OCCASIONALLY, I'm asked why I think the Fed can do more to support the economy (indeed, can for the most part engineer a complete recovery without much assistance from fiscal authorities) while its policy rate is effectively zero and long-term rates are close to all-time record lows. Doesn't additional easing amount to little more than pushing on a string?

It does not, in my view. The reason is that, in my opinion, a determined central bank cannot fail to raise inflation expectations. The Fed has the ability to create as much money as it wants and can use that money to purchase every scrap of federal-government debt, every scrap of outstanding mortgage-backed securities backed by federal housing agencies, and as much foreign exchange as other governments will sell it. It strains credulity to think that the Fed could use its printing press to entirely fund the government and most of the mortgage market and to devalue the dollar with reckless abandon without having an impact on inflation expectations. In practice, it seems to take nothing like that to move expectations; a bit of tweaked language or a few hundred billion in QE purchases are enough to do the trick.

If you concede that the Fed can raise inflation expectations, then you concede everything. Higher expected future inflation raises inflation in the present, and higher inflation in the present simply represents more demand: prices rise because people are deploying more money, to buy assets and goods, to spend and invest. One hears the argument that higher inflation could hurt the economy by reducing real incomes, leading to less spending. But that's not how it works; if reduced real incomes lead to reduced spending, then you don't get the price increases in the first place. Prices don't go up unless there's more money chasing the same stock of goods. One could mount a different argument: that price increases are driven by spending among the rich, such that growth occurs but at the expense of real welfare losses for most workers. I'd argue, first, that distributional issues are best addressed by fiscal authorities and that, second, in practice, it seems to be contractionary monetary policy that exacerbates inequality rather than expansionary policy.

It might make some people more comfortable to talk through actual mechanisms. We can do that. The most important one to take into consideration is the impact of higher inflation expectations on real interest rates. The Fed can't reduce its nominal policy rate any more, but it can raise inflation, thereby reducing the real rate. If marginal propensity to spend is different for creditors and debtors, then using inflation to erode the real value of the private debt stock can boost demand. And so on. But in general, if you think the Fed can raise inflation, then you think the Fed can boost the economy.

And if you think the Fed can't raise inflation, then it would still seem to make sense to urge the Fed to buy as much government debt as it possibly can. If one could entirely monetise the debt with no inflationary consequences, why not do it?