The Post Falls Short On What Fed Can Do

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Saturday, 07 August 2010 07:19

In its discussion of the weak July jobs report the Post noted that the Fed could take steps to boost the economy. It listed the possibilities as: "pledging to keep interest rates low for even longer than now expected, cutting the interest rate on banks' reserves, or buying additional mortgage securities."

These are all relatively modest steps. There are measures that have been proposed that would have much more impact. For example, Greg Mankiw, President Bush's chief economist, and Oliver Blanchard, the chief economist at the International Monetary Fund, have both suggested that the Fed could set an inflation target of 3-4 percent as a way of lowering the real interest rate.

The Fed could also commit itself to buy and hold a large amount of government debt (e.g. $1 trillion to $3 trillion) to alleviate concerns that the debt will impose large interest burdens on the government in the future, thereby creating more room for aggressive stimulus. The Post should be listing the full range of options that are being put forward in policy debates, not just a small narrow set of relatively inconsequential measures.

It also would have been worth mentioning that the Census still employed 200,000 temporary workers in July. Most of these jobs will disappear in the next two months, which means that the economy will have to generate 100,000 jobs a month in August and September just to keep employment flat.