Committing to Inaction as a New Year's Goal for the Federal Reserve to Show Bravery
Committing to Inaction as a New Year's Goal for the Federal Reserve to Show Bravery
"The common critique against a rule-based monetary policy is that it demands Fed authorities to forecast an excessive number of scenarios prior to implementation." This is according to economist Jason Furman, who served as Chairman of Barack Obama's Council of Economic Advisers from 2013-2017 and is currently a professor at Harvard University. It's suggested that Furman may be convinced to challenge this viewpoint or accept that it's not the most compelling argument against a rule-based monetary policy.
Instead, it could be argued that the knowledge divide between Fed economists and the market is so substantial that the Fed's interventions will inevitably deteriorate what they aim to enhance; alternatively, Furman could just point out that even central planning was successful in countries such as the former Soviet Union, Cuba, North Korea under Mao, and China during Mao's reign.
Furman discusses some drawbacks of a rule-based monetary policy, such as: "No rule would have advised the central banks to lower interest rates to zero in March 2020, as they wisely did." This suggests that the market intervention that no professional economist would endorse in times of stability becomes wise when politicians are making irrational decisions and advocating for economic contraction as a means of managing the virus. It seems that Furman might be open to reconsidering this perspective and acknowledging the significance of reliable market indicators during economic crises.
Furthermore, it's peculiar how literally Furman takes the Fed's actions when credit card companies began canceling cards and lending for businesses ceased during the lockdown period. This led to the creation of various government lending programs, making the Fed's rate cut effectively irrelevant amidst the global economic collapse initiated by panic-stricken politicians.
Regarding "zero," Furman may have argued that artificial price controls amount to governments imposing scarcity. Is the Fed's attempt at price control any different?
From the theoretically unachievable "zero" (for a clear explanation, search for compound interest), Furman argued that price inflation was more effectively managed than most of his hawkish critics anticipated. However, this is challenging to comprehend. Prices are determined by the number of global laborers and machines producing goods. In simpler terms, the Fed did not solve the problem; rather, a global economy, impacted by panicked politicians to varying degrees, is painstakingly restoring what was broken. As a result, falling prices are a logical consequence.
Rather than recognizing that international cooperation results in falling prices, Furman pivoted to the "Taylor Rule" and suggested that the Fed shouldn't have required numerous large interest rate increases in 2022 and 2023 if it had followed another rule that in essence calls for market intervention to replace the market itself. This amounts to advocating for further central planning instead of permitting free individuals to cooperatively produce.
Ultimately, it's reassuring that Furman's belief in the Fed's rules now serves as a reminder that whether there are rules or not, what the Fed does holds little influence. Perhaps Furman can be persuaded of this? If the Fed had that much control over the markets, it's unlikely that markets would exist for Furman to study in the first place.
John Tamny, an influential columnist, might argue that the Federal Reserve's interventions under a rule-based monetary policy could potentially disrupt market dynamics, aligning with Jason Furman's contemplation of the divide between Fed economists and the market. On the other hand, economist Jason Furman could draw parallels between the Federal Reserve's rule-based approach and central planning in countries like the former Soviet Union, Cuba, North Korea, and China during certain periods, thereby questioning the effectiveness of such a policy.