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1. Good Policy or Good Luck? Why Inflation Fell Without a Recession

Author:
Thomas Ferguson and Servaas Storm
Publication Date:
09-2024
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
This paper analyzes claims that the Federal Reserve is principally responsible for the decline of inflation in the U.S. We compare several different quantitative approaches. These show that at most the Fed could plausibly claim credit for somewhere between twenty and forty percent of the decline. The paper then examines claims by central bankers and their supporters that a steadfast Fed commitment to keeping inflationary expectations anchored played a key role in the process. The paper shows that it did not. The Fed’s own surveys show that low-income Americans did not believe assurances from the Fed or anyone else that inflation was anchored. Instead, what does explain much of the decline is the simple fact that most workers nowadays cannot protect themselves by bargaining for higher wages. The paper then takes up the obvious question of why steep rises in interest rates have not so far led to big rises in unemployment. We show that recent arguments by Benigno and Eggertson that shifts in vacancy rates can explain this are inconsistent with the evidence. The biggest factor in accounting for the strength in the economy is the continuing importance of the wealth effect in sustaining consumption by the affluent. This arises, as we have emphasized in several papers, from the Fed’s quantitative easing policies. Absent sharp declines in wealth, the continuing importance of this factor is likely to feed service sector inflation in particular.
Topic:
Economics, Monetary Policy, Federal Reserve, Inflation, and Macroeconomics
Political Geography:
North America and United States of America

2. Was Something Structurally Wrong at the FOMC?

Author:
Alan S. Blinder
Publication Date:
10-2024
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics (PIIE)
Abstract:
There is little doubt that the Federal Reserve was late to start raising interest rates as inflation rose in 2021–22. The Federal Open Market Committee (FOMC) made a substantial, though perhaps understandable, error in failing to raise interest rates until March 2022. Much of that policy error can be attributed to faulty forecasts of inflation, which the Federal Reserve shared with many other forecasters. It was not an outlier. But the error was not quite as consequential as the Fed’s sharpest critics allege. Even if the FOMC had started to hike rates earlier, the econometric evidence suggests that the effects on peak inflation would likely have been small. Supply constraints, not excess demand, ruled the roost. They came, driving inflation higher; and then they went, pulling inflation down. Blinder says that the FOMC’s August 2020 framework shoulders more of the blame for the inflationary surge than it should—probably because the new wording revised both of the Fed’s goals, low inflation and high employment, in dovish directions. For that reason alone, the framework will almost certainly be changed in 2025, given the high inflation since. But how? Blinder suggests that the August 2020 change in the employment goal, from symmetry to “shortfalls,” is sensible and probably not too important anyway. But the change in the inflation goal, from a 2 percent point target to flexible average inflation targeting (FAIT), was probably consequential. It may have made the FOMC slow on the draw as inflation gathered steam, and it may have kept monetary policy too tight for too long in 2024. In both directions, Blinder argues, a 1.5 to 2.5 percent target range would be a better choice. To answer the question in the title of this Policy Brief, that may be the structural flaw the Fed should fix.
Topic:
Economics, Monetary Policy, Federal Reserve, Interest Rates, and Supply
Political Geography:
North America and United States of America

3. Precedents, Instruments and Targets that the Fed Has Used to Create and Support a Postcrisis Global Safety Net

Author:
Edward J. Kane
Publication Date:
09-2023
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Much has been made of the Global Safety Net that has been put into place since the Great Financial Crisis but the distributional effects of some of the Fed’s strategies are still shrouded in mystery. In supplying bailout funds at below-market terms to uninsured creditors of firms and governments that were economically insolvent, the Fed reinforced the implicit expectation that megabanks are free to take on high levels of risk and benefit from the upside while being protected from any serious downside. An important example of this is the role of currency swaps. By extending its “temporary” dollar swap lines with other central banks, including the European Central Bank, “until further notice” the Fed broadcasted its intention to act as the financial world’s “liquidity provider” of last resort. The “liquidity” support provided by the Fed to megabanks through cross-border lending in fact acted as subsidies, the costs of which were borne by ordinary US citizens. This is just one piece of an unacknowledged game plan of building global strategies of crisis prevention and crisis management based on misdirection and piles of bullsh*t.
Topic:
Economics, Monetary Policy, Federal Reserve, Central Bank, and Safety Net
Political Geography:
North America and United States of America

4. The case for a cautiously optimistic outlook for US inflation

Author:
David Reifschneider and David Wilcox
Publication Date:
03-2022
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics (PIIE)
Abstract:
The Federal Reserve and most other analysts failed to anticipate the surge in inflation in 2021. Considerable debate now surrounds the question of whether the Fed is too sanguine in anticipating that too-high inflation will mostly take care of itself over the next few years, even as the unemployment rate remains low and monetary policy remains accommodative. This Policy Brief concludes that although the Federal Open Market Committee (FOMC) was too optimistic in the projections it issued in December 2021, the broad contour of its baseline inflation outlook for 2022 and beyond remains sensible. The authors find the 2021 surge in inflation resulted mainly from COVID-19-related sectoral developments rather than the classic situation of aggregate demand outstripping the overall economy's long-run productive potential. The statistical analysis in this Policy Brief was conducted before Russia invaded Ukraine. As a result of the war, the inflation situation will probably get worse before it gets better, and could do so in dramatic manner if Russian energy exports are banned altogether. Nonetheless, if the key considerations identified in this Policy Brief remain in place, and if monetary policymakers respond to evolving circumstances in a sensible manner, the inflation picture should look considerably better in the next one to three years.
Topic:
Federal Reserve, Economy, and Inflation
Political Geography:
North America and United States of America

5. An analysis of central bank decision-making

Author:
Maria Demertzis, Catarina Martina, and Nicola Viegi
Publication Date:
07-2022
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
The process by which central banks take decisions has evolved over the years, with a tendency towards independence and decisions taken by committees rather than individuals. Monetary policy committees can be set up formally in different ways, traditionally falling into one of two categories: individualistic or collegial. Individualistic committees reach decisions by voting and publish the votes of each of their members, while in collegial committees, decisions are typically reached collectively. The European Central Bank is an example of the latter, while the Bank of England follows an individualistic approach. Focusing on decision-making, a relevant question is whether the formal set-up in practice leads to different ways of deliberating and reaching monetary policy decisions. We look at decisions taken by the Bank of England, the Federal Reserve and the European Central Bank over more than 20 years to evaluate how different the decision-making process is in these three central banks. The results indicate that, irrespective of the committee type, their approach to consensus building when they take decisions is similar. The three central banks seem to value reaching decisions by unanimity, both on interest rates – the prime monetary policy instrument by definition – and on asset purchases. Decisions to tighten monetary policy are more often taken unanimously than decisions to ease monetary policy. When maintaining policy unchanged, decisions are usually backed by most committee members.
Topic:
Federal Reserve, Finance, Central Bank, European Central Bank, Decision-Making, and Bank of England
Political Geography:
United Kingdom, Europe, Global Focus, and United States of America

6. Lessons for the Fed from the Pandemic

Author:
John A. Allison
Publication Date:
06-2021
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
The Covid‐​19 pandemic greatly increased the scope and power of the Federal Reserve. The Fed created a number of new emergency lending facilities, which allowed it to make off‐​balance sheet loans and buy the debt of corporations and municipalities through special purpose vehicles backstopped by the Treasury under the CARES Act. Meanwhile, the Fed’s large‐​scale asset purchase program, known as quantitative easing (QE), was put on steroids after the pandemic struck in March 2020. The Fed has been purchasing longer‐​term Treasuries and mortgage‐​backed securities amounting to $120 billion per month, pushing the size of its balance sheet to an astonishing $7 trillion.
Topic:
Economics, Monetary Policy, Federal Reserve, Pandemic, and COVID-19
Political Geography:
North America and United States of America

7. Reflections on Monetary Policy and Its Future

Author:
Jeb Hensarling, Phil Gramm, and John B. Taylor
Publication Date:
06-2021
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
The Fed’s huge balance sheet allows it to engage in credit policy (the composition of the balance sheet is by definition credit policy), which inherently auto‐​resides in fiscal policy — but should auto‐​reside with Congress. This discussion, moderated by John B. Taylor, took place at the Cato Institute’s 38th Annual Monetary Conference on November 19, 2020. The transcript has been edited for publication.
Topic:
Economics, Monetary Policy, Federal Reserve, and Credit
Political Geography:
North America and United States of America

8. Another reason to raise the Fed's inflation target: An employment and output boom

Author:
David Reifschneider and David Wilcox
Publication Date:
08-2021
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics (PIIE)
Abstract:
In 2012, the Federal Reserve formally adopted an inflation target and set it at 2 percent, in line with the level chosen by many other central banks. In hindsight, this setting left policymakers with too little room to cut interest rates when they want to fight recessions. Many researchers have noted that if central banks raised their inflation targets—either individually or in concert—they could do a better job in the long run of keeping inflation near its target and the workforce fully employed. Reifschneider and Wilcox highlight an additional and less-noted consequence of raising the inflation target modestly: The economy could enjoy a temporary but substantial boom in employment and output as it adjusted to the increase in the target. Critical to generating this favorable outcome would be decisive action by monetary policymakers to ensure that the higher inflation target is achieved in a reasonably timely manner. In light of substantial transition benefits, as well as the long-run improvement in economic performance, the authors recommend that the Federal Reserve raise its inflation target to 3 percent as part of its next framework review.
Topic:
Federal Reserve, Employment, Economy, and Inflation
Political Geography:
North America and United States of America

9. U.S. Monetary Policy and the Decline in the Interest Rates (1990-2007)

Author:
Santiago Capraro, Carlo Panico, and Luis Daniel Torres-Gonzalez
Publication Date:
12-2021
Content Type:
Working Paper
Institution:
Political Economy Research Institute (PERI), University of Massachusetts Amherst
Abstract:
Interest rates in the U.S. and in other countries have experienced persistent and generalised declines since the 1980s. The main interpretations of this phenomenon ignore the role of monetary factors, such as financial and monetary policy. The essay proposes an alternative interpretation based on the choice of the Federal Reserve (FED) to conduct monetary policy by attributing high priority to financial stability. The interaction between changes in financial regulation, the transformation of "specialized" into "universal” banking, and the concern with financial instability have led the central bank to add to the role of "lender of last resort" that of "lender of first resort," which systematically provides liquidity at a low cost to financial firms. This new conduct of monetary policy has produced the downward trend in interest rates.
Topic:
Monetary Policy, Federal Reserve, Economy, and Interest Rates
Political Geography:
United States of America

10. How the Classical Gold Standard Can Inform Monetary Policy

Author:
James A. Dorn
Publication Date:
10-2020
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
atching the frenzy surrounding Judy Shelton’s confirmation hearing before the Senate Banking Committee on February 13, one is led to believe that the gold standard is a “nutty” idea, for which no serious economist or monetary policymaker could possibly have a kind word (see U.S. Senate 2020). This article critiques that wholesale refutation of the gold standard. In recent years (as well as in the past), both serious economists and reputable monetary policymakers have recognized the benefits of a gold standard in reducing regime uncertainty and promoting monetary and social order. Whatever one may think of President Trump’s recent Fed picks, the gold standard itself deserves more respect than it’s been getting.
Topic:
Monetary Policy, Federal Reserve, Finance, and Gold Standard
Political Geography:
Global Focus and United States of America