Thursday, July 12, 2012

Is the upcoming election holding the Fed back?

The US economy is going nowhere fast. Growth is low, unemployment is high and inflation (core and headline) are falling below 2%, re-kindling worries about deflation.

But the Fed is sitting pat. Sure they've done a lot in my view. Dropped rates to zero, promised to keep them there a while, pumped trillions of reserves into the system, ran a couple rounds of quantitative easing and don't forget about "operation twist". Nor do I have much confidence that, at this point in the proceedings, monetary policy is capable of a miracle cure for the economy.

But holy spumoli people, don't they have to do something? Sure they do; they're the Fed, dammit!

Bernanke can't keep saying that the Fed is not out of ammo but never fire the gun. The Wolfersons are KILLING him!

Could it be possible that the Fed does not want to be seen "goosing" the economy in the run-up to the Presidential election?

Might the Fed be guarding its vaunted "independence" by avoiding any actions that could be considered politically motivated?

Will we see QE3 or a higher inflation target on the first Wednesday in November?

I think this has to be a factor in the Fed's decision about the timing of further action. Things may worsen enough for them to feel they have to act no matter what, but I think they may be trying to muddle through with the status quo until after the election.

Tell me why I'm wrong in the comments.




5 comments:

Gerardo said...

Perhaps it is shoring up its resources so it can step in when Europe implodes.

It doesn't want to find itself overextended when a real crisis hits like, say, the US military.

Simon Spero said...

I don't think you're wrong, but I can't help feeling that there's got to be some kind of inflation going on somewhere. When you keep pushing on a string, eventually you're going to trip the person who's trying to spike the punch bowl at the stag- party. (I like my metaphors like I like my music- well mixed).

It may be that QE* has mostly just kept the euro at a higher level than it would otherwise have fallen to, but who knows.

I wonder what would happen if, say, Spain announced some serious structural reform (liberalization of their labor markets, in conjunction with a credible bad bank). An upside shock might not be controllable given the single currency, so the latent inflation might be revealed, and politics would argue against tightening if france and italy remained mired.

Can any of the micro- based models predict for this scenario?

Woj said...

I don't think you're wrong but I think the Fed is more afraid of "goosing" the stock market than the economy. The NY Fed just had a research note showing that nearly the entire equity premium over the past two decades relates to anticipation of FOMC announcements, but fixed income and exchange markets are unmoved.

Within the current constraints, the Fed has little ability to improve the real economy and will risk its independence/confidence by continually enacting policies that fail to alter the rate of growth or inflation for more than a quarter.

G Wolf said...

Who or what are the Wolfersons?

Angus said...

G Wolf: Justin Wolfers & Betsey Stevenson

"Iran, number one!! USA ptoie!"