The WSJ "Symposium" on Monetary Policy

The WSJ asked several people, mostly on the right, about whether the Fed has the power to do more. John Taylor's answer was predictable, the problem is that they aren't following the Taylor rule and the sooner they get back to it, the better, so I'll move on to the next participant, Richard Fisher of the Dallas Fed.

Fisher is predictably hawkish, adopts the GOP line on business uncertainty causing problems, and concludes:

The minutes of the last Federal Open Market Committee (FOMC) meeting noted that "a number of participants reported that business contacts again indicated that uncertainty about future taxes, regulations, and health-care costs made them reluctant to expand their workforces." ... Can the Fed do more to propel job creation? Barring an unforeseen shock, I would be reluctant to expand the Fed's balance sheet... Of course, if the fiscal and regulatory authorities are able to dispel the angst that FOMC participants are reporting, further accommodation may not be needed. If businesses are more certain about future policy, they'll release the liquidity they're now hoarding.

The claim that business uncertainty is holding up the recovery will appear again below, so I'll hold off with the evidence against it.

Next is Frederic Mishkin. I wasn't sure how he'd answer. He's fearful that debt monetization will lead to lack of fiscal discipline, that losses on asset purchases might lead to a loss of Fed independence, and that all roads lead to inflation:

The ... Fed's recent announcement that it will reinvest payments from agency debt and mortgage-backed securities into long-term Treasurys has opened the door to large-scale asset purchases. Should the Fed pull the trigger?

Purchasing long-term Treasurys might suggest that the Fed is accommodating the fiscal authorities by monetizing the debt—thereby weakening the government's incentives to come to grips with our long-term fiscal problems. In addition, major holdings of long-term securities expose the Fed's balance sheet to potentially large losses if interest rates rise.

Such losses would result in severe criticism of the Fed and a weakening of its independence. Both the weakening of its independence and the perception that the Fed is willing to monetize the debt could lead to increased expectations for inflation sometime in the future. That would make it much harder for the Fed to contain inflation and promote a healthy economy.

Expanding the Fed's balance sheet through large-scale asset purchases can be necessary in extraordinary circumstances, such as during the depths of the recent financial crisis. But in relatively normal times, the costs of using this tool are sufficiently high that it should not be used lightly.

Relatively normal times? Now? Ah, he means relatively normal on Wall Street, not Main Street. Anyway, next up, Ronald McKinnon. He wants to "spring the near zero interest rate liquidity trap" by, essentially, increasing interest rates. That's a bad policy, so let's move on.

I didn't expect Vincent Reinhart to be the most reasonable of the bunch, though perhaps given the bunch that was selected it might have been a good bet. I could sign on to something along these lines:

The Fed should promise to purchase government and mortgage-related securities between its regularly scheduled meetings as long as activity is forecast to be subpar and inflation is low or headed down. Purchases of, say, $100 billion every six-to-eight weeks would add up to a number worthy of shock and awe for those with a somber economic outlook.

But those foreseeing a quick return to above-trend growth or expecting a slower trend would similarly be reassured that the Fed would not keep its foot on the accelerator for too long. Most importantly, by linking to economic conditions, the Fed would not be providing an open-ended promise to monetize the federal debt.

Last up is Allan Meltzer, and he follows Taylor in calling for the Taylor rule, and he, like Fisher, adopts the "government policy is creating business uncertainty" line:

When Congress established the Fed in 1913, it gave it a dual mandate: high employment and price stability. In its nearly 100-year history, the Fed has achieved both objectives only rarely: 1923-1928, a few years in the mid-1950s and early 1960s, and from 1985 to 2004, when the Fed followed the Taylor rule that incorporates Congress's mandate. Those 20 years when the Fed followed the rule were the longest sustained period of stable growth and low inflation in Federal Reserve history.

In "A History of the Federal Reserve," I concluded that the principal mistakes the Fed has made have resulted from giving excessive attention to current events... By focusing on the short-term, the Fed neglects the longer-term consequences of its actions. ... A rule would change that. ... At times like the present, a rule helps the Fed to recognize that current problems are mainly the result of mistaken government policies that create massive uncertainty.

The Fed added more than a trillion dollars of excess reserves to respond to the financial crisis. ... Adding a few hundred billion to the trillion dollars already available would ... do little for the economy that banks could not do now.

There is very little that the Fed can do to change the near-term, but it can have important influence on the future. The Fed has sacrificed much of its independence during this crisis by helping the Treasury carry out fiscal policy. Adopting and following a rule, like the Taylor rule, is an effective way to regain independence.

The second to the last paragraph misstates the case that people are making for Quantitative Easing. First, as Ben Bernanke, Joe Gagnon, and others have pointed out, research indicates that the Fed could move long-term rates down a bit with QE. If the Fed does this, it then creates an incentive for more business investment and the purchase of more consumer durables. Yes, banks have plenty of funds to lend, and this would give them more, but the problem is lack of demand, and lower interest rates are intended to boost demand back up a bit. It's the demand side effects that matter, not the increased supply of funds. Now, I happen to think that those effects wouldn't be as strong as we need by themselves, fiscal policy needs to join the effort, but the Fed has a role to play.

As for the business uncertainty claim, here's Paul Krugman:

So I just read the latest speech from Richard Fisher of the Dallas Fed; it’s one of the most depressing things I’ve read lately, and given what I read that’s saying a lot.

Much of the speech is taken up with arguing that it’s not the Fed’s job to help the struggling economy, because the big problem there is business uncertainty about future regulation. Urk. Like others, I’ve tried to point out that there is no evidence for this claim: business investment is no lower than you’d expect given the state of the economy, while surveys say that weak sales, not fear of regulation, are holding back business expansion. Oh, and just to make it perfect, Fisher cites Mort Zuckerman to bolster his case.

Back in April, I said I had given up on policy makers, they weren't going to do anything more for the economy, at least nothing beyond "token help" that they could use to political advantage. Every once in awhile I get my hopes up that monetary or fiscal policy authorities might take action after all, but I shouldn't. Lucy always takes the football away.