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A Few Thoughts on Recent Fed Policy at the LSE Blog

The LSE has a new blog on American politics and policy and they kindly asked me to be one of the first set of contributors.  I shared a few thoughts on recent US monetary policy, many of which I've discussed before in various places, including my recent Mercatus paper.

So while wrapping up QE is a necessary start to avoiding the problem of inflation, figuring out how to reduce the Fed’s balance sheet, which has more than tripled since 2008, is the bigger challenge.

In addition, more attention will have to be paid to the real economy and the various factors that are creating the uncertainty that is making banks hesitant to lend and firms unwilling to borrow and invest.Publish

More at the LSE site.

  • Paul Marks

    Sadly there are is little in terms of real savings to invest – many Americans (like many British people) are deep in debt – especially if one counts housing debt (which one should). The housing bubble has not been liquidated – house prices will collapse again at some point (and it can not be long delayed).

    As for investing in productive industry – this would be a good thing to do in normal times, but (as everyone knows) the times are not normal. For example, the Federal government (and many State and local governments) are a vast pile of unfunded liabilities, which hand like the sword-on-a-thread above the head of the real economy (making eating dinner a somewhat unnerving experience). And some of the government entitlement schemes (such as Obamacare) threaten productive industry with an unsupportable burden.

    The real economy is going to collapse – the only question is when.

    So not a good time to invest in it.

  • Rob Rawlings

    On "the big challenge upon ending QE will be the problem noted above: how to avoid inflation as the economy restarts"

    Doesn't the fed have enough tools in its armory to prevent inflation ? For example use OMO to sell back some of the assets its has purchased, or just increase IOR ? In any case ,as MMTers are fond of pointing out ,under interest-rate targeting the amount of reserves in the system are never a constraint on lending – if reserves didn't exists when banks spot lending opportunities the fed will create them – so the huge pool of reserves may be something of a red herring as far as inflation fears go.

    On "Wrapping up quantitative easing in 2014 is long overdue": At a time when weak expectations about future aggregate demand are probably one of biggest drags on the economy won't ending QE (even given its limited effectiveness) further weaken those expectations and slow down growth ? Until those expectations have improved should the fed rather be looking to expand such programs (as well as looking at more "route one" approaches such as "helicopter drop" type policies ?

  • Putting Treasuries back into the private market will simply re-trade those assets again, reducing reserves within the system. From where can come inflation? Those assets are continually market-priced. NBD.
    Putting MBS back on the market CAN have the effect of a repricing of those, and like-structured investment vehicles, which will undoubtedly result in a new market price much lower than paid by the Fed.
    If that re-pricing benchmarks these assets and the lesser-valued similar paper, then the effect on asset values will be deflationary, and not inflationary.
    Depending on how broadly the market flows these adjustments onto other paper assets will effect in a like manner the depth of the deflation threat ……. which is the real reason why the taper is more likely to ebb and flow with a watered-down mix of public and private paper. The CB has zero 'interest' in upsetting the portfolio balances of its policy leaders at the Fed banks.
    The reality is that under a debt(paper) based money system, the CB has an empty toolbox today. As a result, 'posturing' is the highest profile of monetary policy.