The big news today came out of Europe where the European Central Bank (ECB) announced that they would begin quantitative easing in March. Scott Sumner gives some interesting comments on the announcement leading off with the most important observation:
“The policy would have been far more effective if done a year or two ago. It will still be somewhat effective, but not a game changer. Think “less bad times” in the eurozone, not good times.”
Tim Duy looks at how the policies being enacted by other central banks, most importantly QE by the ECB, have slowly pushed the Fed into being more cautious and less likely to raise rates by the middle of 2015. The biggest shift happening over the course of the last week:
“The rest of the world is diverging from US monetary policy. How long can the Fed continue to stand against this tide?
Late last week, Reuters reported that the Fed’s resolve was stiffening. This week, the Wall Street Journal reported the Fed was staying the course. This morning, Bloomberg says the Fed is getting weak in the knees”
Outgoing Minneapolis Federal Reserve President Narayana Kocherlakota, has made news as well during the American Economic Association meetings in Boston at the beginning of the month:
“He took on one of the biggest issues in macroeconomic policy: the degree to which central banks should have discretion in monetary policy…Rather than simply appealing to recent history, Kocherlakota took on the rules versus discretion topic from a theoretical perspective in light of that history.
Kocherlakota presented a theoretical model and applied it to five hypothetical cases in order to make his point. His main point is that recent history clearly demonstrates that the Federal Reserve is biased against letting inflation get out of control. When we build this into our models, and knowing from his experience as a Fed President that policymakers rely “in a complex way, on many indicators of inflationary pressures,” the model suggests that “in the US, discretion is better than any rule.”
Finally, Boston Review want to remind us that the economy could be a whole lot better:
“Before the recession, the Congressional Budget Office (CBO) projected we would have 5 million more jobs at the end of 2014 than we actually do. It also projected that the GDP would be more than 11 percent higher in 2014 than it is now. This translates into a difference in annual output of roughly $2 trillion or more than $6,000 per person. They predicted that wage and salary income would be roughly 20 percent higher than it is today.”