Fed Sideshow Highlights Absence of Much-Needed Fiscal Stimulus Policy
Source Newsroom: Cornell University
Steven C. Kyle, an expert in macroeconomics and government policy, and an economics professor at Cornell’s Dyson School of Applied Economics and Management, comments on the anticipated Federal Reserve Board announcement that it will reduce long-term bond buying as a stimulus.
“Should we care that the Fed is starting to taper its long-term bond buying program by $10 billion a month? Yes, but not because the bond buying itself made such a huge difference. More important is the Fed's signal that it is retreating from a posture of stimulating the economy toward one of being more hawkish.
“Market participants, who tend to respond to slight changes in tone from the Fed like a seismograph to a minor earth tremor, will not fail to notice this change. With unemployment down to 7.3 percent it is tempting to say that the task of stimulating the economy is well on its way, but when you consider that most of the drop in the unemployment figure is because of people leaving the job market rather than finding jobs, then things don't look nearly as rosy.
“But let’s keep the larger picture in mind: When even the conservative International Monetary Fund tells us we ought to use fiscal stimulus rather than more unconventional monetary stimulus, it is probably high time to start doing it. Wild-eyed radicals they aren’t – and they rival the German Bundesbank in their hatred of inflation.
“Our political stalemate makes it impossible to imagine it really is happening, but it is a good idea to keep in mind that fiscal policy could lift us out of our continuing doldrums quite effectively. Monetary policy is second best once short-term interest rates have reached the zero mark.”