Not to pick on economist Diana Furchtgott-Roth, but her MarketWatch column hits on a theme that I have seen a lot of — and expect to see a lot more of as the Janet Yellen nomination for Fed chair moves through the Senate confirmation process. DFR: “What will Janet Yellen, the nominated chairwoman of the Federal Reserve, do to fix the economy? Not much, it appears, if she is wedded to accommodative monetary policy and a continuation of Fed Chairman Ben Bernanke’s regime.”
1. Does DFR think the Fed is an obstacle to recovery? More likely, I think, that the Fed’s latest QE bond-buying has helped offset significant fiscal austerity. Economist Mike Darda:
The fact that austerity appears to have been self-defeating in the euro area while the most rapid fiscal consolidation since the Korean War demobilization in the U.S. has been met with steady growth is a critical testament to the fact that the Fed has been more adept at offsetting demand/velocity shocks than the ECB.
2. Straw man argument alert! I don’t think anyone at the Fed believes monetary policy can fix structural problems or increase the US economy’s growth potential. I know I sure don’t. That stuff needs to be fixed with pro-growth, pro-innovation “supply-side” remedies such as tax, regulatory, and education reform of the sort DFR and I probably mostly agree on. But the Fed can meet increase money demand and provide a stable macroenvironment. Economist David Beckworth:
The way QE is working is by addressing the ongoing, elevated demand for liquidity. The Fed is partially accommodating this demand which then leads to more spending. Evidence of this demand can be seen by the fact that about 85% of US marketable debt—the most liquid asset other than US dollars—is held by individuals, their financial intermediaries, and foreigners. In other words, about 85% of the largest run in public debt continues to be supported by entities other than the Fed. Now, interest rates on treasuries have gradually risen over the past year indicating some of the liquidity demand is easing (i.e. less demand for treasuries lowers their price and raises their yield), but there is still a long ways to go. Other evidence for this ongoing demand for liquidity is that households still hold a relatively large share of their assets in liquid form.