Fiscal policy should be used to address economic gaps, not distortion through monetary policy. Of course, very hard to achieve alignment and consensus in the US political system.
Despite the inflation, it's pretty clear the recovery after 2008 could have been much more rapid with greater fiscal injections.
The Fed should be an algorithm IMO. Way too politically influenced.
In a lot of ways, the feds hands are tied by the political dysfunction in our political branches. They’re just putzing along, trying to plug the holes in a leaky ship.
It's not so much that the Fed’s “hands are tied” preventing them from monetary policy they should, as a central bank, take. Rather, Congress just isn't taking fiscal policy actions that they, as the government outside of the central bank, should take, and (in some cases, especially on the Right) blaming the Fed for for their own nonfeasance.
I mean the Fed didn't even flinch at all in 2021 as all asset valuations reached bubble territory. Real estate appreciated faster than anytime in history. This becomes a real liability down the line if normalization of policy is ever needed. Bubbles can be disastrous to the economy longer term.
They removed the moral hazard of risk taking for the past decade or so.
The policy response to 2008 has shown that next to nothing is going to happen on the fiscal side (though this did change in response to COVID, hopefully this is a positive sign), so the fed has been backed into a corner without a whole lot of room to run.
When a major swing happens, if they do nothing, then it’s “the fed let a recession happen!!!”
Instead they addressed the acute crisis, and continued the same policy for 2 years with no change.
What they should have done was 6 months or so after peak covid panic, start to normalize interest rates and QE. They also didn't consider at all the velocity of the economy and just looked at point in time employment numbers to drive their policy thinking.
It was clear the job market was already overheated at 5% unemployment, for example, due to the historical number of job openings and increasing pace of those job openings, plus record high quits rate. Plus retail sales/inflation.
“Markets” you are discussing aren't part of the Fed dual (actually, triple) mandate, and are of only intermediate, instrumental relevance.
> Fiscal policy should be used to address economic gaps,
Yeah, but Congress has been basically asleep at the switch on fiscal policy for a long time, and to the effect their failures effect the things that are part of the Fed mandate, it is legally the Fed’s job to act via monetary policy, whether or not fiscal rather than monetary policy is the better choice.
If they didn't care about markets, they would have ended QE abruptly, and started raising rates months ago. They only avoided doing this to prevent a market selloff. Every rational thinking person thinks it's absurd for them to be buying MBS when housing is appreciating at record levels amid an inflationary environment.
They spend a lot of time talking about market expectations, market levels in their notes.
They also have a price stability mandate that they've ignored for over a year.
I didn't say that, though.
I contextualized the role of those prices as intermediate and instrumental rather than ultimate goals (and, as such, they are targeted for what, in consideration of other circumstances, they appear to indicate about the things that are mandate goals.)
So if your supposition is correct, they should engineer a decline in the market and real estate to achieve their price stability mandate.
Yet everything they do is dragging their feet to support asset prices. So I agree with your assessment in theory, but don't see them living or acting by that logic.
They could have ended QE overnight in January, for example. Why not?
They continue to pursue low volatility when the times of today warrant higher volatility and less risk taking/speculation.
Probably because no one has confidence enough in any model of the effects of such a large change to base policy on it short of a much more glaring problem than any the Fed is actually facing. The combination of unwinding QE over the period between the last meeting and mid-March and the predicted 25-50 basis point rate hike in mid-March is actually the Fed pumping the brakes on the economy really hard.
The obvious reason they didn't do it is because they knew markets would decline 5-10% on the surprise. Which would actually aid them by curbing risk taking/speculation, raising the cost of borrowing.
I do think Powell is motivated by his reappointment, so that's also playing into his inaction. It's just backfired at this point.
We are clearly entering a wage price spiral. Wages rose an annualized 9% last month. To suggest even a 50 bp hike would put us anywhere close to aggressive tightening is just not true. The traditional thinking is that interest rates must exceed rate of inflation to be in a tightening policy regime.
The Fed pushed job market past the natural rate of unemployment, and now the only way out is a hiking induced recession.
Yet instead of trying to cut off this possibility early, they'll slowly plod along until it's inevitable. There was probably a chance to short circuit the spiral a few months ago.
I suspect Jerome Powell will be looked back on as a disaster. That Biden renominated him out of deference to the political norms that were broken to get him in place is a massive black mark on his record.
We’ve had over a decade of cheap money creating asset price inflation and exacerbating inequality, not to mention the total collapse of the home building for several years and the exodus of qualified talent from that period drained much needed supply from the market.
All of this happening while the largest generation since the baby boom entered prime home buying age.
This has been a 15 year trend. It didn’t start yesterday and it won’t end for a long time.