Is the US Federal Reserve still capable of reducing negative effects from recessions and other economic shocks? Not without drastic measures, says a critic.
More Extreme Measures
The answer is yes – at least, according to a paper by the Fed’s own deputy director of its research and statistics division. Closer inspection of the details, however, suggests that future responses may involve quantitative easing (QE) measures more extreme than those already used in the past decade.
The paper covers Fed levers like QE and interest rates, but does not discuss measures considered more extreme, such as negative interest rates and “helicopter money“.
It uses as its framework the standard US economic model the Fed employs, examining a hypothetical negative event that takes unemployment up five percentage points and injects what it considers to be an appropriate amount of extra money into the economy.
$2-4 Trillion More Needed
A critic of the report, Citi’s head of G10 FX Steven Englander, has pointed out that the Fed’s model assumes a world where the shock does not cause a breakdown in the structure of economic relationships – a problem which would probably not be solved by QE (a method of increasing the money supply which is sometimes oversimplified as “money-printing”)
Englander pointed out the QE amounts the Fed anticipates are as high as $2-4 trillion increases – doubling the amount of money the Fed already circulates.
If you can’t take policy and bond interest rates below zero, he said, this may not be enough to have an adequate impact. Without introducing more extreme measures like those mentioned above, the Fed would effectively have to keep interest rates at zero forever.
While the paper describes a scenario where the Fed could mitigate a serious negative economic event in the more distant future, its existing “weapons” against crises would have “almost no ability to offset a shock in current circumstances.”
Americans and those in any country with exposure to the US economy (which is almost the entire world) had better keep their fingers crossed things stay stable in the near future – and perhaps look for more sound-money alternatives like precious metals and Bitcoin.
Left Also Criticizing Federal Reserve
While those on the libertarian right and most Bitcoiners have long questioned the Federal Reserve’s purpose and performance, distrust is spreading to other parts of the political spectrum.
A group called Fed Up, described as “a network of community organizations and labor unions,” has scored a face to face meeting with Kansas City Fed President Esther George alongside its annual meeting in Jackson Hole, Wyoming, this week.
Fed Up’s goals for the Fed are: more transparency, diversity and a greater focus on income inequality – not traditionally part of the Fed’s remit in determining monetary policy, which is maximum employment and a stable inflation rate only.
Congress Wants More Diversity
127 members of Congress including high-profile figures Senators Elizabeth Warren and Bernie Sanders sent a letter to Fed Chair Janet Yellen calling for more diversity, while Hillary Clinton has reportedly called for reduced influence from the financial world on regional Fed boards.
By “diversity,” the critics are likely referring to the Fed’s 12 regional presidents – of which 11 are white and 10 are male. This does not reflect American society or its needs, the letter said.
Like many other organizations in recent years, the Fed has demonstrated some willingness to boost diversity among its officeholders, with Yellen telling Congress diversity was “extremely important” and the Fed wants “to promote stronger job markets with gains to all groups.”
Is the Federal Reserve really up to the massive job of saving the US economy when needed? Would the ethnicity of its officeholders make any difference at all?