The minutes of the June Federal Reserve Open Market Committee meeting are now out and the results are totally baffling. The FOMC decided that conditions were worse than they’d previously projected they would be, and revised downward their forward-looking forecasts for growth, inflation, and employment but decided that the appropriate response is . . . nothing.
Ezra Klein surveys some of the thinking behind this inaction but I think he underplays how crazy this is. The Fed does these projections because the projections are relevant to policy. When the projections change, policy is supposed to change. Otherwise why are they doing this in the first place? If the price level was above trend, and the inflation rate was above target, and then inflation expectations rose does anyone doubt that the Fed would be moving to tighten? So with the price level below trend, and the inflation rate below target, and inflation expectations falling why don’t they move to loosen? Talking about how the Fed is ignoring the full employment part of its dual mandate is besides the point—they’re either ignoring or redefining the price stability part.
Meanwhile, I think Paul Krugman, Brad DeLong (and again), and Tyler Cowen are really all saying the same thing about the prospects for re-inflating the economy by printing money and dropping it from helicopters.
To make monetary stimulus work, you need to raise inflation expectations. But to achieve this, you need token of your inflationeering. If you drop the money and say “don’t worry about inflation, I have an exit strategy” that won’t work. If you just drop the money and don’t say anything, it might or might not work depending on some hard to assess factors. But if you drop the money and say “I’m dropping this money because I want prices to go up faster in order to catch up to the long-run trend” that should work.