I suppose that’s bad grammar, but you’ll get my point.
Here are two views of the situation:
1. The Fed has been given a relatively clear mandate, and it’s just a question of how best to implement the mandate. Because of policy lags, FOMC members will have differing views of how best to meet that goals. In August 2008 Richard Fisher thought higher interest rates were a good idea, other FOMC members did not. Over the next few years a small group of FOMC member often preferred a tighter stance, while Evans preferred easier money.
2. The Fed has been given a very vague mandate. FOMC members have completely different policy goals. Rather than being technicians trying to carry out the mandate given by our elected leaders, they are in fact unelected policymakers with enormous power. They are able to create severe recessions at the drop of a hat. And they can do so without attracting much attention, as easy money looks like tight money, and vice versa.
I think there are good arguments for both views of the Fed. The first view seemed to fit the Great Moderation, and the second view seems to better fit the period since the onset of the Great Recession.
But whichever view you hold, there is an outrage that is being ignored by the American press. If the first view is true, then it’s outrageous that FOMC members aren’t apologetic for their past mistakes. I’m not saying they should say “I’m sorry,” we know that alpha males are too childish to do that. But there should be some sort of general consensus that group one was correct and group two was incorrect. Surely it ought now be possible to agree on whether Richard Fisher was correct in calling for higher interest rates in August 2008.
And if it’s not possible, isn’t that an extremely sad comment on the state of monetary policy-making? Think about it. Suppose it were true that we can’t say whether monetary policy was too tight or too loose in 2008 or 2009. What would that imply about the subsequent growth in NGDP? It would mean that it was “merely a matter of opinion” as to whether the biggest drop in NGDP since 1938 was too big or whether it should have been even bigger. That Congress had no real opinion on the matter, and was leaving it up the Richard Fisher’s of the world to decide whether it’s be a good idea to whack $1.2 trillion off our nominal GDP relative to trend, right in the middle of the biggest financial crisis in American history.
I’m not very good at hiding my sarcasm, so I think you know where I come down on this issue. I think the Federal Reserve System has been an absolute disgrace in recent years. I respect Ben Bernanke, and assume he is doing his best. It’s too bad he has so many colleagues who seem to be totally unaware of the grave responsibility in their hands.
PS. I’m not calling the Fed a disgrace for not agreeing with my policy views, but rather for dodging their responsibility. Was monetary policy too tight in late 2008 or not? Was the fall in NGDP in 2009 undesirable or not? Was the slow pace of recovery in NGDP after early 2009 undesirable or not? There’s simply no accountability, and that’s the problem.
PPS. After I wrote this I saw that Lars Christensen was thinking along the same lines; he’d already posted this:
In fact it is interesting that when central bankers describe the ups and downs in the economy nearly never hold themselves accountable. If inflation overshoots the inflation target we rarely (in fact never) hear central banks say “the failure to fulfil our inflation target was due to our overly loose monetary policy”. I wouldn’t really expect that and frankly I also hate admitting being mistaken. But this is nonetheless telling of the general tendency for macroeconomists – including those working for central banks – to fail to realise the importance of the monetary policy reaction function.
I’d recommend the entire post, it’s more thoughtful than this one.