I’m glad to see the blogosphere really beating on the Federal Reserve these days. A few things I missed.
First: If they’ll have me, I’d like to be a member of Modeled Behavior’s 4% Club. You should join too! I think we probably overestimate what the Fed can do, but at this point it should be “and the kitchen sink too” when it comes to getting unemployment down.
Second: Chris Hayes, guest hosting for Rachel Maddow, had an excellent segment on the Federal Reserve and an analogy of the economy as a farm and the Fed as a dam manager.
Third: Tim Duy is making me depressed with his recent bleak view on the Federal Reserve.
Fourth. Here’s a fun one that I don’t think I’ve seen anyone bring up: Does the Federal Reserve historically just not like Democrats? Here’s two things I’ve seen that make me go ahead and ask.
The first is a paper a friend brought to my attention, The Fed’s Real Reaction Function: Monetary Policy, Inflation, Unemployment, Inequality – and Presidential Politics by James K. Galbraith, Olivier Giovannoni and Ann J. Russo (2007). One of the things they find:
Finally, there is the claim that the Federal Reserve is apolitical. We examine the hypothesis of a presidential election cycle in the term structure of interest rates. We find compelling evidence that such a cycle existed in both sub-periods. Specifically, we find that in the year before presidential elections, the term structure deviates sharply from otherwise-normal values. When a Republican administration is in office, the term structure in the pre-election year tends to be steeper, by values estimated at up to 150 basis points, and monetary policy is accordingly more permissive. When a Democratic administration is in office, the term structure tends to be flatter, by values also estimated at up to 150 basis points–and monetary policy is more restrictive. These findings are robust across model specifications and across time, though the anti-Democrat effect is smaller after 1983. Taken together, they suggest the presence of a serious partisan bias, at the heart of the Federal Reserve’s policymaking process.
The Federal Reserve takes stronger actions under Republican administrations and more restrictive actions during Democratic administrations. I sit around and think “why does the Federal Reserve keep monetary policy so restrictive when it should be more permissive?” And this paper seems to have one reason.
I’d like the macro people who read this blog to kick the tires of that paper for me, because I’m seeing a conservative Fed being very restrictive under a Democratic administration at a time when there is a desperate need for Fed action. Please tell me it’s a nutty and wrong paper, because I really hate for it to have come to this, especially with Obama’s Fed nominees having been delayed.
The other reason was Worthwhile Canadian Initiative writing out the bio of Richard Fisher of the Dallas Fed, the person who has been hitting the “business uncertainty” line hard and removing reducing unemployment from the things the Fed is supposed to be doing. The bio:
Looking through many of his speeches since he was appointed in 2005, I was struck by a number of things.
1. He loves to use naval metaphors.
2. When he talks about monetary policy issues, there’s little mention of unemployment. His clear preoccupation is inflation.
3. He sees globalization as a force that has reduced the effectiveness of monetary policy and the scope for fiscal policy.
4. He worries a lot about government debt and deficits and taxes…..
In March 2008, the paramount risk to the US economy [in his mind] is expected loose monetary policy. But what about the recession? the dual mandate? financial turmoil? He went on to clearly chart his preferred course (with multiple nautical references) in the same speech:
…We cannot, in my opinion, confidently assume that slower U.S. economic growth will quell U.S. inflation and, more important, keep inflationary expectations anchored. Containing inflation is the purpose of the ship I crew for, and if a temporary economic slowdown is what we must endure while we achieve that purpose, then it is, in my opinion, a burden we must bear, however politically inconvenient. To some, this may appear a Hobson’s choice. I don’t see it that way. Our obligation is to prevent inflation in order to sustain long-term employment growth. I believe that the best way to cut through the treacherous economic waves that are upon us and keep our ship steaming forward is to stick to our purpose. [Speech, March 4, 2008]
Bear Stearns collapsed the following week. His response?
In building the bridge to restore financial order and efficiency, my primary interest is to do the minimum necessary to get the job done. And no more. In so doing, my hope is that we restore the long-term faith of the millions of risk takers who make our economy so mighty. [April 9, 2008]
Such is the mindset of some of the men on the FOMC.
I really encourage you to read the whole thing. So Fischer gives generic pro-business Republican messaging. He doesn’t care about unemployment, thinks implementation of the Dodd-Frank finreg bill, of all things, is devastating the real economy, and probably wants to keep the Bush tax cuts for good measure. That’s expected as he is appointed by banks.
But this needs to be balanced by President Obama getting his appointments to the Fed, and quickly. The GOP just did a major harm to the country and to the Democrats by denying Obama his Presidential responsibility to appoint his choices to the Fed; they missed this previous FOMC meeting. Will they be there in time for the next one?