Friday, June 22, 2012

Monetary Ammunition: Part Three

(Part One and Part Two).

Operation Twist has gone through, but not everyone agrees it was a good idea. A dissenting voice within the Fed, from Jeffrey Lacker:
"I do not believe that further monetary stimulus would make a substantial difference for economic growth and employment without increasing inflation by more than would be desirable," Lacker said in a statement.
Specifically, Lacker pointed to the central bank's newly established inflation goal as a hurdle to further monetary support, despite signs that the labor market has taken a turn for the worse.
"While the outlook for economic growth has clearly weakened in recent weeks, the impediments to stronger growth appear to be beyond the capacity of monetary policy to offset," Lacker said.
"Inflation is currently close to 2 percent, which the Committee has identified as its inflation goal. A significant increase in inflation could threaten the Fed's credibility and make it more difficult to achieve the Committee's longer-run goals, including maximum employment."
Credibility in fighting inflation matters to the Fed, and not just because inflation is a "bad thing" (which it is). Additionally, if businesses expect inflation then they'll just increase prices as monetary policy is loosened, so output remains the same.

If the Fed loses the public's trust in fighting inflation, that fact alone can make inflation larger and monetary policy ineffective. 

How many more rounds of monetary easing can we go through before that tipping point is reached? For the economy's sake, hopefully internal opposition within the Fed - such as that voiced by Lacker - can bolster the Central Bank's overall credibility... or at least prevent it from collapsing entirely.

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