Thursday, February 21, 2013

The leopard cannot change his spots

Did you hear the one about the modern central banker who was able to credibly promise to be irresponsible?

Me neither.

Release of recent FOMC minutes reveal that all is not well on the QE bus:

However, many participants also expressed some concerns about potential costs and risks arising from further asset purchases. Several participants discussed the possible complications that additional purchases could cause for the eventual withdrawal of policy accommodation, a few mentioned the prospect of inflationary risks, and some noted that further asset purchases could foster market behavior that could undermine financial stability. Several participants noted that a very large portfolio of long-duration assets would, under certain circumstances, expose the Federal Reserve to significant capital losses when these holdings were unwound, but others pointed to offsetting factors and one noted that losses would not impede the effective operation of monetary policy. A few also raised concerns about the potential effects of further asset purchases on the functioning of particular financial markets, although a couple of other participants noted that there had been little evidence to date of such effects....  

...Several participants emphasized that the Committee should be prepared to vary the pace of asset purchases, either in response to changes in the economic outlook or as its evaluation of the efficacy and costs of such purchases evolved. For example, one participant argued that purchases should vary incrementally from meeting to meeting in response to incoming information about the economy. A number of participants stated that an ongoing evaluation of the efficacy, costs, and risks of asset purchases might well lead the Committee to taper or end its purchases before it judged that a substantial improvement in the outlook for the labor market had occurred.

(Quote from Tim Duy. more here)

To fight inflation, modern democracies have given the keys to the bus to conservative central bankers over the last 30 years. They worry about inflation when there is no inflation. They couch all expansionary policy statements with weasel words and out clauses that scream "we don't really mean it".  They cannot change their spots. Which is why they can pump trillions into the economy without generating much in the way of increased inflation expectations. Everyone knows they are not serious.

The single most effective tool to raise inflation expectations in the US would be to appoint Paul Krugman as the new Fed chair and let Matt Yglesias be his deputy.

1 comment:

jwood9207 said...

LOL! Yes, but could they get confirmed?