Powell using his position to influence the election was the bridge too far for me. He’s got to go. And, frankly, as you point out, the Fed is not so important anyway. So, the whole thing can go. Let’s not even go into how bad their data is (intentionally misleading). Looking forward to a decentralized world where central bank policy rates are a thing of the past.
The danger is not always toward too much inflation. And sometimes politicians will try to get the Fed to be too restrictive! Remember the "debase the currency" fearmongers in 2009? Many people woud like the Fed to run the economy well or ill depending on their politics. Betcha Biden wishes the Fed had inflated less even it is meant higher unemployment.
Didn't the last bout with inflation happen because of government spending, not necessarily low interest rates? The Fed was stuck in 2008 QE thinking and didn't move rates up fast enough-especially given the dramatic increase in government spending due to Covid/Biden's bill.
In the case of rates today, it seems like the data overwhelmingly would favor lowering at least .25, or .5. I realize it won't help the fearfulness that exists currently in the swaps market but it wouldn't hurt, nor would it be inflationary, since that's mostly a government spending phenomenon.
I'd also add, when people like Austan Goolsbee are running branches of the Fed, it is in fact heavily politicized--like most of our supposed objective institutions in America.
"The Fed went all-in with Treasury on the bailouts of 2020, buying up nearly all the new treasury issues, directly buying state and local government debt, financing astounding firehoses of money"
Exactly what any independent central bank seeking to facilitate adjustment of the massive shock of COVID would do.
"Should financial regulation be separated? How should financial regulation be reformed? (Are we going to be living with Dodd-Frank rules for 100 years?)"
Yes, financial regulation should be separated
Reform is not possible as long as the financial industry remains nationalized
Yes, we will live with Dodd-Frank and its death-spawn for as long as our republic is standing
"You can only get lower unemployment by inflation in excess of what people expect."
That's the only way in a one good, one input, one relative price model but that is not a good model for thinking about demand or supply shocks that have vastly different effects on different goods and services and kinds of labor some with stickier prices than others. In that kind of model you want people to expect not "low" (target) inflation. but the "right" amount of over-target infation, which need not be the same from one shock episode to the next
"Even conventional views now chalk up much inflation to “supply shocks” or “demand shocks,” implicitly saying that the Fed couldn’t do much about it."
Not quite. The central bank still can (has to) chose how much to let the shock and consequent need for relative price adjustment to manifest as engineered inflation and how much as unemployment. The "not much" does, however, imply that knowing how much inflation to engineer is difficult to discern in the face of idiosyncratic shocks
I agree. Supply, relative demand, demand shocks only cause inflation if they cause the Fed and Treasury to respond. But the conventional talk ignores that, and conventional modeling sends the nominal anchor off to a quickly forgotten footnote, so that paper after paper says "supply shocks caused inflation" forgetting the needed accommodation.
I enlist in your campaign to set straight the convectional talk and conventional modelling.
So as not to talk behind your back, here is what I said to Brad DeLong [approximately. I can’t access the comment ]
“I want you, John Cochrane and Scott Sumner in a conclave (doors locked no food or water) to elect an new Fed meta policy. Blanchard is the Camerlengo.” :)
While the Fed doesn’t print money it does actually inflate the money supply through quantitative easing.
When the Federal Reserve (the Fed) buys assets through quantitative easing (QE), it doesn't use money from taxes or borrowing. Instead, the Fed creates new money in the form of electronic reserves, or bank reserves, on its balance sheet. These reserves are then used to purchase assets like government bonds from banks and other financial institutions.
How is this dichotomy not substantially the same thing as “printing” money?
Doesn't time-consistency also apply to tax policy? For example, an EV tax credit encourages R&D only if it is expected to last. A Roth IRA only encourages savings only if the tax exception on gains is expected to last for DECADES. The Fed is an abomination of off-balance sheet transfers between savers and investors. Remember, regulation is off balance sheet taxing/spending. Likewise, monetary policy, with heterogeneous persons, is the same thing. You were right when you discussed accountability to the electorate.
There is one VERY good reason for Fed independency. Inflation is a tax, the power of the purse is on the hands of congress, so the president should not have authority to implement an inflation tax. It is as simple as that.
Having the ability is not the same as having the mandate to do so. Congress mandate to the Fed is to achieve price stability. In fact, I believe this is one of the most natural examples of why Congress need to establish an independent agency.
Now, if you push me on that, I think there are aspects where it does not qualify. For instance, the Fed can interpret "price stability" on its own. So you can argue that Congress should be clear of say, what level of inflation is consistent with price stability. Congress should also be clear on what tools are allowed. Is the use of quantitative easing part of the Fed's arsenal? And if so, what assets can the Fed purchase. The situation is even worse with financial stability, as I pointed out in another post.
I am very in favor of the revitalization of the nondelegation doctrine. But this is not about no delegation at all, it is about delegation without proper guidence. As the SCOTUS puts it in the SEC v. JARKESY case: "Congress had violated the nondelegation doctrine by authorizing the SEC, without adequate guidance, to choose ..." Propoer guidance is the key.
While public arguments, like those between Trump and Powell, focus on the Fed's independence in monetary policy, it ha enabled politically motivated decisions in other areas too.
1. Politically Directed Research: Regional Fed branches increasingly operate like liberal think tanks, funded without congressional appropriation. For instance, the Minneapolis Fed's "Opportunity & Inclusive Growth Institute," the San Francisco Fed's persistent funding of a climate agenda, and the Richmond Fed's former "Center for Advancing Women in Economics" all represent initiatives that fall outside the Fed's core mandate. These ventures are funded by the Fed, with unelected officials using public resources to finance politically driven agendas.
2. Regulation as Social Policy: The Fed has leveraged "financial stability" concerns as a pretext to subsidize or penalize certain industries. The push on climate change is the primary example. By sponsoring research into "climate risk," the Fed creates the very justification it needs to impose lending constraints on banks, thereby steering capital away from disfavored sectors like fossil fuels and indirectly promoting a green agenda.
The Federal Reserve uses its institutional independence to implement what its officials believe is best for the country, advancing a specific political ideology whether Congress agrees or not. Congress has to restrict what the Fed can do.
Nice essay. But for my money, Fed manipulation is more in the hands of Congress - an act of Congress created the Fed after all. The Fed Chair testifies twice a year before the House and Senate committees, and guess what? He is doing that this week. Congress is the Fed's overseer. as you note, the president can nominate—not appoint—a chair and Fed board members; that is subject to Senate approval. Then there are the district bank presidents appointed by their respective boards—not by the president. So thats a lot of fluff between the president and 'control.' Still, Ronald Reagan was able... through the luck of the draw to appoint enough Board members of independent mind that they were able to control Fed policy when Volcker was the chair. In those days Volcker still held sway on the FOMC, but only board members—at each meeting—vote on discount rate requests by district banks, and the board alone votes on those. And at that time Volcker opposed a Fed funds rate cut but the Board did an end run around that control by voting to accept a discount rate cut request, putting Mr. Volcker behind the eight ball. So there are many ways to influence and control the Fed. I'd say the Fed has about the right degree of freedom vs. oversight. I'm sure some disagree. But the system has worked well. However, under the Biden Democrats, the Fed was definitely bullied on climate, as you point out, and on stopping being preemptive with policy—and that one cost us inflation. People think the president has the most influence on the Fed. I don't. He just has teh bully pulpit, and THAT is not the same thing.
If the FED is accountable to anyone, it is Congress, not the White House. Should be completely independent from WH for obvious political reasons.
But Congress seems content to abrogate its authority and responsibility to Trump in all matters so who knows what will happen. First time in my 80 years I have seen Congress with no spine to defend its constitutional authority.
So long as its inception is via legislation and not amendment it is up for interpretation. Although in 2008 an over 200 year old amendment was interpreted by the Supreme Court and it inexplicably took a guy with an over 200 IQ to interpret it!?! Why do people that interpret the Constitution need such high IQs?? Such a head scratcher! 😉
Powell using his position to influence the election was the bridge too far for me. He’s got to go. And, frankly, as you point out, the Fed is not so important anyway. So, the whole thing can go. Let’s not even go into how bad their data is (intentionally misleading). Looking forward to a decentralized world where central bank policy rates are a thing of the past.
What the christ?
The danger is not always toward too much inflation. And sometimes politicians will try to get the Fed to be too restrictive! Remember the "debase the currency" fearmongers in 2009? Many people woud like the Fed to run the economy well or ill depending on their politics. Betcha Biden wishes the Fed had inflated less even it is meant higher unemployment.
Didn't the last bout with inflation happen because of government spending, not necessarily low interest rates? The Fed was stuck in 2008 QE thinking and didn't move rates up fast enough-especially given the dramatic increase in government spending due to Covid/Biden's bill.
In the case of rates today, it seems like the data overwhelmingly would favor lowering at least .25, or .5. I realize it won't help the fearfulness that exists currently in the swaps market but it wouldn't hurt, nor would it be inflationary, since that's mostly a government spending phenomenon.
I'd also add, when people like Austan Goolsbee are running branches of the Fed, it is in fact heavily politicized--like most of our supposed objective institutions in America.
Maybe interest rates should be set by the average of a popular vote?
"...Fed encourage lending to a lot of people who would later have trouble repaying their mortgages."
The repayment problems were mainly that the Fed was not inflating enough 2009 onward and much unemployment developed.
"The Fed went all-in with Treasury on the bailouts of 2020, buying up nearly all the new treasury issues, directly buying state and local government debt, financing astounding firehoses of money"
Exactly what any independent central bank seeking to facilitate adjustment of the massive shock of COVID would do.
"Should financial regulation be separated? How should financial regulation be reformed? (Are we going to be living with Dodd-Frank rules for 100 years?)"
Yes, financial regulation should be separated
Reform is not possible as long as the financial industry remains nationalized
Yes, we will live with Dodd-Frank and its death-spawn for as long as our republic is standing
discontinue deposit insurance
unleash banks
release the kraaken
let all hell break loose
"You can only get lower unemployment by inflation in excess of what people expect."
That's the only way in a one good, one input, one relative price model but that is not a good model for thinking about demand or supply shocks that have vastly different effects on different goods and services and kinds of labor some with stickier prices than others. In that kind of model you want people to expect not "low" (target) inflation. but the "right" amount of over-target infation, which need not be the same from one shock episode to the next
"Even conventional views now chalk up much inflation to “supply shocks” or “demand shocks,” implicitly saying that the Fed couldn’t do much about it."
Not quite. The central bank still can (has to) chose how much to let the shock and consequent need for relative price adjustment to manifest as engineered inflation and how much as unemployment. The "not much" does, however, imply that knowing how much inflation to engineer is difficult to discern in the face of idiosyncratic shocks
I agree. Supply, relative demand, demand shocks only cause inflation if they cause the Fed and Treasury to respond. But the conventional talk ignores that, and conventional modeling sends the nominal anchor off to a quickly forgotten footnote, so that paper after paper says "supply shocks caused inflation" forgetting the needed accommodation.
I enlist in your campaign to set straight the convectional talk and conventional modelling.
So as not to talk behind your back, here is what I said to Brad DeLong [approximately. I can’t access the comment ]
“I want you, John Cochrane and Scott Sumner in a conclave (doors locked no food or water) to elect an new Fed meta policy. Blanchard is the Camerlengo.” :)
:)
All in favor of Narrow Central Banking say Aye :)
While the Fed doesn’t print money it does actually inflate the money supply through quantitative easing.
When the Federal Reserve (the Fed) buys assets through quantitative easing (QE), it doesn't use money from taxes or borrowing. Instead, the Fed creates new money in the form of electronic reserves, or bank reserves, on its balance sheet. These reserves are then used to purchase assets like government bonds from banks and other financial institutions.
How is this dichotomy not substantially the same thing as “printing” money?
Doesn't time-consistency also apply to tax policy? For example, an EV tax credit encourages R&D only if it is expected to last. A Roth IRA only encourages savings only if the tax exception on gains is expected to last for DECADES. The Fed is an abomination of off-balance sheet transfers between savers and investors. Remember, regulation is off balance sheet taxing/spending. Likewise, monetary policy, with heterogeneous persons, is the same thing. You were right when you discussed accountability to the electorate.
In summary, there are absolutely zero unique arguments for Fed independence.
There is one VERY good reason for Fed independency. Inflation is a tax, the power of the purse is on the hands of congress, so the president should not have authority to implement an inflation tax. It is as simple as that.
But a handful of technocrats should have the ability to tax and spend? Sounds like a violation of the "nondelegation doctrine." https://en.m.wikipedia.org/wiki/Nondelegation_doctrine
Having the ability is not the same as having the mandate to do so. Congress mandate to the Fed is to achieve price stability. In fact, I believe this is one of the most natural examples of why Congress need to establish an independent agency.
Now, if you push me on that, I think there are aspects where it does not qualify. For instance, the Fed can interpret "price stability" on its own. So you can argue that Congress should be clear of say, what level of inflation is consistent with price stability. Congress should also be clear on what tools are allowed. Is the use of quantitative easing part of the Fed's arsenal? And if so, what assets can the Fed purchase. The situation is even worse with financial stability, as I pointed out in another post.
I am very in favor of the revitalization of the nondelegation doctrine. But this is not about no delegation at all, it is about delegation without proper guidence. As the SCOTUS puts it in the SEC v. JARKESY case: "Congress had violated the nondelegation doctrine by authorizing the SEC, without adequate guidance, to choose ..." Propoer guidance is the key.
While public arguments, like those between Trump and Powell, focus on the Fed's independence in monetary policy, it ha enabled politically motivated decisions in other areas too.
1. Politically Directed Research: Regional Fed branches increasingly operate like liberal think tanks, funded without congressional appropriation. For instance, the Minneapolis Fed's "Opportunity & Inclusive Growth Institute," the San Francisco Fed's persistent funding of a climate agenda, and the Richmond Fed's former "Center for Advancing Women in Economics" all represent initiatives that fall outside the Fed's core mandate. These ventures are funded by the Fed, with unelected officials using public resources to finance politically driven agendas.
2. Regulation as Social Policy: The Fed has leveraged "financial stability" concerns as a pretext to subsidize or penalize certain industries. The push on climate change is the primary example. By sponsoring research into "climate risk," the Fed creates the very justification it needs to impose lending constraints on banks, thereby steering capital away from disfavored sectors like fossil fuels and indirectly promoting a green agenda.
The Federal Reserve uses its institutional independence to implement what its officials believe is best for the country, advancing a specific political ideology whether Congress agrees or not. Congress has to restrict what the Fed can do.
Enjoyed the essay, your final paragraph contained some crucial issues that should be debated, the balance sheet first and foremost.
Nice essay. But for my money, Fed manipulation is more in the hands of Congress - an act of Congress created the Fed after all. The Fed Chair testifies twice a year before the House and Senate committees, and guess what? He is doing that this week. Congress is the Fed's overseer. as you note, the president can nominate—not appoint—a chair and Fed board members; that is subject to Senate approval. Then there are the district bank presidents appointed by their respective boards—not by the president. So thats a lot of fluff between the president and 'control.' Still, Ronald Reagan was able... through the luck of the draw to appoint enough Board members of independent mind that they were able to control Fed policy when Volcker was the chair. In those days Volcker still held sway on the FOMC, but only board members—at each meeting—vote on discount rate requests by district banks, and the board alone votes on those. And at that time Volcker opposed a Fed funds rate cut but the Board did an end run around that control by voting to accept a discount rate cut request, putting Mr. Volcker behind the eight ball. So there are many ways to influence and control the Fed. I'd say the Fed has about the right degree of freedom vs. oversight. I'm sure some disagree. But the system has worked well. However, under the Biden Democrats, the Fed was definitely bullied on climate, as you point out, and on stopping being preemptive with policy—and that one cost us inflation. People think the president has the most influence on the Fed. I don't. He just has teh bully pulpit, and THAT is not the same thing.
If the FED is accountable to anyone, it is Congress, not the White House. Should be completely independent from WH for obvious political reasons.
But Congress seems content to abrogate its authority and responsibility to Trump in all matters so who knows what will happen. First time in my 80 years I have seen Congress with no spine to defend its constitutional authority.
So long as its inception is via legislation and not amendment it is up for interpretation. Although in 2008 an over 200 year old amendment was interpreted by the Supreme Court and it inexplicably took a guy with an over 200 IQ to interpret it!?! Why do people that interpret the Constitution need such high IQs?? Such a head scratcher! 😉