Must-read: David Glasner: “The Sky Is Not Falling… Yet”

Must-Read: If you think that there is one chance in ten that the sky is falling with respect to the development of deflationary expectations, then you conclude that Federal Reserve policy is not appropriate–that they ought to be straining nerves to make policy looser to diminish that chance.

If you also think that there is one chance in two that in two years an inflationary spiral will have clearly begun… then you also conclude that Federal Reserve policy is not appropriate–that they ought to be straining nerves to make policy looser to diminish the chance of deflation, for there is plenty of policy time and policy space, plenty of sea room, to curb aggregate demand in the future should it attempt to blow us out to sea.

But there is next to no sea room and next to no policy space to boost aggregate demand if needed, for we are on a lea shore right now.

I am kinda thinking these days that only yachtsmen and yachtswomen should be allowed to hold central-banking policy jobs…

David Glasner: The Sky Is Not Falling… Yet: “The 2008 crisis. was caused by an FOMC that was so focused on the threat of inflation…

…that they ignored ample and obvious signs of a rapidly deteriorating economy and falling inflation expectations, foolishly interpreting the plunge in TIPS spreads and the appreciation of the dollar relative to other currencies as an expression by the markets of confidence in Fed policy rather than as a cry for help. In 2008 the Fed at least had the excuse of rising energy prices and headline inflation….

This time, despite failing for over three years to meet its now official 2% inflation target, Dr. Yellen and her FOMC colleagues show no sign of thinking about anything other than when they can show their mettle as central bankers by raising interest rates again…. [But] Dr. Yellen’s problem is now to show that her top–indeed her only–priority is to ensure that the Fed’s 2% inflation target will be met, or, if need be, exceeded, in 2016 and that the growth in nominal income in 2016 will be at least as large as it was in 2015. Those are goals that are eminently achievable, and if the FOMC has any credibility left after its recent failures, providing such assurance will prevent another unnecessary and destructive financial crisis…

January 25, 2016

AUTHORS:

Brad DeLong
Connect with us!

Explore the Equitable Growth network of experts around the country and get answers to today's most pressing questions!

Get in Touch