Building upon Christopher Hayes’ metaphor of central banking as farming, Neil Irwin shows that some of the issues in implementing unconventional monetary policy can be tricky since no one at the Fed has ever tried them before. Fed officials are reluctant to act because they are uncertain of the outcome. Here is Irwin:
If the nation were a farm, Hayes argued, the Fed would be the agency in charge of water and irrigation. Its job is to keep water (money) flowing enough to maximize crops (strong job creation), but not pump in so much water as to cause flooding (inflation). We’re currently in an extreme drought (a deep recession), but the Fed is refusing to pump in more water because it’s afraid that doing so will cause flooding down the road.
This drought is so bad that the Fed has already drained its main reservoir completely (cut the federal funds rate to zero). So if it’s going to take new efforts to water the fields, it has to find more water through some unconventional means, such as by airlifting water in by helicopter, or piping it in from a nearby lake. (These are the equivalents of quantitative easing, or buying Treasury bonds and other securities to increase the money supply and drive down long-term interest rates).
The problem is, while the Fed has lots of experience and knowledge about how the controls on its normal reservoir work, and how much to open the valves to get the right amount of water onto the fields, these other tools are untested. If they pipe water in, they’re not sure how much will get to the fields–it might be too little to do much good, and it might be so much as to cause flooding.
That is a good point, but it certainly did not stop farmer Bernanke and all his farm hands from flooding the financial fields with large scale “credit easing” in 2008-2009. I am sure there was plenty of uncertainty back then about conducting “credit easing”, but the sense of urgency overrode this concern. Likewise, if there were enough urgency today the Fed probably would not hesitate to do more unconventional monetary policy. The real question, then, is why the lack of urgency?
Hat tip: Ezra Klein
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