Arnold Kling  

The Vague Fed

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In the testimony, Sen. Shelby asks Bernanke what everyone wants to know: what more can the Fed do for the economy, if needed. Bernanke replies that the Fed has options from lowering the interest on reserves rate, to language changes in the FOMC outlook, to balance sheet tweaks.

He notes current policy is "already quite stimulative" and adds "we do still have options, but they are not going to be conventional options."

Pointer from Mark Thoma, who elsewhere clarifies the issue.

What comes across is a Fed Chairman saying, in effect, "We could save the economy, but we won't."

I think that he should be obliged to disclose his thinking in precise terms. What is his forecast of the economy if the Fed executes policy X? What is his forecast if it executes policy Y?

Everyone is acting as if in order to maintain the Fed's independence, the Fed must be allowed to be vague about its targets, vague about how it might achieve those targets, secretive about how it thinks its actions influence those targets, and ad hoc in its approach to deciding when to take action. I would suggest re-examining such assumptions.

As you know, I do not think that the Fed can actually hit a precise target for something like inflation or nominal GDP. But I do think that having the Fed set such a target would be better than continuing with the current approach.

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CATEGORIES: Monetary Policy

COMMENTS (3 to date)
paul writes:

hopefully some day soon people (and maybe even economists) will realize that the fed is largely impotent in affecting the economy. I feel embarrassed for professional economists analyzing the current recession. its like medicine men speculating on the causes and cures for the plague.

Jim Ancona writes:

This week's Econtalk podcast with John Taylor addresses many of the same issues.
Definitely worth listening to.

Arthur_500 writes:

I think the Fed must be vague just as any business or sports team must be vague about their plans. Indeed, people note when the Fed does something unexpected and this was documented in a Fed paper some years ago.

Our economy as diversified that in many ways the Fed remains somewhat impotent. However, they have the power of the bully-pulpit as well as the ability to create money. They can also raise various reserve requirements (oddly this was never discussed when financial overhaul was written).

Overall, the best thing the Fed can do is be publicly vague and use that to their advantage as the tail tries to wag the dog.

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