Steven Horwitz
The LSE has a new blog on American politics and policy and they kindly asked me to be one of the first set of contributors. I shared a few thoughts on recent US monetary policy, many of which I've discussed before in various places, including my recent Mercatus paper.
So while wrapping up QE is a necessary start to avoiding the problem of inflation, figuring out how to reduce the Fed’s balance sheet, which has more than tripled since 2008, is the bigger challenge.
In addition, more attention will have to be paid to the real economy and the various factors that are creating the uncertainty that is making banks hesitant to lend and firms unwilling to borrow and invest.Publish
More at the LSE site.
On "the big challenge upon ending QE will be the problem noted above: how to avoid inflation as the economy restarts"
Doesn't the fed have enough tools in its armory to prevent inflation ? For example use OMO to sell back some of the assets its has purchased, or just increase IOR ? In any case ,as MMTers are fond of pointing out ,under interest-rate targeting the amount of reserves in the system are never a constraint on lending - if reserves didn't exists when banks spot lending opportunities the fed will create them - so the huge pool of reserves may be something of a red herring as far as inflation fears go.
On "Wrapping up quantitative easing in 2014 is long overdue": At a time when weak expectations about future aggregate demand are probably one of biggest drags on the economy won't ending QE (even given its limited effectiveness) further weaken those expectations and slow down growth ? Until those expectations have improved should the fed rather be looking to expand such programs (as well as looking at more "route one" approaches such as "helicopter drop" type policies ?
Posted by: Rob Rawlings | September 03, 2013 at 01:57 PM