Here’s the Financial Times:
The Fed also has acknowledged it lacks the tools to solve all the problems in the economy, since it can only lend money, but not spend it to help businesses or households. And the Fed is acutely aware that its policies have done plenty to save financial markets from distress, but cannot deliver benefits as easily to low-income families and the unemployed.
That’s entirely false. The Fed doesn’t just lend money; it can and does create money and also spend the new money on assets in order to boost NGDP and help businesses and households. This policy delivers benefits to unemployed workers by reducing the unemployment rate.
The Fed is worried that the lack of a fiscal agreement will threaten the recovery and make its job harder. The US central bank does not want to be left alone in propping up the recovery.
Why?
This is good:
Some economists have suggested the Fed might tweak that to include a reference to an average 2 per cent inflation objective “over time” — reflecting its new policy framework.
Investors arguing for the new guidance to be rolled out this week say the Fed risks a loss of credibility if it does not act quickly to reinforce its monetary shift.
Today’s Fed meeting will be much more important than the typical meeting. We will get some indication as to whether the Fed plans to obey the law—fulfill its mandate from Congress—or go sit in the corner and mope about the fact that fiscal policy is not all that it would prefer.
Bonus question: When the government lends money is that policy expansionary? When the government borrows money is that policy expansionary? Does the FT believe that the answer to both questions is yes?
READER COMMENTS
Rajat
Sep 17 2020 at 8:56pm
Ha ha, the Reserve Bank of Australia recently changed its inflation target from 2-3% over the cycle to 2-3% ‘over time’ (https://www.rba.gov.au/inflation/inflation-target.html), and is currently forecasting inflation of 1-1.5% for the next couple of years (https://www.rba.gov.au/media-releases/2020/mr-20-20.html) after undershooting the lower bound of 2% since 2014 (https://www.rba.gov.au/speeches/2018/sp-dg-2018-04-12.html).
Thomas Hutcheson
Sep 18 2020 at 1:27pm
But ultimately the power of the Fed to affect nominal income is to induce someone to decide to purchase something, consumers to consume, investors to invest, why not government to govern? If ex hypothesi, one kind of potential spender — government, say — does not respond to incentives, the Fed will have to “do more” to get others to take up the slack so that it can achieve its stable prices-full employment mandates.
Michael Pettengill
Sep 20 2020 at 1:21pm
The central bank of Venezuela has created lots of money. That means the Venezuelan economy is Great!?
Money does not creat jobs, nor create business revenues, only employers paying workers and customers buying from businesses, and when money is worthless, payments will be in eggs, petrol, etc, as is the case in Venezuela.
Mike Sproul
Sep 20 2020 at 1:31pm
I create money all the time. I’ll get an oil change from my mechanic and pay him with my $50 IOU. He then pays the IOU to his worker as wages. The worker pays it to the grocer, who pays it to his produce supplier. The supplier rents a house from me, so I eventually get my IOU back as rent.
Bonus question: Can you think of any important difference between me and the fed?
Warren Platts
Sep 20 2020 at 2:11pm
OK, what if the Fed created the money, and then loaned it to the feds, who then cuts a check to every taxpayer in the amount of $1200, no strings attached. The next day, the Fed writes the loan off, leaving the feds off the hook.
That way the Fed does what it does best–making loans; and the feds do what they do best–handing out freebies.
(Of course a large fraction of this loan would wind up stimulating foreign producers of exports, but with the dollar devaluing, I guess it could be worse.)
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