My recent article arguing that the Fed was basically right to embark on QE2 drew mostly criticism from our commenters, as I expected. Now that I’ve had a chance to look through them all, I’ll respond to a few common themes and interesting points in the criticism. (Thanks of course to the minority of commenters who agreed with the article, too.)
Looser monetary policy hurts savers. That’s often true. But when the federal government is holding the supply of money below the demand for money balances, expanding that supply can raise the long-term return on savings by stimulating economic growth.
Rising commodity prices signal a dangerous increase in inflation. Other factors affect commodity prices, such as rising Asian demand. Those factors don’t influence TIPS spreads, which are thus a better market indicator.
I support central planning of money, which cannot possibly work. I will plead guilty to thinking that, to the extent we have central planning of money, we should make it work as well as it can. But I think we could and should radically reduce the discretionary power of central banks by tying them to a market rule, as Scott Sumner has proposed.
“[M]onetary policy has no medium- or long-term effect on real economic growth.” If a central bank is holding the supply of money below the demand for money balances, though, an expansion of that supply can increase real growth in the short run, and it can do so without negative long-term effects.
“[V]elocity has been down because the demand for money has been tamped down by all the uncertainty around Obama’s policies.” Probably so, although that’s not the only reason. Whatever the causes, a decline in velocity is an increase in money demand that the money supplier should accommodate. Listen to the market rather than second-guess it.
“[You make no] mention of the Fed’s purported reasoning for QE– i.e reduce long-term rates to help the US housing market and improve US homeowner balance sheets . . . . [L]ong-term/mortgage rates are up since QE especially QEII– so if that was the real reason, QE has been [an] epic fail.” As I mentioned in the article, several arguments of varying plausibility were made for QE2. The better argument for it hoped it would increase expectations of economic growth and thus long-term interest rates.