John Berry Defends the Honor of the Federal Reserve System: Monetary Policy at the Zero Lower Bound Blogging

Behind the paywall at http://SMRA.com, John Berry responds to Paul Krugman:

No Paul, Political Intimidation Is Not Shaping Fed Policy: Paul Krugman… and other [Left Opposition] Fed critics are going to be disappointed again tomorrow when the Federal Open Market Committee does not announce a big policy shift…. Krugman… complained that Chairman Ben S. Bernanke and his colleagues aren't doing more because they fear some sort of retaliation from conservative congressional critics.

Whatever the Fed is or is not doing, that's not the reason….

Krugman wrote:

more of the 'quantitative easing' that is now the main tool of Fed policy should be a no-brainer. So what's going on? I think that Fed officials, whether they admit it to themselves or not, are feeling intimidated-and that American workers are paying the price for their timidity.

Krugman leaps to that conclusion solely because he believes… fear of political retaliation must be the reason why [his preferred policies] haven't been adopted. Well… Bernanke's views… on the ability of a central bank to stimulate an economy when overnight interest rates have hit the zero bound have changed greatly… began to shift as early as 2002….

In the FOMC discussion… 2003… everyone agreed that setting ceilings on long-term rates simply would not work…. The idea of announcing a higher inflation target… disappeared well before the conservative political pressure materialized…. When Bernanke discussed the limits of the zero bound a dozen years ago, the issue was Japan where mild deflation was a constant reality….

Looking at this history and also remembering all of the extraordinary actions Bernanke and the Fed took during and after the financial crisis, many of which were wildly unpopular, the issue of the influence of political intimidation looms very small indeed.

In my view, there is an odd symmetry between the Federal Reserve of today and the Federal Reserve of the 1970s. The Federal Reserve of today does not take effective steps to reduce unemployment because it thinks any risk of sustained inflation above 2%/year is unacceptable. The Federal Reserve of the 1970s did not take effective steps to control inflation because it thought sustained unemployment above 7% was unacceptable. Since then, the Federal Reserve of the 1970s--Arthur Burns and G. William Miller--have been censured, condemned, scorned, and damned for their failure to understand the situation they were in and their proper objective function.