Sorry for all the first person. This is a confession.
I mentioned in my rules for blogging post that I want to leave some room for learning. With that in mind, here is something I learned.
I used to be very irritated during the early recovery period when the hair shirts would claim that the Fed just wanted to keep interest rates low and went around inventing reasons for doing so.
That seemed to me to intentionally miss the point, and to be a case of just wanting to have interest rates higher, maybe so as not to ruin a perfectly good and fully deserved depression.
The reason the Fed was keeping interest rates low was because economic conditions justified that. The conclusion followed the reasoning.
But now I realize – or at least suspect – that my take was wrong. And it actually follows from a bunch of points I had made myself, but had just not put together properly. It is not quite that the Fed was keeping rates low just for the sake of doing so. But they were acting in an ad hoc way (thank god) and were dreaming up justifications for their policy that made it seem more systematic than it was.
This is not criticism of them. This is criticism of me, for not pulling it all together. Consider the nonsense that came out as official communication from the Fed between 2008 and 2016:
- We are being guided by a policy rule or the logic of a policy rule.
- We just discovered that the neutral interest rate has fallen.
- QE works by removing default-free rates duration from private markets.
- The flow of QE does not matter. It is the stock. So we will end with a taper.*
- Thankfully we get to taper before those super-dangerous unintended consequences show.
- We have to taper because QE has worked.
- Falling inflation breakevens are mostly just the risk premium.
- There will be growth in the spring, next one, invariably.
- We might raise interest rate to fight a bubble, were one ever to arise. Probably not, but maybe, if we ever saw one.
- We might also try h money in a pinch, but only if really needed. It is part of our vast unused toolkit, and like QE is a fearsome weapon.
- We have a long-run inflation objective? Ok, even I admit to being dumb enough still to accept them on their word here. It’s complicated.
I complained pretty much in real time about every item on this list. And yet I still got irritated by people looking at the Fed and saying, you know I don’t think the Fed is actually concluding from such reasoning.
As for the ad hoc approach, that itself never bothered me. It is better to take er as she comes than to pretend disastrously that you got er all figured out. But I held to a rather unfair standard others who were similarly observing that Fed communication was so full of it.
* Asterisk indicates top prize for utter brazenness and extremely prescient reliance on the complete gullibility of professional Fed watchers, academics and other Fed hangers on.