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Tell NPR, the Fed Has Many More Bullets

Wednesday, 22 June 2011 04:55

In its top of the hour news segment NPR told listeners that there is little else that the Fed can do to boost the economy. This is very seriously wrong.

The Fed could do more quantitative easing, it could target a long-term interest rate, for example targeting a 2.5 percent 10-year government bond rate, or it could target a higher inflation rate (e.g. 3-4 percent). All of these measures would some impact in boosting the economy.

The Fed is choosing not to go this route because its open market committee apparently feels the potential benefits do not outweigh the risks, however it is simply wrong to say that additional options to boost the economy do not exist. The Fed has simply opted not to take them.

NPR's mis-reporting on this point is important because the decisions of the open market committee are in part political ones. They respond to the larger debate within the country. If people do not even know that the Fed has options that could spur growth and reduce unemployment then they will be less likely to try to pressure the Fed to pursue such options.

Comments (5)Add Comment
written by izzatzo, June 22, 2011 5:51
In a related story NPR also noted there was little anyone could do to stem the ongoing tide of tornados and floods due to diminishing returns, explaining that's why it was newsworthy.
written by paine, June 22, 2011 9:37
the skunks at the fed only need do one thing now

call for a full employment fiscal deficit

and if they get one
they can incrementally accomodated
the bloody beast in toto
written by Sam Adenbaum, June 22, 2011 11:16
It's probably no worse than the Saturday morning segment NPR aired explaining how big $14 trillion is. Lot's of talk about how many football fields it would cover or how high a stack of dollar bills would go. Never once comparing $14 trillion to the size of the economy or whether debt to gdp was at a new high.
NPR has Joined the Establishment
written by Steve, June 22, 2011 3:30
NPR economic reporting is uniformly horrible. The "Planet Money" team gets basic macroeconomics wrong. They either never heard of Keynes or are studiously ignoring him. It's even worse when Ira Glass gives the whole hour of "This American Life" over to them. They basically say, "Gee. These rich people are right about everything after all." NPR, like most of the rest of the media, is in the creditors' pockets. NPR used to be adventurous. Now, they are just part of the Inside the Beltway establishment.
targeting inflation rate
written by ts, June 22, 2011 3:31
I really would like to see the Fed target the inflation rate to 3-4%, because when they failed to accomplish this, economists would finally shut up about saying they can do this.

Monetary policy requires a transmission mechanism: lower interest rates need to translate into more lending, more spending, or marginal increases in investment in order to impact GDP. It's hopefully clear by now that none of these are working or have worked in this recession. Bank lending is still contracting, spending is sluggish, and capital investment did not go positive until after the recovery began (and two years after the Fed went to zero interest rates).

Trying to influence the "money supply" (I put this in quotes because I really don't think anyone knows what this is), by open market operations, reserve requirements, quantitative easing, what have you, requires the same mechanism. In order to target inflation, not only would you have to have the mechanism working whereby reserves turn in to loans and spending, AND that needs to become enough demand to drive up prices, which is very unlikely when capacity utilization is still in the mid 70s.

Inflation targeting was used for a while in the 1970s and 1980s (it was a monetarist idea), and it should have died a horrible death when it failed miserably along with monetarism. The only way it works is if you deliberately restrict "inflation" to a limited set of goods. For example, the "low inflation" of the 1990s that ran alongside a hyperinflation in stock and real estate prices, which we now know as the twin bubbles.

While I respect Olivier Blanchard as a smart person, his theory of inflation targeting to fix the economy is crackpot economics. Sadly, this is what most of the discipline has been reduced to.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.