Remember when people wondered when Ben Bernanke would raise rates? Yeah, that was as recently as a few months ago.
These days all anyone can ask is: when will he crank up the printing presses once again?
That’s the subject of Monday’s Paul Krugman op-ed titled The Feckless Fed, in which he slams Bernanke for not already doing more to fend of deflation. And he’s particularly dismayed, since Bernanke seemingly “got it” when he gave his famous 2002 speech on the dangers of deflation, and the Fed’s possible tools in fighting it.
So what does Krugman suggest Bernanke do?
But here we are, visibly sliding toward deflation — and the Fed is standing pat.
What should it be doing? Conventional monetary policy, in which the Fed drives down short-term interest rates by buying short-term U.S. government debt, has reached its limit: those short-term rates are already near zero, and can’t go significantly lower. (Investors won’t buy bonds that yield negative interest, since they can always hoard cash instead.) But the message of Mr. Bernanke’s 2002 speech was that there are other things the Fed can do. It can buy longer-term government debt. It can buy private-sector debt. It can try to move expectations by announcing that it will keep short-term rates low for a long time. It can raise its long-run inflation target, to help convince the private sector that borrowing is a good idea and hoarding cash a mistake.
Nobody knows how well any one of these actions would work. The point, however, is that there are things the Fed could and should be doing, but isn’t. Why not?
With the money supply falling, and the economy seemingly sputtering, the calls for Bernanke to do something will only grow louder. As for a Fed rate hike… maybe 2012?
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