Date post: | 25-Dec-2015 |
Category: |
Documents |
Upload: | sabina-townsend |
View: | 214 times |
Download: | 0 times |
The Future of the FedApril 27, 2011
Joseph GagnonApril 27,2011
Usually it operates on the short-term interest rate.
But monetary policy can operate on long-term interest rates, i.e., bond prices.
Monetary policy can operate directly on other asset prices, such as equities, real estate, and foreign exchange.
There is no limit to the amount of private spending that can be created by monetary policy under any circumstances.
Abusing this power deteriorates the balance between output/employment and inflation.
Not an immediate concern in United States.
But current situation will not last forever.
Central banks prefer to operate on short-term interest rates to minimize the variability of their income.
Aggressive Fed actions in 2008-2009 prevented a second Great Depression. Financial shock was larger than 1929.
But, “a lot” is not the same as “enough.”
In December 2009 I called for $2 trillion QE2.
In November 2010 Fed announced $0.6 trillion QE2. Fed faced opposition to QE2 from many
politicians and financial market pundits. Fed had little support for QE2. Fed is uncertain about QE2 effects.
This timidity has cost America at least 1 million jobs.
For rest of 2011, Fed should do another $0.6 trillion in QE2.
But, the window for QE2 is closing. Economy is recovering, albeit at a slower
pace than it could have. The scope for monetary stimulus
depends not on today’s unemployment rate, but the rate expected in 1 to 2 years.
Joerg Bibow, Skidmore College and Levy Economics Institute
“The Future of the Fed”, Roosevelt InstituteNYC, April 27, 2011
Fed met its LOLR challenge Fed’s pre-crisis blunders concerned regulation & supervision,
not monetary policy. Fed has to live up to its R&S duties. Dodd-Frank limits on Fed 13(3) emergency lending authority
shift burden to act (quickly) to Treasury/Congress Fed continues to take its “dual mandate” seriously
Mandate should not be re-focused on price stability only▪ ECB is the warning example
Does not mean Fed MP conduct cannot be improved. Scrutiny is warranted. CBI needs to be balanced.
Highly accommodative Fed policy is here to stay Even as QE2 may end in June Absorbing “excess liquidity”, when needed, technically no
problem Given labor market slack & wage inflation at 2%, no inflation
riskThe Federal Reserve Now J
Bibow
The Federal Reserve Now J Bibow
Scenario A: the “not so great ‘00s” Scenario B: “eurosclerosis” Scenario C: better than “roaring ‘90s” Not even “maximum employment” by 2014 under Scenario C
Employment-to-population ratio sharply down!
output gap
Fed has domestic mandate, but sets global monetary policy benchmark. World economy is not an optimum currency area though.
Financial globalization has created a policy-domain problem. As part of wider conflict between democracy and
globalization. Floating exchange rates are not the solution.
Argument to let “market forces” determine exchange rates unconvincing from EM perspective when foreign policy decisions are key driving force (“currency wars”).
For EM it’s reserve accumulation vs. capital controls. It’s about reclaiming lost policy space. EM reject new constraints through IMF rules on capital
controls. It seems G-20 can’t agree on anything anymore.The Federal Reserve Now J Bibow
Dollar’s status still very convenient to some. Wall Street, large corporates; “exorbitant privilege”
But extra drag on U.S. labor market & wages. Magnifying “globalization-competitiveness-inequality
nexus” Political problem (“democratization of credit” band-aid
failed) “The dollar is our currency, but your problem”
(Connally). Or today perhaps? “It may be your reserve currency, but
it’s also a bit of an inconvenience to us right now.” ▪ Also, the oil factor
Mix of: key reserve currency status, financial globalization, rudimentary U.S. welfare system, and U.S. aversion against fiscal policy is putting excessive burden on Federal Reserve. Likely to provoke bubbles and global tensions.
The Federal Reserve Now J Bibow
Perry MehrlingRoosevelt Institute, NYC
April 27, 2011
Memories of 1907 (JP Morgan) And 1910 (Jekyll Island)
Memories of 1862 (Greenbacks)Real Bills Doctrine, a political frame
British version, Trade bills▪ versus finance bills (Wall Street)▪ versus Treasury bills (Washington)
American adaptation▪ versus central banking (regional structure)▪ pro manufacturing and farming bills
Capital Market
Federal Reserve
Banking
Money Repo Rate Target Fed Funds
Commercial Paper
Treasury Bills C&I lending
Credit Corporate Bonds
Treasury Bonds Mortgage lending
Government Finance QE2 as Government Bank War Finance
Capital Finance Shadow Banking and Dealer of Last
Resort International Role of the Dollar
Eurodollar System and International LOLR
Technical Challenges: from banks to markets Liquidity, funding and market Solvency, institutions and instruments Stabilization Policy, prices and quantities
Political Economy Challenges The Fed and Government (fiscal dominance) The Fed and Wall Street (TBTF, dealers’ club) The Fed and Globalization (China, Euro)
Thomas PalleyNew America [email protected]
Federal Reserve Reform
Governance EconomicPhilosophy
MonetaryPolicy
RegulatoryReform
Monetary Policy
InflationTargeting
Balance SheetRegulation
New InterestRate Targets
Relation to theRest of Macro
Policy