It’s better for the Fedsters to arrive at the party late than not at all. I’m delighted they were able to join while the crisis is still young.
Really, I find it difficult to jump on top of the Powell Fed like I did the Bernanke and Yellen Feds. It’s a surprising reaction because, over the last few years, the future circumstance of arriving at the ZLB has been generally discussed with sort of a general sentiment that the people behind it should do the right thing and resign… And here we are, once again, at the ZLB as of today. I suppose I am considering that, unlike with Bernanke and Yellen Feds, here perfection isn’t allowed to be the enemy of the good. There’s much more to be said for trying to get out ahead of this circumstance and falling short, than not trying at all until months later.
And for me, especially now (more on my circumstance later), seeing more appropriate responses to the crisis from the Powell Fed makes all the difference. They may not be perfect. But these people are TRYING to get it right and I don’t count on seeing a replay of the Great Recession.
For whatever it is worth, perhaps only two cents, I am putting my thoughts down about what I think is wrong with what is happening with monetary policy right now. A lot of it comes from the statement where they talk about the inflation goal. The goal is treated like an unattached unicorn in the statement when the nominal ANCHOR is what the monetary policy story is all about.
People don’t understand that the anchor is what monetary policy is about because the Fed doesn’t tell them that. The Fed then faces a lot of heat for “printing ‘em up” when it is the right thing to do for the sake of avoiding added economic damage from nominal instability. They can’t paper over real economic damage from a pandemic. But they can and are required to do everything possible to prevent nominal instability from adding more economic damage on top of real problems.
We should see inflation expectations rising in a panic, not sinking like a stone. And it’s not because inflation rises by itself during a panic, as it obviously does not. There’s nothing in the statement explaining how crisis and the nominal anchor are related, and what the Fed’s responsibility is to the anchor, and that is why inflation expectations are instead sinking. Remember Pavlov’s dog? It should be like a bell ringing and seeing inflation expectations rising when doo doo hits the fan, though I think Lars Christensen refers to it as the Chuck Norris effect. But it’s the same kind of expectations conditioning. The Fed can’t get there with a passing mention of unicorns during a diatribe on interest rates. They just can’t.
If the Fedsters really want to end the era of finding themselves at the ZLB and say good bye to the excess economic damage inflicted getting there, they need to get rid of the interest rate peg at the minimum, or at least stop talking about it so much as if the interest rate peg is the only thing that matters. It can’t be what matters when it breaks after merely being coughed on, and to leave the policy regime in such a repeat-offender state is nothing short of irresponsible.