Federal Reserve's Monetary Policy & Economic Reaction - National Review

23/2/2018 Federal Reserve's Monetary Policy & Economic Reaction | National Review
Ramesh Ponnuru and David Beckworth
Feb. 23, 2018
MAGAZINE | MARCH 5, 2018, ISSUE
A Monetary Correction
By RAMESH PONNURU & DAVID BECKWORTH February 17, 2018 3:13 AM
Gold seal at the Federal Reserve Bank in Kansas City, Mo. (Photo: Fotoeye75/Dreamstime)
It now displays the kind of open-mindedness that conservatives have been

begging for.
O ur economy is finishing its ninth year of expansion following the

economic crisis of 2008 and 2009. While this expansion has been long-
lasting, it has also been weak by post–World War II standards. Theories
abound for this weakness. One common explanation, particularly on the right, is
You have 4 free articles remaining. >
https://www.nationalreview.com/magazine/2018/02/17/a-monetary-correction/ 1/11
that the Federal Reserve’s attempts to stimulate the economy have had the
perverse effect of keeping economic growth low.
Feb. 23, 2018
In 2007 and 2008, the Federal Reserve reduced the federal-funds rate — the
interest rate it targets — from 5.25 to 0.25 percent. It held that rate down for
seven years. Since 2015, it has increased it in increments to 1.5 percent. The Fed
has also made large-scale asset purchases to ease credit. Most of the Fed’s
conservative and libertarian critics allow that some of these moves were justified
as a response to a sharp recession, but maintain that the Fed has kept monetary
policy too loose for too long. Its actions distorted markets so much as to amount
to “financial repression.” With interest rates held low, investors moved to risky
assets, including stocks, to reach for yield. Inequality worsened but the real
economy did not prosper.
Many of these same critics spent the first years of the recovery warning that easy
money would lead to a surge in inflation. With no such surge having occurred,
the argument has shifted. The current critique is that the expansion has been
artificial, and will be revealed as such as the Fed retreats from its extraordinarily
accommodative policies. As interest rates rise to normal levels and the Fed’s
asset holdings shrink, that is, we will see how dangerously dependent the
economy has become on support from the Fed to achieve even modest growth.
There is an alternative perspective that better fits the facts. The truth is that
poor Fed policy has contributed to the weakness of the expansion. But the Fed
has erred by keeping money too tight, not too loose.
The best indicator of the stance of monetary policy is the rate of growth of
spending throughout the economy. Accelerating growth in spending signals an
expansionary policy and decelerating growth a contractionary one. In the 1970s,
spending growth was high and rising, leading to high rates of inflation. During
the Great Moderation that followed that period, spending grew at a relatively
You have 4 free articles remaining.
steady pace, averaging 5.3 percent a year. This steady pace promoted >
macroeconomic stability. Economic actors were able to make and coordinate

their plans against a backdrop expectation that the volume of spending would
Feb. 23, 2018
keep growing at the accustomed rate.
SOURCE: FRED Database, Authors’ Calculations;

NOTE: Money spending is measured by NGDP.
The crash of 2008 and 2009, however, saw the steepest decline in spending
since the Great Depression. In its aftermath the Fed did not pursue a policy of
Feb. 23, 2018
letting spending bounce back to maintain its average growth rate. The red line in
Figure 1 shows what a historically normal spending path would have looked like.
A loose-money policy would have led to growth significantly above that line.
Instead, as the figure shows, spending grew at a level significantly below the pre-
crisis rate. It has risen at 3.7 percent per year during the recovery.
Inflation is another indicator of the stance of monetary policy, and it too has
signaled tight rather than loose money. Since the end of the crisis, inflation as
measured by the Fed’s preferred indicator — the core PCE price index — has
averaged 1.5 percent per year. That rate is below the average level of the
previous decades, and, as Figure 2 shows, also below the Fed’s target of 2
percent inflation. Both Fed officials and many outside observers call the low
inflation rate a “puzzle” given loose monetary policies. But there is no mystery
once you drop the assumption that monetary policy has been loose.

Feb. 23, 2018
FRED Database, Authors’ Calculations
A key reason this mistaken assumption is so widespread is that people wrongly

associate low interest rates with easy money. They fall into this error because
central banks commonly seek to stimulate economies by cutting interest rates
and
You to cool down economies
remaining.by raising interest rates. But what is stimulative is
have 4 free articles >
an interest rate below the natural, or market-clearing, interest rate, and what is
contractionary is an interest rate above the natural rate. If the Fed has set
Feb. 23, 2018
interest rates low but a weak economy has a natural rate of interest that is even
lower, then monetary policy is tight. And an excessively tight policy can cause
the economic weakness that brings down the natural rate. As Milton Friedman
explained, the low interest rates of the Great Depression were a result of
extremely tight money.
Multiple studies suggest that the natural rate of interest has been very low in
recent years, and was negative during the worst of the crisis. It is thus
misleading to say, as Fed officials and their critics commonly do, that the Fed
has pursued a low-interest-rate “policy.” The recession, the slow recovery, and
the high global appetite for Treasury securities — all of which tight-money
policies exacerbated — were the main reasons for low interest rates.
During the economic crisis, the Fed cut the interest rate it targets — but did not
cut it as fast as the natural rate fell. While it engaged in “quantitative easing”
(QE) to aid the recovery, it also made decisions that limited the effect of this
move. First, it paid banks above-market returns for parking the money created
by QE at the Fed. That money was therefore not invested in Treasury securities
and new loans. Second, it signaled that QE would be temporary. Standard
monetary theory holds that permanent expansions of the money supply are
much more effective than temporary ones in boosting spending and inflation.
Among the reasons the Fed has refrained from a more expansionary policy is
that it has feared a return of the high inflation of the 1970s. Many of its officials
have also adopted the assumption that low interest rates and an expanded
balance sheet are dangerously loose-money policies. And so in recent years they
have moved to raise interest rates and shrink the balance sheet — two
unambiguously contractionary policies — even while inflation has been below
target. The alternative of letting spending bounce back would have involved a
period of higher inflation, but also higher real output and a faster recovery of the
labor market. It would also almost certainly have led to a faster rise in interest
rates.
Feb. 23, 2018
The economy seems largely to have adjusted to the new, lower pace of spending
growth. The problem now is not that monetary policy is erring on the side of
tightness and thus holding back the economy’s potential. It’s that the Fed’s
apparent bias against letting spending and inflation drift higher, even
temporarily, makes it more likely that the next economic downturn will again be
severe and the next recovery will again be sluggish.
To avoid this danger, what matters most is not whether the Fed raises or lowers
the federal-funds rate in the near term. What is most important, rather, is that
the Fed commit itself, in public, to stabilizing the long-run growth rate of
spending. The Fed could, for example, set a 4 percent growth rate with the
understanding that if it misses the target one year it will seek to make up for it
the next. If spending comes in at 3 percent one year, that is, the Fed’s target the
next year should be 5 percent — and vice versa. The expectation that spending
will not be allowed to collapse will help to put a floor under interest rates and
thus, to a certain degree, be self-fulfilling. In the event a downturn happened,
though, the Fed would not be constrained from pursuing a more expansionary
policy. We would follow something like the red line in Figure 1 in that case.
At the same time, inflation would not drift ever upward as it did in the period
before the Great Moderation. Since spending growth is mathematically
equivalent to real economic growth plus inflation, a commitment to stabilizing
spending growth implies a commitment to stabilizing inflation as well. The
inflation rate would rise above its average level when real growth is slow and
below it when real growth is fast, but would stay within a narrow band.
In practice, the Fed’s current inflation target is asymmetric: The Fed is less
concerned about undershooting it than overshooting it. A commitment to
You have 4 free articles remaining.
stabilize >
spending growth should in contrast be symmetric. Achieving symmetry
would require an abandonment of the Fed’s current policy of paying banks more
for holding excess reserves than they could earn from lending and buying
Feb. 23, 2018
Treasuries. That policy, as Cato Institute monetary-policy scholar George Selgin

has explained, constrains the Fed’s ability to encourage spending while leaving it
free to discourage it.
The Fed is unlikely to take any of these steps, however, unless it first jettisons
the conventional wisdom about our allegedly hyperstimulative policies over the
last decade. It should get our recent history right, lest it condemn us to repeat it.
— Mr. Beckworth is a senior research fellow with the Program on Monetary

Policy at the Mercatus Center at George Mason University and a former
international economist at the U.S. Department of the Treasury. Mr. Ponnuru
is a senior editor of National Review.
IN THIS ISSUE
ARTICLES
ECONOMY & BUSINESS
A Monetary Correction
By RAMESH PONNURU & DAVID BECKWORTH
POLITICS & POLICY
Progressive Hamiltonians
By JAY COST
WORLD
Reporting Under the Gun

By JAY NORDLINGER
POLITICS & POLICY
WFB Today
You
By
have 4 free articles remaining.
RICHARD BROOKHISER >
FEATURES
Feb. 23, 2018
CULTURE
The Intellectual Emptiness of ‘White Supremacy’

By KEVIN D. WILLIAMSON
EDUCATION
The Resegregation Myth

By ROBERT VERBRUGGEN
BOOKS
Dark Visionary
By DOUGLAS MURRAY
BOOKS, ARTS & MANNERS

BOOKS
A Free People
By DANIEL JOHNSON
CULTURE
Moral Failure
By THEODORE KUPFER
BOOKS
The Assault on Reality

By RACHEL LU
BOOKS
The Struggle for Meaning

By KELLY JANE TORRANCE
FILM & TV
A Fishy Left-Wing Tale

By ROSS DOUTHAT
SECTIONS
LETTERS
Letters
You
By
have 4 free articles remaining.
THE EDITORS >
THE WEEK
The Week
Feb. 23, 2018
By THE EDITORS
THE LONG VIEW
Transcript: The View

By ROB LONG
ATHWART
He’s Talkin’ to You

By JAMES LILEKS
POETRY
Poetry
By SEAN EDWARD KINSELLA
HAPPY WARRIOR
The End Justifies the Obscene

By KYLE SMITH
SPONSORED CONTENT Recommended by
Top 10 Recommended What do those food 8 zombie walks This is the ancient
Antivirus Providers expiration dates around the world for animal your cat
For Mac (2018) really mean? Not 'The Walking Dead' evolved from
My Antivirus Review From h
the Grapevine f Grapevine
From the From the Grapevine

Feb. 23, 2018
Existence of UFOs Remember that kid 'Man flu' is real, so ¿Tienes una
'beyond a reasonable who invented a way give the men in your habitación? Alquílala
doubt,' according to to clean up ocean life a break en Booking.com
Environmental ff l
News and l ? 'News
Environmental b and
k Environmental News and Booking.com
Information | MNN - Mother Information | MNN - Mother Information | MNN - Mother
Nature Network Nature Network Nature Network


Federal Reserve's Monetary Policy & Economic Reaction - National Review

Загружено:

Сведения о документе

Оригинальное название

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

Federal Reserve's Monetary Policy & Economic Reaction - National Review

Загружено:

Авторское право:

Доступные форматы

23/2/2018 Federal Reserve's Monetary Policy & Economic Reaction | National Review

Ramesh Ponnuru and David Beckworth

Feb. 23, 2018

MAGAZINE | MARCH 5, 2018, ISSUE

It now displays the kind of open-mindedness that conservatives have been

O ur economy is finishing its ninth year of expansion following the

macroeconomic stability. Economic actors were able to make and coordinate

keep growing at the accustomed rate.

SOURCE: FRED Database, Authors’ Calculations;

You have 4 free articles remaining. >

Feb. 23, 2018

FRED Database, Authors’ Calculations

A key reason this mistaken assumption is so widespread is that people wrongly

Treasuries. That policy, as Cato Institute monetary-policy scholar George Selgin

— Mr. Beckworth is a senior research fellow with the Program on Monetary

POLITICS & POLICY

Reporting Under the Gun

POLITICS & POLICY

The Intellectual Emptiness of ‘White Supremacy’

The Resegregation Myth

BOOKS, ARTS & MANNERS

The Assault on Reality

The Struggle for Meaning

A Fishy Left-Wing Tale

THE LONG VIEW

Transcript: The View

He’s Talkin’ to You

The End Justifies the Obscene

SPONSORED CONTENT Recommended by

You have 4 free articles remaining. >

Feb. 23, 2018

You have 4 free articles remaining. >

Вам также может понравиться