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Categories of Fed action

When you hear about the Fed deciding to do -- or not do -- more, you have to look pretty carefully about the category of "more" they're considering. Traditional Fed moves -- lowering interest rates, saying interest rates will remain low, and so forth -- are pretty ineffectual in this environment, as they're just a continuation of current Fed policy, and if current Fed policy were working, we wouldn't be having this discussion. Daniel Indiviglio makes that case in more detail here.

There are also a number of more radical moves the Fed could take, from buying up securities to targeting a certain level of GDP growth, but, for all sorts of reasons, the Fed is reluctant to commit to newer forms of intervention. There's status quo bias, there's fear of being forced to use these tools in future downturns, there's internal disagreement over whether these tools should even be used. But that's all to say that serious Fed intervention requires getting over two hurdles: first, convincing the Fed that it should intervene; and second, convincing the Fed that it should turn to these new tools in order to make that intervention effective.

By Ezra Klein  |  July 8, 2010; 11:18 AM ET
Categories:  Federal Reserve  
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Comments

why does no one ever mention "buying lots and lots of stuff on ebay" as part of the Fed's modern toolkit?

Posted by: bdballard | July 8, 2010 11:32 AM | Report abuse

The fed is ignoring its mandate to keep unemployment low, while fighting what Krugman calls the invisible bond and inflation vigilantes. When interest rates are effectively 0, the fed needs to try other things to get unemployment down...

Posted by: srw3 | July 8, 2010 12:35 PM | Report abuse

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