Krugman Spells Out The Next Step In Latest Must-Read On The Fed

The latest Paul Krugman post regarding yesterday’s FOMC decision is definitely a must-read, whether you agree with him or not.

First he notes the absurdity of fixing the Fed balance sheet right where it is right now. As he puts it, what are the odds that the optimal size of the Fed balance sheet, given the state of the economy, just happens to be the exact level it’s currently at?

But beyond that critique of the decision, he speaks to something we were talking about yesterday, which is the new strategy by Krugman and his ilk to influence policy by applying direct pressure to the Fed itself.

He writes:

So why am I even slightly encouraged? Because the critics did, at least, succeed in moving the focal point. Not long ago gradual Fed tightening was the default strategy; but as I said, at this point the Fed realised that continuing on that path would have unleashed both a firestorm of criticism and a severe negative reaction in the markets.

What we need to do now is keep up the pressure, so that at the next FOMC meeting the members are once again confronted by the reality that not changing course would be seen as dereliction of duty. And so on, from meeting to meeting, until the Fed actually does what it should.

So this is the new game plan. Countless pundits will keep hammering the Fed, and Krugman will keep applying peer pressure to his fellow economists to loosen.

And we think they’ll be successful, because opening the door to more QE was the hardest part.

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