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Saturday, January 19, 2013

'The Fed Drives Best at Higher Speeds'

Christina Romer urges the Fed to learn from history:

The Fed Drives Best at Higher Speeds, by Christina Romer: With all the drama about fiscal policy..., it’s easy to miss the quiet policy evolution taking place ... at the Federal Reserve. The central bank has adopted a more aggressive monetary policy that could be very helpful to the recovering economy. But ... the Fed’s commitment to its new policies appears shaky. Soon after the December meeting, some members of the policy-making committee spoke out against the action...
So why ... are some policy makers threatening to undo the recent actions? In a recent paper, Prof. David Romer ... (my husband), and I found that pessimistic views about ... expansionary actions have played a major role in limiting Fed moves over the last few years. Policy makers worry that such actions will do little good and that they could cause inflation, distortions in financial markets, and losses on the Fed’s portfolio.
I can’t say for sure that those views are wrong today. We just don’t have enough experience with situations like the current one... But our paper shows that in two periods when the Fed made terrible errors,... the Great Depression of the early 1930s and the high inflation of the early and late 1970s, monetary policy makers did little because they were convinced that action would be ineffective. Subsequent events proved both decisions wrong. ...
When monetary policy makers meet again at the end of this month,... the Cassandras on the committee might want to reread the policy record from the 1930s. The degree to which some of them sound like their Depression-era counterparts might shock them — and give them pause. ... The important thing is that hypothetical fears shouldn’t stop the Fed’s evolution. History is on the side of doing more, not standing on the sidelines.

    Posted by on Saturday, January 19, 2013 at 03:22 PM in Economics, Monetary Policy | Permalink  Comments (12)

          


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