Morning Must-Read: Ryan Avent on Monetary Policy

Ryan Avent: Monetary policy: No cushion needed, apparently: “THE Federal Reserve basically never sees a recession coming (at least when it isn’t busily creating one to whip inflation)….

San Francisco Fed president John Williams spoke as if America’s most recent macroeconomic convulsion took place in the 1970s: ‘In his own economic forecast, Mr Williams said, the Fed will raise interest rates in the middle of next year with the unemployment rate at about 6 per cent, inflation at 1.5 per cent and “everything moving in the right direction”.“At that point if we don’t start to adjust monetary policy there’d be a risk of overshooting,” he said. “You don’t wait until you’re at full employment before you start to raise interest rates from zero.”’ That reads to me like the words of a man who has learned nothing at all from the experience of the past few years. That’s probably a little unkind; what is said in public never corresponds exactly to what is said in discussions with the rest of the FOMC or in private. But I find this very troubling…. Monetary policy appears to have consistently underreacted to weak demand—delivering too little stimulus with too long a lag. That underreaction is down partly to a lack of familiarity with ‘unconventional’ policy tools, and partly to FOMC members’ concerns that unconventional tools involve risks that normal interest rate policy does not. I don’t know exactly how much the zero lower bound has cost the American economy over the past half decade, but the bill probably runs to several trillion dollars. So you’re on the FOMC. You have plenty of recent, bitter experience with this important assymetry…. How do your views evolve? Not at all, it would seem, if you are Mr Williams, who appears to be suggesting that any risk of overshooting is intolerable. Better to put the current recovery at risk and court future disaster than treat the inflation target symetrically.