It’s certainly something that economists have talked about for years. … Economists routinely look it. Having said that, I’m not sure the Fed would be driven to do much more than it’s doing right now. It already has an amazingly accommodative monetary policy and it’s hard to see how they could make it ever more accommodative. … The Fed is almost pushing on a string right now because the usual housing channel for refinancing is blocked. And on the business side, people are sitting on mountains of cash, but it’s not whether the 10-year yield is 1.9 percent or 2.3 percent that’s going to ignite U.S. investment. … What makes me nervous is anything that looks like temporary increases in inflation because our experience is that’s a genie that’s very hard to put back in the bottle. I would much rather see us do the restructuring in the economy that we need for conventional monetary policy to work, which would mean clearing up the policy uncertainty that is limiting the willingness of business to invest, and help facilitate the deleveraging on the household side. Part of the problem is that the Fed is trying to do the job of the government, too, because the government’s has been sitting on its hands.
Glenn Hubbard in July 2008:
The current policy stance of holding the federal funds rate at 2% will keep monetary stimulus in place. With inflationary expectations not declining, this stimulus will almost surely raise inflationary expectations as the economy improves. This consequence can be seen already in surging commodity prices and the weakness in the foreign-exchange value of the dollar.
It is worrisome that the Fed’s own 2008 projections have risen over the year both for headline inflation (by about 1.5 percentage points) and core inflation (by about 0.2 percentage points). Furthermore, the Fed’s projections of receding inflation in 2009 and 2010 coming true will almost surely require increases in the federal funds rate.
This is via David Glasner. He responded to Kevin Donoghue in his comment section as follows:A continuation of a negative real federal funds rate and the increase in money growth accompanying it raises the risk of increasing inflationary expectations, a costly mistake to fix.
Kevin, Yeah, I saw his blog. I thought it was kind of interesting. Even if he was a little annoyed with me, it’s still nice to be noticed. And I also saw your comment on Brad DeLong’s blog post about Krugman’s outburst. Thanks for your kind words. Actually, Peter K, who also commented on DeLong’s post, is probably right that the few blogs that I link to probably create a slightly misleading impression of where I am coming from. I don’t think that his comment that I have been rehashing Krugman’s ideas without attribution is correct. What I am trying to do is to show how to apply the Fisher equation in a somewhat novel way and to come up with a result that fits in with Keynes. In the process, I think that I am shedding some light on both Fisher and Keynes. It is also not true that Krugman is the first one to understand the possibility of an equilibrium negative real rate. Pigou discussed the possibility in his review of the General Theory in 1936. But instead of introducing a positive rate of inflation to resolve the paradox, Pigou invented the Pigou effect as the way out. I discussed this in two of my early posts “Krugman and Sumner on the Zero Interest Lower Bound: Some History of Thought” and “Krugman on Mr. Keynes and the Moderns.”Well I was wrong. Fascinating stuff.
*The American online magazine contributing editors are Jonah Goldberg, Mark Perry, and Marc Thiessen.