What is the Fed Thinking?
By Arnold Kling
Basically, all of them support having the Fed try to undertake expansionary monetary policy, although Krugman thinks it might not work. As you know, I believe in monetarism even less than Krugman, but I still would make a Pascal’s Wager case for trying a monetary expansion, my skepticism notwithstanding.
Here are two cynical explanations for the Fed’s actions.
1. The Fed does not think that we are in a recession. The banks are still standing, aren’t they? I know that when I was at the Fed in the 1980’s there would have been folks, particularly at the New York Fed, who really were in this mindset. But I doubt that it represents the dominant view today.
2. If the Fed were to make a dramatic change, it would have to explain what it is doing. This is always a problem for the Fed, where part of the mystique comes from its vague communication about policy. Even worse, it probably would have to be specific about the target that it is aiming for, such as future nominal GDP (Scott Sumner’s favorite) or inflation (DeLong’s choice). Any time you announce a target ahead of time, you do two things:
a) you reduce the significance of the open market committee. With the target in place, policy is set. What the Fed does in the money market to try to hit the target becomes an operational/technical question, not a policy question. So a lot of people lose the prestige that they enjoy when policy is subject to frequent reviews and can be changed ad hoc.
b) you run the risk of missing the target (what if that nutcase Kling turns out to be correct about monetary impotence?), and that would damage the Fed’s prestige, perhaps irreparably.
So, from a status-preservation point of view, I can understand why the Fed would not do what seems to make the most economic sense from a textbook macro perspective.