There are no signs in the pace of technological progress, in the level of investment, in the pace at which the American labor force educates itself, in measures of capacity utilization, in signs of upward wage pressure due to labor quality bottlenecks, or in surging commodity prices due to supply bottlenecks to suggest that the path of growth of U.S. sustainable potential GDP is materially lower today than was believed back in 2007.
Yet real GDP in the U.S. today is and remains at least 5.5% below the path that past history tells us is consistent with stable inflation, and thus with rough balance in the labor market.
It is true that fiscal policy is and has been sub-optimally tight due to Republican Congressional obstruction and the Obama administration's turn in January
2009 2010 to deficit reduction as job #1 with Obama's call that since "families across the country are tightening their belts… the federal government should do the same". It is true that financial policy with respect to housing has been highly suboptimal due to the Obama administration's commitment of the Japanese Mistake with its failure to replace Ed DeMaro as head of FHFA with someone who understood the situation--and this in spite of all Tim Geithner's reassurances in 2009 that he understood the lessons from the Japanese Mistake, and that the Obama administration would not repeat them.
Nevertheless, when fiscal policy and financial policy are suboptimal it is the responsibility of the Federal Reserve to take proper steps to offset them. Potential harms from accelerating the Federal Reserve's quantitative-easing asset-purchase policies do not appear major. The actual harm from the disaster of a depressed economy is immediate and dire.
Given the history of the past six years, right now I would expect the Federal Reserve Open Market Committee to have reached the conclusion that a CPE Deflator inflation target of 2%/year with no catchup after shortfalls is inconsistent with its accomplishing both parts of its dual mandate, and that it needs to shift to a 2%/year inflation target with level catchup, to nominal GDP targeting, or to a 3%/year or 4%/year inflation target in order to accomplish its congressional mandate.
Failing that, I would expect an FOMC to announce that the slow pace of real economic growth requires an acceleration of asset purchases, not a tapering.
Yet those two positions, which seem to me the reasonable, sound, sensible, technocratic positions, appear to have no votes on the FOMC.
Why not? What are they thinking?
James Politi in Washington and Vivianne Rodrigues:
Fed minutes show broad support for tapering this year: According to the minutes of its last rate-setting meeting released on Wednesday… the precise timing of a “tapering” of its $85bn-a-month bond buys was still hanging in the balance, the minutes indicated. Officials were united in support of slowing US central bank asset purchases later this year, but divided on the timing of their first move, according to minutes from the July 31 meeting…. According to the Fed minutes, “almost all participants” in the meeting were “broadly comfortable” with plans outlined by Ben Bernanke, Fed chairman, to scale back asset purchases this year, and wind them down entirely by the middle of next year. But they do not appear to have settled on whether the economy was strong enough to withstand a first tapering step at the next meeting on September 17-18….
The minutes said that “in general there was support for maintaining the current numerical thresholds in the forward guidance” – but they also noted that “several participants were willing to contemplate lowering the unemployment threshold if additional accommodation were to become necessary or if the committee wanted to adjust the mix of policy tools”. Others however worried that lowering the threshold for rate increases could undermine its effectiveness and credibility, since it may be viewed as a variable that could move in both directions.