See Ryan Avent at The Economist, Arnold Kling, and Tim Duy at Fed Watch for a discussion rising from Robert Hall’s presentation at the AEA meeting on the actions of the Federal Reserve.
From Mr. Avent:
But Stanford economist Robert Hall really nailed the crux of the question, so far as I was concerned. At the AEA meetings a year ago in Denver, I listened to Mr Hall speak a few times on this issue and point out that with the market-clearing interest rate below zero the economy was stuck with high unemployment. At the time, I wondered why, if that were true, that the answer wasn’t simply a higher rate of inflation, which could combine with a zero nominal interest rate to move the real interest rate below zero.
This time around, Mr Hall addressed the point head on. He noted that in a liquidity trap, the real rate of interest was simply equal to the negative inflation rate. In other words, if the Fed’s nominal rate is at 0% and the inflation rate is 2%, then the real rate of interest is -2%. If a -3% real interest rate is necessary to clear the economy, then all that’s needed is a higher rate of inflation—3% rather than 2%. Mr Hall noted that this was an important point because potentially the Fed could have an enormously helpful impact on the economy simply by raising inflation just a little. And here’s where things got topsy-turvy. Mr Hall argued that:
A little more inflation would have a hugely beneficial impact on labour markets,
And a reasonable central bank would therefore generate more inflation,
And the Federal Reserve as currently constituted is, in his estimation, very reasonable; therefore
The Federal Reserve must not be able to influence the inflation rate.
Assume for a moment that the governors of the Federal Reserve aren’t motivated by ideology, desire for pecuniary gain, or even the imperative to satisfy the Fed’s (conflicting) statutory obligations but primarily to increase their own repute. That the governors have, in fact, maintained or increased their repute is the underpinning of Mr. Avent’s summary of Dr. Hall’s presentation.
Doesn’t pursuing their own and the Fed’s repute including a reputation for reasonableness, competency, or even omniscience completely explain the Fed’s actions of the last dozen years without recourse to other explanations?
Mission accomplished! Neither Hall, Avent, Kling, or Duy question those things. My experience in life is that if you want to figure out what people are trying to do don’t pay any attention to what they say they’re trying to do, what they should be doing, or what you’d like them to be doing. Focus on what they actually accomplish.
I assume you saw the charts showing that the Fed overestimates employment and inflation, leading to policies that emphasize controlling inflation. They dont behave as though they have a dual mandate. The reputation they seem to value is that of price stabilizers.
Steve
“The Federal Reserve must not be able to influence the inflation rate.”
I would argue this is accurate. The Fed’s own models, and those of every neo-liberal economist, projected QE and near zero interest rates as inflationary because their models are based on the money multiplier stimulating lending and therefore increasing demand. The only inflation we got was from traders who heard the Fed was printing money and (to their detriment) ran out to buy equities and commodities thinking they could score big by capitalizing on rising prices.