While warning the president elect to avoid bullying the Fed, Bloomberg mentions in passing that it has become obvious over the past decade that monetary policy is inevitably political.
The standard case for leaving central banks alone to conduct monetary policy rests on three points. First, a government that controls the central bank might be tempted to finance unaffordable budget deficits by printing money. (See Zimbabwe.) Second, to provide economic stability, a steady hand on the monetary controls is required, which demands some insulation from day-to-day politics. (Would anybody want to put Congress in charge of interest rates?) Third, monetary policy done right is a technical thing, like running a utility. It’s basically apolitical.
The first two reasons remain as persuasive as ever. The third, however, was always suspect — and never more than now. Monetary policy isn’t purely technical. It has real-world consequences. Changes in interest rates hurt some and help others. And central banks sometimes have to decide how quickly to curb inflation — with a short, sharp recession, say, or with gentler pressure applied for longer. Such decisions are hardly apolitical.
The point should be obvious to anyone who has been paying attention to the Fed policy for the last decade. Resorting to unconventional measures was necessary after the recent recession. The central banks were right to adopt these methods — governments failed to use fiscal policy effectively, leaving the Fed and its counterparts no choice.
Ok, and then so…?
The interesting thing about the passage above is that there is no evidence for the claim offered. Nor is the point even argued, in the passage cited above or later in the editorial. There is an assertion made along with the claim that the assertion is obvious. And then there are seemingly random words appearing.
Here is some evidence. The unemployment rate has spent almost an entire decade above conventional estimates of its natural rate and inflation has missed the Fed’s target by an average of about 50 bps to the downside over this same period. The Fed is now finally within hailing distance of achieving the dual mandate — one that was accepted without comment prior to the crisis. But it has taken them a decade to do this.
Demonstrably, with the advantage of hindsight, monetary policy has been too tight. Either that or easy and tight have no meaning. Monetary policy is what it does, not how it makes you personally feel. With the advantage of hindsight, the zero bound on nominal interest rates appears to have been binding. For many, this thought it just too exotic to contemplate.
I can see, then, why Bloomberg chose not to actually argue their point, which for some weird reason they take to be obvious. I don’t really know how journamalism works, never having ever been a journamalist. But I guess typically the editor himself doesn’t have an editor or fact checker?