Photo: Wikimedia Commons
Republican Senator Bob Corker is emerging as something of a leader among Republicans in the Senate on monetary policy issues. He’s advocated eliminating the Fed’s dual mandate, so that the central bank’s job would solely be price stability, not full employment.In the days leading up to this weekend’s Jackson Hole Bernanke speech, Corker has just released an op-ed in the FT blasting the Fed chair with the title Bernanke Should Show Some Humility.
In it, Corker gets three big concepts about monetary policy totally wrong.
And though it might seem pointless to take time out of our day to criticise the views of a politician, the myths he purveys are so common that doing so is a good exercise for everyone interested in the subject.
The first bad point is this one:
…we are faced with a troubling dynamic where bad economic news is good for stocks because it means more cheap money is on the way and good economic news is bad for stocks because it means less money will be printed.
You hear this a lot but it’s bunk.
Over the past few years, the market has consistently gone up during periods of good data and gone down during periods of bad data.
The easiest way to show this is simply to compare the S&P 500 with initial jobless claims. Both improve and weaken together.
The next chart shows the S&P vs. the Citigroup Economic Surprise Index, a measure designed to show whether the economic data is regularly surprising to the downside or the upside.
As you can see, the S&P generally has been rising during periods of relative upside surprises, and declines during downside surprises.
Photo: Eric Platt/Business Insider, Data: Bloomberg
So Corker is wrong about what drives the market. It’s the economy not the Fed.
The second big howler is this line:
It undermines the free market system, allows Congress to use the central bank as a scapegoat while avoiding tough policy decisions, and creates Fed addicts in our financial markets.
You hear this a lot: That the Fed’s “money printing” allows Congress to spend like drunken sailors without consequences, because the Fed is holding down rates.
This is hogwash. During periods of quantitative easing, interest rates have actually risen. And the Fed doesn’t look at the national debt or interest payments when making policy. It looks at unemployment and inflation, and there’s no evidence that Congressional debt dynamics have ever been an issue. So the idea that the Fed has made it easier for Congress to avoid hard decisions is without basis.
If you’re unconvinced, here’s a great chart from Doug Short that shows during QE1 and QE2 (the first shaded periods), rates on the 10-year actually jumped.
Photo: Doug Short
The third error is where he blasts the Fed for hurting savers, which is probably the most common myth of them all.
In the meantime, though, we should set the following test for the next nominee to be the Fed chairman: do you see limits to monetary policy and will you stop punishing savers?
What punishes savers is not the Fed, but a combination of falling growth and falling inflation, and a world where everyone wants to save. Think about it, when times are bad, everyone is eager to save, and so naturally institutions that take these deposits have no incentive to pay anyone any return for their cash. The bad economy is what punishes savers. Stoking growth (which is what the Fed has tried to do using unconventional measures) should hopefully provide better returns to all kinds of investors, from stock holders to plain vanilla savers.
Corker is provably wrong on what drives the stock market, how the Fed interacts with Congress, and the Fed’s impact on savers.
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