Last week, the Washington Post published an article reporting that the Fed is weighing “new steps to bolster growth” in the face of the sluggish economic recovery, but Lacker and Duke seem to think otherwise. (It should be noted that Lacker doesn’t have a vote on the Fed’s Federal Open Market Committee this year, due to the voting positions rotating.)
Yesterday, I wondered whether President Obama’s three nominees for the Fed Board, who are scheduled to come before the Senate Banking Committee on Thursday, can push the central bank into taking more action to boost employment, considering that maximizing employment is one half of its mandate. But there are already members of the FOMC who aren’t quite so willing to rule out additional steps. In an interview with the Wall Street Journal, Boston Fed President Eric Rosengren said that if Congress doesn’t step up to do more about the unemployment rate, it will be up to the Fed to fill the void:
If it looks like we’re not going to meet either element of our objective in a two- to three-ear horizon, we need to start thinking about what else we could do or what else the fiscal authorities could do. But in the absence of fiscal action we’d have to think about what more we could do … if the economy gets weaker and the inflation rate gets lower, we should be thinking about alternative policies.
“I’m not expecting to see that much progress on the unemployment rate over the course of the second half of this year,” Rosengren said. “Ideally we’d be seeing growth north of 4% in order to be really pushing the unemployment rate down from its very elevated levels and we’re not seeing growth at nearly 4% at least for the second half this year. Unfortunately, it looks like it will be a good bit slower than that.”
Yesterday, Paul Krugman laid out what additional Fed steps to boost employment in the face of anemic growth might look like:
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.
Deficit hysteria has gripped Capitol Hill, making it all but impossible to move the most common sense stimulus measures, like extending unemployment benefits. So Rosengren’s scenario under which more Fed action is called for is likely to become reality.