“There’s a sense out there that, quote, quantitative easing, or asset purchases, is something completely foreign, new; strange kind of thing, we have no idea what the hell is going to happen, and it’s an unanticipated and unpredictable policy. Quite the contrary: this is just monetary policy. Monetary policy involves the swapping of assets – essentially, the acquisition of Treasuries and swapping those for other kinds of assets. (It) will work, or not work, in much the same way that monetary policy – ordinary, more conventional, familiar monetary policy – will work. (There is) not as much discontinuity as people think.”14
Indeed, had the Fed not been pinned against the zero lower bound for the nominal Fed funds rate, and had been able to cut the that rate, rather than launch QE2, it would have been most rational to expect the same flight to risk assets, alongside a weaker dollar and firmer commodity prices that has unfolded, since Ben spoke at Jackson Hole.
This is how monetary policy ease is transmitted, be it conventional or unconventional. Indeed, as I argued in August,15 unconventional has now become conventional. Nattering nabobs of negativism should accept that. To be sure, current monetary ease is likely to be much less effective in bolstering aggregate demand growth than historically, given liquidity trap conditions. But the transmission mechanism is the same, including a lower level for the foreign exchange value of the dollar.
The Fed makes policy consistent with its legislative mandate handed down by the democratically-elected government of the United States. And that’s what the Fed is pursuing: mandate-consistent levels for inflation and the unemployment rate. This is as it should be.
The rest of the world should simply accept this outcome as reality, and adjust – or not adjust – their own domestically-oriented objectives and policies accordingly. Is there room for multi-lateral dialogue, perhaps even some degree of coordination, as various jurisdictions grapple with heterogeneous economic and financial exigencies? Absolutely. But that does not imply that the Fed should abdicate its responsibilities to pursue the mandate given to it by the American people. Pursuing that mandate is precisely what the Bernanke-led FOMC is doing.
Bravo, Ben: Illegitimi non carborundum.
Paul McCulley
Managing Director
November 9, 2010
mcculley@pimco.com
1 What If?, /Pages/July%202009%20Global%20Central%20Bank%20Focus%20McCulley.aspx
2 The General Theory, Chapter 12, page 158.
3 http://www.constitution.org/constit_.htm#con1.8.5
4 http://www.federalreserve.gov/aboutthefed/section2a.htm
5 http://www.federalreserve.gov/boarddocs/press/monetary/2003/20030506/default.htm
6 http://www.federalreserve.gov/boarddocs/press/monetary/2003/20030812/default.htm
7 http://www.federalreserve.gov/boarddocs/press/monetary/2004/20040630/default.htm
8 The Plankton Theory Meets Minsky, /Pages/GCBF-%20March%202007.aspx
9 Comments Before the Money Marketeers Club Minsky and Neutral: Forward and in Reverse,
/Pages/GCBF%20Dec%202007.aspx
10 Pyrrhic Victory, /Pages/FF%20September%202005.aspx
11 http://www.chicagofed.org/webpages/publications/speeches/2010/10_19_evanston_speech.cfm
12 http://www.federalreserve.gov/newsevents/speech/bernanke20100827a.htm
13 http://www.washingtonpost.com/wp-dyn/content/article/2010/11/03/AR2010110307372.html
14 Sewell Chan, "Bernake Attempts to Sooth Doubters," New York Times November 6, 2010,
http://www.nytimes.com/2010/11/07/business/economy/07fed.html?_r=1&ref=alan_greenspan
15 When Unconventional Becomes Conventional,
/Pages/WhenUnconventionalBecomesConventional.aspx
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