I’ve been meaning to comment on this interesting piece from yesterday’s NYT on how some would like to see the Federal Reserve do more than they’re already doing to stimulate growth. Specifically, the argument goes, they should be trying harder to raise the rate of inflation, which has lately been below their 2% target.
Inflation, unlike job creation, is something the Fed can control with some precision. Higher inflation could accelerate economic growth and job creation by encouraging people to spend more and make riskier investments.
Yet annualized inflation fell to 1.3 percent in December, and asset prices reflect an expectation that the pace will remain well below 2 percent in the next decade.
Now, there are two major arguments against this line of thinking. The first, most dominant one is that the Fed should always be hawkish on inflation, they’re already playing with fire, and they should, if anything, do less here not more. It’s often an argument made by those with large quantities of assets whose value would be eroded by higher inflation, or by lenders as opposed to borrowers. That’s certainly not my argument.
But the second argument is that even if they wanted to, in the current weak demand climate, even a lot more “quantitative easing”—the Fed’s bond purchase program—wouldn’t move the inflation needle much at all. The NYT piece suggests this may be in part because Ben and Co. have been so convincing in their “we’ll-never-let-inflation-get-away-from-us” routine that prices are, in this sense, too well-anchored. The hyper-responsible Fed would need to convince everyone, at least for a moment, that it was more reckless than it seems, and that’s hard to do.
But—and I’m agnostic about this—my impression is that it’s not a slam dunk that a lot more money-printing and bond buying would generate more demand and thus faster inflation. For that, I actually think you’d need more real economic activity, more workers with more jobs and fatter paychecks, consumers with more incomes…that sort of thing.
It’s not that more QE wouldn’t move the needle at all—e.g., it’s been quite helpful in lowering the value of the dollar and thus helping our exports. But I’d like hear more from advocates like Mark Thoma, cited in the piece, and with whom I was just hanging out in OR, on why he’s confident that the Fed could do this.