Debate Club

With Each Round, Fed's Bullets Grow Fewer, Less Powerful

By SHARE

For the sixth straight year, a mid-year growth scare has prompted calls in late summer for the Fed to do more. Yet, while the Fed remains vigilant, further action—particularly in the form of QE3—would be unwise at this juncture.

The annual calls for more easing should highlight the simple fact that prior rounds of Fed intervention have failed to jumpstart economic growth. Central banks have been pursuing similar policies for the past half decade with the same results. The pattern should now be clear: Markets get freaked out by some terrible event (bad employment numbers, European crisis, etc.) and we start to see strains on the financial sector and a sell-off in stocks. As the problem grows, it becomes self-reinforcing, so central banks intervene with some cheap cash binge (QE1, QE2, Operation Twist, long-term refinancing operations, etc.), and the economy picks up for a while before the next calamitous event spooks markets back into a sell-off.

[See a collection of political cartoons on the economy.]

Monetary policy—no matter the scope—cannot produce a sustainable boost to real economic variables like employment and growth. As was painfully on display in the 1970s, persistent attempts to boost growth or reduce unemployment with more accommodative monetary policy results in higher inflation that must eventually be terminated at great cost. And, as inflation pushes up wages, inflation expectations rise too—causing great harm to new business investment and leading to less effect with each successive injection of cash.

If policymakers were to write out a serious list of the top 20 things that were needed to fix the U.S. economy, Fed policy would be 18th or 19th on the list. The problem is that the other 17 things are held captive by political gridlock. With real economic problems like a continued housing market drain, massive uncertainty caused by the looming fiscal cliff, and creeping regulatory authority, it's hard to argue that the problem is tight Fed policy.

Remember that with large economic slowdowns taking place in China, India, Brazil, and Europe, the fact that the U.S. is growing at all makes it a relative overachiever. Yet, since interest rates have been driven practically to zero, it is questionable what the Fed could even reasonably do to produce a short-term boom. Bernanke is surely on guard should we begin to see even more slowdown, but he has precious few bullets left in his gun. For now, he should wait to fire until we really need them.

Daniel Hanson

About Daniel Hanson Economics Researcher at the American Enterprise Institute

Tags
Bernanke, Ben
economy
Federal Reserve

Other Arguments

#1
41 Pts
Quantitative Easing Inappropriately Expands the Fed's Reach

No – Quantitative Easing Inappropriately Expands the Fed's Reach

Steven Horwitz Mercatus Center Senior Affiliated Scholar

#2
20 Pts
Cheaper Credit Will Not Fix the Housing Market

No – Cheaper Credit Will Not Fix the Housing Market

Mark Calabria Director of Financial Regulation Studies at the Cato Institute

#3
8 Pts
Quantitative Easing Would Provide Relief to Middle-Class Families

Yes – Quantitative Easing Would Provide Relief to Middle-Class Families

Adam Hersh Economist at the Center for American Progress

#5
-24 Pts
We Need Quantitative Easing to Raise Employment

Yes – We Need Quantitative Easing to Raise Employment

Mark Weisbrot Co-Director of the Center for Economic and Policy Research

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