Federal Reserve Bank of Boston President Eric Rosengren said the central bank should pursue an “open-ended” quantitative easing program of “substantial magnitude” to boost growth and hiring amid a global slowdown.
The Fed should set its guidance based on the economic outcomes it seeks and focus on buying more mortgage-backed securities, Rosengren said today in a CNBC interview. Without new stimulus, the jobless rate would rise to 8.4 percent at the end of this year and economic growth wouldn’t exceed its 1.75 percent average in the first half of the year, he said.
“What I would argue for actually is to have it open-ended, that we focus on economic outcomes,” Rosengren said. “It would be setting a quantity that you’re going to continue to buy until you get the economic outcomes that you want.”
This actually sounds a lot like what NGDP targeting proponent Scott Sumner has suggested as one option for central bank:
Let’s summarize. QE is not at all radical. It’s been used already. Why not use it systematically for the communication device that even Bernanke admits the Fed has lost and wishes he still had? “Target the forecast” is no longer radical. The Fed’s been clearly moving in that direction, step by step. And Bernanke has repeatedly emphasized that the dual mandate is taken seriously, and that the needs of the unemployed require the Fed to occasionally miss on inflation for part of a business cycle. Put it all together as follows:
The New York Fed will be instructed to buy $30 billion a week in T-securities of various maturities, until the Fed’s forecasting department is able to forecast a path of unemployment and inflation over the next 5 years that minimizes the sum of the deviation of inflation from 2% and unemployment from its long run average (or estimated natural rate.) At that point it will stop. If forecasts of inflation and unemployment change in such a way as to under or overshoot the previous expectation, the New York Fed will either buy or sell T-securities, as appropriate.
AEI’s Stephen Oliner, formerly an economist at the Fed for some 25 years, also thinks the central bank can do more by altering its communications strategy regarding inflation:
… assume the jobless rate is 8 percent, well above the level believed to be consistent with full employment. Assume as well that inflation is running at 2½ percent — slightly above the Fed’s target — and that the FOMC projects it to remain there for the next few years. In this scenario, the dual mandate gives the Fed the latitude to ease policy to bring down the unemployment rate, the more serious of the two target misses. However, the Fed’s behavior in recent years suggests that it would be hesitant to act.
Now, introduce a revised policy statement that says the FOMC considers inflation between 1 and 3 percent to be an acceptable range around the target. Moreover, if inflation moves outside this range, the revised statement obligates the FOMC to explain how inflation will be brought back to target within a specific time frame, say one to two years. With this policy statement in place, the FOMC would be free to ease further, provided that it expects inflation to remain below 3 percent after the easing. If this forecast proves to be wrong and inflation rises above 3 percent, the Fed would be on the hook to guide it back to target. This is a win-win compared to the current situation: more aggressive action to combat high unemployment, combined with insurance against runaway inflation.
A strategy statement with more meat than the current one would enable the Fed to pursue its dual mandate in a more balanced way, while committing the Fed to keep inflation in check. Such a statement would advance the Fed’s goal of making monetary policy more transparent, more accountable, and more effective.
While many pundits say the Fed can’t do more right now, that simply isn’t true, as the above policy ideas show. And lower interest rates are not necessarily the sign that monetary policy is loose. It can mean just the opposite as Milton Friedman once said regarding Japan’s Lost Decade(s):
As far as Japan is concerned, the situation is very clear. And it’s a good example. I’m glad you brought it up, because it shows how unreliable interest rates can be as an indicator of appropriate monetary policy.
During the 1970s, you had the bubble period. Monetary growth was very high. There was a so-called speculative bubble in the stock market. In 1989, the Bank of Japan stepped on the brakes very hard and brought money supply down to negative rates for a while. The stock market broke. The economy went into a recession, and it’s been in a state of quasi recession ever since. Monetary growth has been too low. Now, the Bank of Japan’s argument is, “Oh well, we’ve got the interest rate down to zero; what more can we do?”
It’s very simple. They can buy long-term government securities, and they can keep buying them and providing high-powered money until the high powered money starts getting the economy in an expansion. What Japan needs is a more expansive domestic monetary policy.
The Japanese bank has supposedly had, until very recently, a zero interest rate policy. Yet that zero interest rate policy was evidence of an extremely tight monetary policy. Essentially, you had deflation. The real interest rate was positive; it was not negative. What you needed in Japan was more liquidity.