The Fed, after all, is supposed to pursue two goals: full employment and price stability, usually defined in practice as an inflation rate of about 2 percent. Since unemployment is very high and inflation well below target, you might expect the Fed to be taking aggressive action to boost the economy. But it isn’t.
It’s true that the Fed has already pushed one pedal to the metal: short-term interest rates, its usual policy tool, are near zero. Still, Ben Bernanke, the Fed chairman, has assured us that he has other options, like holding more mortgage-backed securities and promising to keep short-term rates low. And a large body of research suggests that the Fed could boost the economy by committing to an inflation target higher than 2 percent.
But the Fed hasn’t done any of these things. Instead, some officials are defining success down.
The difference between this situation and the situation with Congress and fiscal policy — and the reason I’m not necessarily as pessimistic as Krugman — is that there is a tractable path forward for improving monetary policy. Congress is only going to become more hostile to fiscal stimulus, but Barack Obama’s two appointments to the Federal Reserve Board of Governors are going to get confirmed one of these days and perhaps they’ll shift the median vote on the Open Market Committee in a better direction. If they don’t, we’re in big trouble. But they might. The puzzling thing is that both the White House and the Congressional leadership have been so lackadaisical about getting this done.