A Monetary Policy 101 Lesson For the Can Kicks Back
There is no good place to start with this new blog post from The Can Kicks Back's Jenna Behrendt. Almost every sentence declares itself with a bold ignorance of how monetary policy and the Federal Reserve work. But to begin, let’s start with the first paragraph:
"The chairman and his allies have been pushing forward the economic stimulus plan, but until Wednesday, it was unknown that some disgruntled officers opposed this course of action. Half of the Reserve’s members want to end the campaign by the end of this year. The package was originally approved in 2009, costs a total of $787 billion, and was designed to save between 900,000 and 2.3 million jobs.”
The first, and most glaring error here is the fact that the author confuses the America Recovery and Reinvestment Act of 2009 (the $787 billion stimulus plan) with the Fed’s Large-Scale Asset Purchases, or QE. One is fiscal policy, the other is monetary policy. To some people, it is just a difference of one word. But in practice, The Can Kicks Back confusing the two shows that political campaigns focusing on the federal debt do not get how exactly the government and the Federal Reserve fit in to the U.S. economy. Fiscal policy is set by Congress, and monetary policy is set by the Fed. The $787 billion stimulus? Nothing at all to do with Ben Bernanke.
Second, using buzz words like “allies” and “disgruntled officers” tries to politicize monetary policy, when in fact monetary policy, by its congressional mandate, is set independently of political input from the president and Congress. Implying that factions are forming within the FOMC is silly. Half of the participants may want to scale back QE by December of this year (of course, this decision depends whether the economy improves), but 11 of the 12 voting members felt that it is not worth ending QE now. That seems like a pretty straightforward, and not politically divisive, debate based on timing. Furthermore, this information was not “unknown” until Wednesday, as the author suggests. The Federal Reserve releases the minutes of each FOMC meeting, detailing how each member feels about current policy.
Third, the author then drops this gem on the reader: “Currently, the Fed is partaking in a program of buying mortgage-backed securities and Treasury securities, to help ease financial conditions…The main goal is to keep short-term interest rates close to zero until the unemployment rate falls below 6.5 percent.”
QE does not raise or lower short-term rates, at least not directly. The Fed directly raises and lowers the short-term rate by raising and lowering the fed funds rate (currently at 0-0.25%). The main goal of QE, or buying up Treasury bonds and mortgage-backed securities, is to lower long-term rates. Lowering long-term rates is important because corporate debt and mortgage rates are tied to long-term rates, and affect investment decisions, hiring trends, and consumer spending. The only way QE affects short-term rates is through the expectations channel — or in other words, because the Fed is buying assets to lower long-term yields, people should not expect the Fed to raise short-term rates anytime soon. If anything, signaling an exit from QE is currently a headache for the Fed because markets, just like the author, cannot seem to understand that QE is not the same as the fed funds rate.
The author concludes her piece with a complaint that the Federal Reserve has not indicated a clear path to end this program…except that is exactly what Ben Bernanke did at his June 19 press conference. So why does The Can Kicks Back favor ending QE now, versus in December? Inflation is below the 2% target and is expected to remain there until 2015, and unemployment is above the 6.5% threshold, and expected to remain there until 2015. Given that Congress seemingly does not have any motivation to produce a short-term stimulus to produce jobs, or address long-term fiscal sustainability, the Federal Reserve most definitely should continue with monetary easing to help the economy get better (If anyone suggests that inflation and/or financial stability are greater risks to the economy that the long-term unemployed, please see here).
The Can Kicks Back engages Congress with the millennial generation on long-term fiscal sustainability. The campaign should devote more of its energy to getting our elected officials to do something productive on fiscal policy (really, I’ll take anything at this point: infrastructure, tax reform, whatever), instead of weighing in on the Federal Reserve. Displaying such ignorance as to how monetary policy works discredits their more important goal of improving the outlook for millennials.