Can We Get Some More Certainty, Please?

This NY Time article highlights one of the key problems with the way the Fed currently functions (my bold below):

Everyone on Wall Street is waiting on the Fed. Whatever the outcome of Tuesday’s midterm elections, the Federal Reserve is widely expected to take new steps this week to spur the nation’s snail-paced recovery.. The question is how aggressively the Fed will act… Analysts expect the central bank to buy securities on the open market in an effort to the unlock the flow of credit to the economy. Estimates of the size of the program range from $500 billion to $2 trillion…

But while investors have been staking out their positions for weeks the announcement — and the potential ramifications — remain fraught with uncertainty. Given that the Fed’s news is expected to land as Wall Street is digesting Tuesday’s election results, analysts are bracing for a volatile day, particularly if the Fed underwhelms investors.

This shouldn’t be. A modern central bank should have an explicit nominal target to help create certainty. Yet, here we are in the 21st century guessing what the most influential central bank in the world plans to do at its next meeting. In fact, we have been guessing all year as we watched in bewilderment as inflation expectations dropped from January through September. “Why wasn’t the Fed responding?”, we wondered. Then, suddenly, we learn in late September the Fed had had enough. Inflation would not be allowed to fall any further and this would happen with a second round of quantitative easing. Inflation expectations responded accordingly by jumping back up. I am glad for the change of heart, but enough of this monetary policy roller coaster ride! And this is not just any monetary policy roller coaster ride, but a Space Mountain monetary policy roller coaster ride where you can’t see what is coming next. There are many issues with a gold standard, but at least one knew what to expect going forward. If we are going to make our fiat monetary system work we need to have the same forward-looking certainty. These past few years such certainty has been missing. It is not hard to imagine how much better our economy would have been had the Fed adopted an explicit nominal target a few years back. It is well past time for the Fed to move beyond its wishy-washy, guess-if-you-can policy goals and commit to an explicit nominal target.

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About David Beckworth 240 Articles

Affiliation: Texas State University

David Beckworth is an assistant professor of economics at Texas State University in San Marcos, Texas.

Visit: Macro and Other Market Musings

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