Not sure I see the point of this . If Congress does more, then the Fed will likely do less. Sure, I think Congress and the Fed should definitely both be doing more, especially in the wake of a worsening unemployment situation and outright deflation, but what we really need is another trillion in QE. Even with deflation in the core rate and worsening unemployment, the Fed raised the discount rate. If a big package comes out of the Congress, it will raise the Federal Funds rate.
The problem is Ben "inflation-fighter-extraordinaire" Bernanke is ensconced at the Fed. He's going to ensure the Dems get f*ck!d next fall.
As I recall, Brad DeLong supported Ben Bernanke...
Termites in Your Cabinet
11 hours ago
"Not sure I see the point of this . If Congress does more, then the Fed will likely do less."
ReplyDeleteIt is not just a matter of more or less, but where the money goes. (Arguably, there are better ways to bring unemployment down, however.) The Fed cannot target specific aspects of the economy very well.
"If a big package comes out of the Congress, it will raise the Federal Funds rate."
First, a big package is not going to come out of Congress. The Reps will filibuster first. Second, it is not clear that the Fed would raise the Funds rate. If they did, Bernanke would be grilled before Congress about being politically motivated. More likely, the Fed will wait for some indication of an inflationary effect first. But high unemployment indicates unutilized capacity. Bringing it down may have little inflationary effect. So any Fed response would very likely be later and smaller than the stimulus.
Besides, low unemployment is a Fed mandate. Perceived opposition to reducing unemployment would also lead to grilling before Congress.
ReplyDeleteRe: "If they did, Bernanke would be grilled before Congress about being politically motivated."
ReplyDeleteDon't look now, Min, but Bernanke just raised the Discount rate!
I don't see any Congressional grilling forthcoming...
I mean, if they raised the funds rate (not the discount rate) soon after the passage of a large jobs bill. That is what would appear to be politically motivated. This raise does not have that appearance. :)
ReplyDeleteWell, they may not raise rates the same day or week as the Jobs bill is passed, but they would certainly be less likely to do more QE, to cut the discount rate back to where it was before last week, and would be much more likely to raise the Fed Funds rate at some point. Might happen four months later. Doesn't mean it would't counteract the jobs bill.
ReplyDeleteAnyway, a small bill might help and might not affect Fed Policy. But we've got a Fed determined to keep inflation down close to 1% and to keep unemployment high... Jobs bill won't change that.
1, Raising the discount rate is no big deal. Their target rate has not changed.
ReplyDelete2, QE is not such a amazing idea anyway. All QE does effectively on aggregate is transfer income from savers to borrowers, i.e. the interest income lost to creditors is gained by debtors. Since the govt sector is in a net borrowing position WRT the private sector, the net effect of QE is to reduce the deficit.
3, monetary policy is no great help in a balance sheet recession, because the private sector does not want to lend money. It wants to pay down debt.
4, the magical inflation solution is not really a solution at all. Even if you think it's possible, if successful, it will merely raise prices of goods at a time when incomes are falling, thus making everything worse.
Should be "private sector does not want to borrow money..."
ReplyDeleteDoh!