The Corner

Economy & Business

The Fed and Normality

A security guard walks in front of an image of the Federal Reserve in Washington, D.C., March 16, 2016. (Kevin Lamarque/Reuters)

My article in the latest NR issue concerns what additional steps the Fed can take to support the economy during and after the coronavirus shutdown. David Bahnsen adds two caveats to what I say. Both are well-taken.

First, he notes that we should be careful about overreading TIPS spreads as a sign of falling expectations for inflation. That’s a fair point. I mentioned it as one piece of evidence, along with falling asset prices, commodity prices, and expected federal-funds rates, that all told the same story. On that larger story — we are going through a disinflation — Bahnsen and I are, I believe, in agreement. It’s not what we would expect if what was damaging the economy was primarily a supply shock, as early analyses of the economic impact of the coronavirus suggested.

Second, he worries that the Fed’s dramatic interventions won’t be unwound once we have recovered. Although I didn’t mention it in the article, that concern points to another virtue of my main recommendation: that the Fed switch from an inflation target to a spending-level target. That shift would not increase the Fed’s role in our economy and would even allow for it to have a lighter footprint. Just as the Fed didn’t have to keep interest rates sky-high once it broke the back of inflation in the 1980s, a credible commitment to stabilizing the growth of spending would make it possible to have a shrinking balance sheet. Interest rates, and expected interest rates, ought to rise too.

The people who have criticized the Fed over the last ten years because they favor tighter money are not wrong to want all the things they want. The way to get those things just isn’t tighter money, especially now.

Ramesh Ponnuru is a senior editor for National Review, a columnist for Bloomberg Opinion, a visiting fellow at the American Enterprise Institute, and a senior fellow at the National Review Institute.

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