CNBC.com picked this story up from Reuters about a paper written by San Francisco Fed’s President John Williams. Of Williams, It says:
San Francisco Fed President John Williams argued that timidity can be a virtue when it comes to using central bank tools, like bond-buying, whose effectiveness and risks are not as well known as more traditional policy levers like short-term interest rate targets.
“Uncertainty about the effects of policies is especially acute in the case of unconventional policy instruments such as using the Fed’s balance sheet to influence financial and economic conditions,” Williams said in a paper he is to present at a Society for Computational Economics conference in Vancouver, Canada on Friday.
The uncertainty does not mean the unconventional tools should not be used, Williams said, but only that they should be used less, and only after other methods have been exhausted, he argued.
“Indeed, once one recognizes uncertainty, some moderation in monetary policy may well be optimal,” Williams said. Such an approach will bring economic output and inflation only gradually back to normal levels.
Most Fed officials forecast inflation to stay at or below the central bank’s 2 percent target through 2015, giving the Fed plenty of leeway to double down on stimulus and get the economy more quickly back to normal, he and others have argued.
Not so, Williams said.
“The claim that the Fed is responding insufficiently to the shocks hitting the economy rests on the assumption that policy is made with complete certainty about the effects of policy on the economy,” he said. “Nothing could be further from the truth.”
Williams said the sizable uncertainty around the Fed’s bond-buying program means that the central bank should be only about half as aggressive as it has been in using this tool.
The only thing to fear is uncertainty itself, apparently. In the absence of a substantive argument to support his theory, it’s pretty hard to make heads or tails of. What shocks hitting the economy is he referring to that are not coming from FOMC meeting releases or boneheaded Fed Presidents talking to hear themselves talk? I can’t recall any other shocks besides these except for what has become at least occasionally predicable financial turmoil in Europe, also from predictably bad monetary policy. There is little uncertainty regarding EZ monetary policy and it hasn’t helped.
I think, however, that what this guy is saying is that no one at the Fed knows what they’re doing and so doing nothing is better. While he’s thinking about erring on the side of the mass destitution of others versus 3 or 4 percent inflation, he must be completely forgetting about managing monetary and credit aggregates commensurate with the economy’s long run ability to increase production.
And since he’s admitting to being incompetent, I think the proper thing to do in that situation would be to resign instead of asking us to accept that the law be broken so he can keep his nice paneled office with the huge leather chair while average people are being stripped of their dignity and futures. I suppose it says an awful lot about his ethics; because I generally assumed people should actually deserve those things due to merit rather than cowardice.