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Thursday, August 22, 2013

DeLong: I Do Not Understand the Federal Reserve's Current Thinking at All

Travel day today, so quick one from Brad Delong:

And I Do Not Understand the Federal Reserve's Current Thinking at All...: There are no signs in the pace of technological progress, in the level of investment, in the pace at which the American labor force educates itself, in measures of capacity utilization, in signs of upward wage pressure due to labor quality bottlenecks, or in surging commodity prices due to supply bottlenecks to suggest that the path of growth of U.S. sustainable potential GDP is materially lower today than was believed back in 2007.
Yet real GDP in the U.S. today is and remains at least 5.5% below the path that past history tells us is consistent with stable inflation, and thus with rough balance in the labor market.
It is true that fiscal policy is and has been sub-optimally tight due to Republican Congressional obstruction and the Obama administration's turn in January  2010 to deficit reduction as job #1 with Obama's call that since "families across the country are tightening their belts… the federal government should do the same". It is true that financial policy with respect to housing has been highly suboptimal due to the Obama administration's commitment of the Japanese Mistake with its failure to replace Ed DeMaro as head of FHFA with someone who understood the situation--and this in spite of all Tim Geithner's reassurances in 2009 that he understood the lessons from the Japanese Mistake, and that the Obama administration would not repeat them.
Nevertheless, when fiscal policy and financial policy are suboptimal it is the responsibility of the Federal Reserve to take proper steps to offset them. Potential harms from accelerating the Federal Reserve's quantitative-easing asset-purchase policies do not appear major. The actual harm from the disaster of a depressed economy is immediate and dire.
Given the history of the past six years, right now I would expect the Federal Reserve Open Market Committee to have reached the conclusion that a CPE Deflator inflation target of 2%/year with no catchup after shortfalls is inconsistent with its accomplishing both parts of its dual mandate, and that it needs to shift to a 2%/year inflation target with level catchup, to nominal GDP targeting, or to a 3%/year or 4%/year inflation target in order to accomplish its congressional mandate.
Failing that, I would expect an FOMC to announce that the slow pace of real economic growth requires an acceleration of asset purchases, not a tapering.
Yet those two positions, which seem to me the reasonable, sound, sensible, technocratic positions, appear to have no votes on the FOMC.
Why not? What are they thinking? ...

    Posted by on Thursday, August 22, 2013 at 01:12 PM in Economics, Monetary Policy | Permalink  Comments (30)


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