Without the Fed’s bond buying program, it’s almost certain the US economy would be in far worse shape than it is currently. Not to say, however, that things are great. Far from it. New consumer spending data today point to second-quarter GDP growth of under 2% — maybe closer to 1% — following revised first-quarter GDP growth of 1.8%. At the same time, inflation remains extraordinarily low.
Now in a speech today, New York Fed President William Dudley made a special point of telling investors expecting earlier interest rate hikes “that such an expectation would be quite out of sync with both FOMC statements and the expectations of most FOMC participants.” So chillax, people!
Good to hear, but should the Fed be doing its QE program differently? Ashwin Parameswaran:
I’m not opposed to the withdrawal of monetary stimulus but the stimulus itself. In particular I am opposed to the nature of the stimulus which focuses all its efforts on propping up asset prices.
However, unlike most Fed critics who tend to be conventional “austerians”, I’m a strong critic of asset-price based monetary policy and an equally strong advocate for combined monetary-fiscal stimulus in the form of direct cash transfers to households.
I support helicopter drops not just because it is fairer and more “neutral” in its impact on income distribution than quantitative easing. I support helicopter drops because it is the parachute that prevents the hard landing if we stop quantitative easing. I support helicopter drops because it is the most free-market of all macro-stabilisation policies.
Rather than bailing out banks and firms and propping up asset prices, helicopter drops simply mitigate the consequences of macroeconomic volatility upon the people. I support helicopter drops because it helps us build a resilient economic system as opposed to chasing the utopian aim of perfect macroeconomic stability.
One form a “helicopter drop” could take is a Fed-financed across-the-board tax cut, a topic I recently discussed. But to summarize: Ben Bernanke a decade ago recommended deflationary Japan pursue just such a policy, along with an inflation target. Adair Turner, former head of the UK’s Financial Services Authority, and monetary economist Michael Woodford also are in favor of the idea, coupling the idea with a nominal GDP target. Economist and blogger Josh Hendrickson thinks the policy would be stimulative but worries whether “it would be politically feasible to have a tax rebate that is large enough to have the needed effect on the level of NGDP — especially considering it would be financed through money creation.” And David Beckworth sums up:
The economy’s inability to reach “escape velocity” is because of the shortage of safe, money-like assets. A Fed-financed tax cut (or “helicopter drop”) that directly delivered money to households and continued to do so until nominal GDP hit its pre-crisis trend growth path would be a very effective way to solve this shortage.
I guess I would prefer the Fed for now continue its current program while communicating its intentions better by adopting an explicit NGDP level target. A second best might be the Kocherlakota Plan.
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