I am on record as an overall admirer of The Ben Benank’s work as Fed Chair. I believe that the Fed acted decisively at the height of the crisis and that QE, if nothing else, did stave off deflation.
But my oh my oh my, the Fed has really made a bollux out of forward guidance. This however, I do not blame on Bernanke. I feel like it was pushed on him by outside economists and other FOMC members (Evans and Yellen, you know I’m talking about you!). I just can’t believe Ben would think such cheap talk would seriously move the economy.
First they went with calendar based guidance. You know, the Fed promising to keep interest rates low until the rivers run dry. But the economy did not really respond. So the Fed, under intense pressure to “do more”, switched to outcome based guidance. You know, the Fed promising to keep interest rates low until unemployment fell below 6.5%.
Well, we now sit on the cusp of a 6.5% unemployment rate, but we’ve gotten there largely for the wrong reason, namely a persistent decline in labor force participation. Employment has still not hit pre-crisis levels and nobody is very happy with the state of the economy, least of all Evans and Yellen of the 6.5% pronouncement.
Now they have a big problem, which is rationalizing not raising rates when the 6.5% threshold is crossed. We are getting mired, Bill Clinton-like, in a maze of Talmudic interpretations of what words mean and what can be weaseled on without losing the Fed’s vaunted credibility.
I guess someone should have read Williamson on incomplete contracts? Or any right wing public choice nut on unintended consequences of government policies?
Maybe some folks on the FOMC should stop worrying about how to rehabilitate forward guidance and start thinking more humbly about what monetary policy can actually do.