Facebook Twitter LinkedIn

I get a lot of criticism from both liberals and conservatives. The right complains I’m an inflationist, even though I’m actually an inflation hawk. The left complains about my seemingly irrational crusade against fiscal stimulus. “After all they are our allies, and doesn’t every bit help? Surely you don’t think Mr. Bernanke would sabotage additional fiscal stimulus, after all, he is asking for it.”

That’s what they say. And my response is yes I do think the Fed would sabotage additional stimulus, and so does the press:

Concerns that the U.S. Federal Reserve could start unwinding its massive monetary stimulus program later this year sent equity markets into a tailspin last week, with the heightened volatility extending into a new week as Asian markets opened lower on Monday. . . . So the fact that the outlook for the global economy is better than it was six months, albeit not stellar, means the outlook for equities overall remains positive, analysts said. In fact, it’s some signs of improvement in the U.S. economy and recent comments from Fed officials that have sparked talk of an early end to quantitative easing.

Despite the current round of austerity, growth this year (partly due to QE3) is so strong that the Fed is considering tightening monetary policy. Now let me emphasize that I don’t think growth is very strong this year, and I oppose tightening monetary policy. But it doesn’t matter what I think, and I’m not even sure it matters what Bernanke thinks. It matters what the Fed thinks. And if they are strongly considering tightening monetary policy under current conditions, just imagine what they’d be doing if Congress was actually doing fiscal stimulus right now!

As I’ve said on numerous occasions, I support sensible fiscal stimulus that works through supply-side channels, such as Christina Romer’s proposal for an employer-side payroll tax cut, or cuts in taxes on investment income.

The Fed is steering the economy. All this debate over austerity takes pressure off the Fed, leading the public to believe that one side or the other of the squabbling VSPs in Washington are to blame for our weak economy. In fact, neither side is to blame; the Fed is. If my views were widely accepted, any move by the Fed to scale back QE would face a torrent of criticism. Instead, it will happen (when it does) almost unnoticed. And it will further slow the recovery.

Facebook Twitter LinkedIn

Tags:

This entry was posted on May 27th, 2013 and is filed under Monetary Policy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or Trackback from your own site.



