funny—and yet falls short of the mark.
Not only do various FOMC members seem to have a monomaniacal obsession with raising rates, but the tool of QE has vanished from the short-term collective memories of FOMC’ers and Ben Bernanke.
The Fed Wants To Live in Yesterday
I have been reading Ben Bernanke’s blog, and wondering when he will tackle the topic of QE, which was, after all, his monetary policy flagship for several years.
Evidently I will have a long wait. Bernanke blogs long and hard about interest rates, and also about “normalizing” Fed policy—that is, raising rates. Maybe Bernanke is not yearning like an interest-rate crackhead, but…what happened to QE?
The policy of central-bank buying of bonds, aka quantitative easing or QE, seemed to work in the United States to boost aggregate demand and resulted in little if any inflation (while paying down the national debt, no less). What is not to like?
You would think central bankers would wheel out QE as the super-weapon to end all recession-depressions forever.
But endlessly we hear Fedsters crying to get back to the good old days, when a central bank could jigger interest rates and obtain macroeconomic results. The Fed seems to want to good old days of moderate inflation and a viable Fed policy consisting of hopping interest rates around—but without the moderate inflation.
Is that not a null set? Interest rates do not work at ZLB. And with a 2% inflation target then ZLB is always on the doorstep—when not in the house.
Bernanke Talks Up Big Federal Deficits
“But economically, it would be preferable to have more proactive fiscal policies and a more balanced monetary-fiscal mix when interest rates are close to zero.”—Bernanke, in his latest blog post.
In a fleeting mention, Bernanke relegates QE back “to the shelf,” once everything gets back to normal, presumably after Washington borrows and spends gobs of taxpayer money.
Yet, what has been the success of Japan in fighting deflation, after years—even decades—of mind-boggling and world-record federal deficits?
Until they recently got serious about QE, they were still in deflation!
You know, the more I re-read that letter to Bob McTeer…the less funny it becomes.