Despite the current U.S. economic rebound and some signs of U.S. job creation, Goldman’s Jan Hatzius thinks the U.S. should continue to maintain an extremely easy monetary policy.
Goldman’s Jan Hatzius:
Despite the better recent growth data, the cyclical case for easy monetary and fiscal policy remains very strong. It’s true that the overall macroeconomic policy stance—including the level of the real funds rate, the Fed’s impact on mortgage spreads via its expanded balance sheet, and the cyclically adjusted federal budget balance—is unusually accommodative at present. However, as shown in Exhibit 1, it is not quite as easy as one would expect based on the historical relationship between the policy stance on the one hand and the Fed’s expectations for inflation and unemployment on the other hand. Indeed, under the Fed’s expectations, a tighter aggregate policy stance will not be warranted until sometime in 2011, and under our own forecasts, it will take even longer.
The U.S. should roll back easy fiscal policy (ie. the huge budget deficit) before rolling back monetary policy.
Our analysis suggests that fiscal policy should start to “exit” from its current easy stance well before monetary policy, for two reasons. First, the link between an easy fiscal policy now—i.e., a large deficit—and a high debt stock in the future is virtually automatic. In contrast, the link between an easy monetary policy now and a financial asset bubble in the future is much less tight, though low interest rates and large Fed asset purchases do raise the odds of excessive housing and equity valuations.
Our conclusion: very large benefits from continued easy monetary policy and—at least for now—small costs in terms of the risk of renewed asset bubbles strongly support our forecast that the federal funds rate will stay at its current near-zero level for much longer than generally expected. However, the case for fiscal policy is less clear-cut. While the benefits of continued accommodation are large, the costs look increasingly sizable as well. Hence, the fiscal “exit” should come well before the monetary one.
That’s why Goldman is forecasting that the federal reserve won’t hike interest rates any time soon. They believe it’s in the best interest of the recovery. Let’s first see the budget deficit fall.
(Via Goldman,The Sequencing of the Exit: Fiscal Should Come First, Jan Hatzius, 23 April 2010)
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