We’ve chatted with a few folk past days from Fed districts here and there, to get some idea of staff reaction to Bernanke’s recent Congressional testimony. There is nothing official about our survey, nothing statistically significant; just a few friends with nothing better to do at lunch time.
First, no one thinks that another “twist” would make any difference. The interest rate level at the long end is not the problem. All twist represents is a change in the makeup of the Fed’s portfolio; this is the same as doing nothing they say.
However, most of the folk we spoke to do not think the Fed is impotent. One reminded us of Friedman’s 2000 comments re Japan: “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.”
And it is true; the Fed can buy anything it wants to, including a herd of cows in Montana. So outright purchases of all maturities remain an option – continue to expand “high powered money”, that is - currency and bank reserves, until she fires up. Still, a hawk or two may stand in the way, for now.
Next, most have conceded that the Bernanke Fed has resorted to cheer leading and will continue to do so. Fine.
Finally, most are exasperated with the “mental midgets” in Washington; referring here to those who stand in the way of a rule-based fiscal agenda vs the flagrant, shotgun approach of an interventionist administration; referring in this case to the left. This is the only place that staffers fault Bernanke’s testimony – “the case is obvious.” Why was he circuitous in his testimony? Why not more direct? “This is not a secret,” one source noted.
Who knows? He does the best he can, trusting in his instinct. We have to do the best we can, trusting in our instinct to translate Fed policy to the bottom line.
Robert Craven
First, no one thinks that another “twist” would make any difference. The interest rate level at the long end is not the problem. All twist represents is a change in the makeup of the Fed’s portfolio; this is the same as doing nothing they say.
However, most of the folk we spoke to do not think the Fed is impotent. One reminded us of Friedman’s 2000 comments re Japan: “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.”
And it is true; the Fed can buy anything it wants to, including a herd of cows in Montana. So outright purchases of all maturities remain an option – continue to expand “high powered money”, that is - currency and bank reserves, until she fires up. Still, a hawk or two may stand in the way, for now.
Next, most have conceded that the Bernanke Fed has resorted to cheer leading and will continue to do so. Fine.
Finally, most are exasperated with the “mental midgets” in Washington; referring here to those who stand in the way of a rule-based fiscal agenda vs the flagrant, shotgun approach of an interventionist administration; referring in this case to the left. This is the only place that staffers fault Bernanke’s testimony – “the case is obvious.” Why was he circuitous in his testimony? Why not more direct? “This is not a secret,” one source noted.
Who knows? He does the best he can, trusting in his instinct. We have to do the best we can, trusting in our instinct to translate Fed policy to the bottom line.
Robert Craven
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