What should the Fed fear?
The blogger Thorstein Veblen -- not to be confused with the Thorstein Veblen -- thinks the Federal Reserve should fear doing too little.
Someone please tell me how the risks of doing too much and of doing too little are symmetric?
If the Fed "does too much" and unemployment in one year is at 8.3-8.7%, while inflation is at 2.7%, there is no loss to society whatsoever. If the Fed "does too much" and unemployment in one year is 7.3% and inflation is 3.7%, that is still a tradeoff I would make in a heartbeat. Above 4%, and I would reconsider, but there would be plenty of time between now and 4% inflation in which the Fed could roll its stuff back ... And I'm aware that once inflation starts to increase, the Fed may have to roll it's stuff back quickly, but since the Fed can increase the Fed Funds rate, but cannot cut it, it should be easy to keep inflation under 3%, much less 4%.
On the other hand, if the Fed "does too little", and unemployment in one year is at 10.3-10.7%, and inflation is at .3-.7%, that would be a total nightmare for millions of people, and the Dems will be bloodied in a landslide. If the numbers get worse, and unemployment rises to 11.3-11.7, that would be a total nightmare for millions of people, and the Dems will be bloodied in a landslide. Of course, in either of these latter two scenarios, what would happen is so much pressure would build on the Congress, that we would get more stimulus, and at some point, if the economy continues to do badly enough w/ no inflation, Bernanke might recalibrate and do more [quantitative easing].
The most likely scenario from my vantage is the "boiled frog" scenario, by which the economy continues to get better, albeit slowly, and may even beat unemployment predictions next fall, falling to 8.9% by election day! In this case, of course, there would be no urgent need for more QE, no need for more stimulus, but it would be a total nightmare for millions of people.
I should note that I've removed a bit of profanity to conform to Post style rules. The unnecessary economic misery of millions is no reason to use strong language.
Photo credit: By Karen Bleier/Getty Images
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