Tim Duy Article on Fed Policy Action

[MichaelB]

Here is a well-written piece (despite the headline) by Tim Duy on the Fed where he contrasts the two primary views within the FOMC on the need for Fed policy action.

Stanley Fischer and Lael Brainard Are Battling for Yellen’s Soul - Bloomberg Business

 

[Gone4Good]

I don't quite understand why the asymmetry of risks facing the Fed under the current economic environment doesn't carry more weight in the discussion.

Whatever the Fed does they risk making a mistake. If they tighten policy too late, they risk higher inflation. If they tighten too quickly they risk pushing the economy into deflation.

Considering that the Fed absolutely knows how to fight inflation but has no proven technique for fixing deflation it seems as if the clear policy bias should be toward risking the problem you know how to solve.

And yet the Fed seems to fear an inflation rate that overshoots their target far more than they fear one that undershoots, even though undershooting is far more problematic.

 

[LARS]

I suspect behind closed doors, as recently vocalized by Former Dallas Fed governor ( http://globaleconomicanalysis.blogspot.com/2016/01/former-dallas-fed-governor-richard.html), there is a large contingent that recognizes the efficacy of ZIRP/NIRP has not been particularly successful especially in light of side effects, which have created a massive (understatement) debt problem, the unwinding of which will be extremely difficult. More ZIRP/NIRP compounds that problem as witnessed by Japan. Moreover, the experience of Japan, with a twenty year head start on the US, which while not a perfect analogy for the US, highlights the real dangers of the continued policy approach of more of the same.


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[samclem]

I'm very happy to let Europe lead the way into NIRP, we can see what it does for/to them. And the idea that we should prefer inflation to deflation because we know how to fix the former loses some strength if we have to go into uncharted waters and use tools with unknown secondary effects (NIRP) in order to achieve that.