Will the Fed's Continue to Spend?

As successor of Ben Bernanke, chairman of the Federal Reserve, Janet Yellen is predicted to continue the Federal Reserve’s spending policies to keep the economy stable.  The Economist this month rendered a clear picture for the Federal Reserve’s plan going forward with respect to QE.  With government shutdown on our minds, this article has come in a timely manner.

The concept of QE is simple, bottom line- it pumps money into the US economy to help keep interest and unemployment rates low.  On the contrary, this adds to the deficit that the government has been griping about over the past couple of weeks.  Looking forward- Does the Federal Reserve necessarily need to keep to its current spending policy to lead the economy along or should they let the invisible hand guide the US markets course? 


Dave Tufte said...

Nathan: 94/100 ("markets course").

The Federal Reserve does not "spend" in the conventional sense. Ever.

What the Federal Reserve does do is exchange assets of differing liquidities with private entities. When they decide to try and expand the economy, they make offers on less liquid assets, and pay for them with more liquid assets. This reduces the Fed's liquidity (which isn't a problem because they don't "spend"), and increases the liquidity of the private sector (that does "spend"). They do the opposite if they are worried about inflation.

Janet Yellen is expected to follow Ben Bernanke's lead, and be amenable to expansionary policy for the foreseeable future.

Fed policy has nothing to do with the shutdown, or the deficit.

There are certain aspects of quantitative easing which amount to converting an expansionary fiscal policy into an expansionary monetary policy. Big deal.

Mike said...

With my basic knowledge of economics I agree with Janet Yellen and her decision to follow the policy of Ben Bernanke. I believe QE is growing and protecting the American economy. It is the inefficient spending by government agencies have caused our nation’s debt to rise.

JRich said...

Fiscal policy is one of the most heated topics of each election and present in the media nearly every day. I agree that during our current lower economic situation the Federal Reserve should continue current fiscal policies of adding money to the U.S. market. Additional funds and access to funds has great potential to stimulate the economy.

Dave Tufte said...

Mike: 50/50

Mike has expressed two opinions. The problem with them is that there are no counterfactuals. JRich has a similar problem.

This is not a criticism of either. Instead, I'm pointing out a very common way that people "do macroeonomics".

A counterfactual is a situation in which something is done a different way to see if there are different results.

The problem with saying that Janet Yellen will be good because Ben Bernanke did well is that ... we don't know how things would have turned out if Bernanke hadn't been in charge.

Personally, I'm inclined to agree with Mike that Bernanke did well, and Yellen will too ... I'm just more guarded about my viewpoint.

Now, I will say that Mike's second opinion, that it is "inefficient spending by government agencies" that is the problem is ... vastly overrated. I think inefficiency is an easy target, but we again come back to the "compared to what" question. Every year our government becomes in institution more focused on sending checks to the middle class than on actually doing anything constructive. And you can't be inefficient if you don't do much (and the government is wildly efficient at its chosen task of sending out checks).

Dave Tufte said...

JRich: 50/50

Sorry ... I commented with Mike's grade in the last comment, but not yours.

Ryan Horlacher said...

As is generally the problem in economics, it is difficult to prove one way or the other whether or not QE is really having a positive effect on the economy. Two things that haven't been mentioned are the large reserves that banks are holding instead of lending and the larger market response to continued QE.

Banks are holding huge reserves so while the Fed has very effectively increased the monetary base, the money supply has not increased by nearly as much. While long term interest rates have been held low as desired, lending has not increased significantly. This is a point of much concern and discussion.

With regard to markets, the stimulus has certainly done much to restore faith in the US economy. We see this in soaring stock markets. What we don't see as much are large increases in investment by firms. The indefinite nature of QE3, while helping on some fronts, may be causing businesses to hesitate in spending their large cash reserves. The uncertainty created by not knowing when QE3 will end is possibly worse than ending it.

Dave Tufte said...

Ryan Horlacher: 50/50

Just to defend the profession a little; it isn't that it's natively hard to prove things in economics, it's that we're largely non-experimental. History has the same problem ... but we care a lot more about current macroeconomic conditions than historical episodes.

I agree that the ongoing unwillingness to lend is a big problem. Bank managers say this is because of fear of regulation, and who am I to disagree?