Direction of Fed Policy

Mark Thoma, James Galbraith, and Dean Baker all discuss the impact of Federal Reserve policy. I personally tend to find the greatest value in Galbraith’s comments. The entire question revolves around whether the Fed is an effective Inflation-fighting agent, or an efficient Unemployment-fighting agent. Individuals interested in this discussion should pursue the link to the Stock and Watson paper in Thoma’s commentary. I believe that the Fed is remarked poor in delivery of impact in either area. Rationale for this restates the Galbraith position that We can have high Employment with low Inflation, already proven in the 1990s; Inflation targeting, therefore, does not target full employment goals precisely, and sharp pressure on Resources, while raising their Pricing, does not necessarily increase overall Inflation (here We have the advent of technology and increased Productivity).

The major value of Fed policy enters with the Interest rates on Federal Treasuries. Inadvertent Fed policy has worked through the 2000s to minimize the Cost of Federal Debt restructure. This has allowed the current Administration to pursue an adverse economic policy, without sharp consequence. Current economic policy allows for the low Labor Participation rate in this Country (Bread and Circuses), without the malformation of high Taxes. Removal of Fed constraints to mollify Treasury rates would double, if not triple, current Debt Service Costs. Here is where the major impact of the Fed resides.

The Question discussed by Thoma, Galbraith, and Baker tries to define the value of Fed targeting of Inflation or Full Employment. My position states that the Fed is a poor instrument to utilize against either goal. The Fed has little power to affect the growth of M3, which is based upon the capability and innovation of the economy, not Interest rates. Extremely high Debt charges can adversely impact Employment, but low Interest rates cannot be shown to have equivalent impact on Hiring, when those Rates are below a basic Nine Percent. Business will borrow at such Rates, if there is sound economic opportunity, and Profitability will still be assured with pay-down of Debt, as long as Capital Equipment life expectancy exceeds Debt life. The above discussion simply says the Economy and Business has ability to set aside Fed policy in the pursuit of Business Profits. Fed policy attuned to either Goal fails to achieve real impact, and the Fed should adopt a policy searching for reduction of Federal Debt; through increasing the Cost of Debt Service. lgl