Since the financial crisis of 2008, amplified by the measures needed during Covid, we’ve heard great grumbling from the right about quantitative easing, which was often called printing money. (The Fed can indeed inject more money into the economy by buying bonds and securities but that should not be confused with giving the government more money to spend. Federal spending is controlled by Congress and is fixed by budget before the Fed decides to do anything in that fiscal year, other than emergency funding.)
Notwithstanding the obvious objective reality that adding money when it was needed helped save the economy from disaster, especially when it was already close to that point, the Fed’s work was blamed for everything, especially inflation.
What nobody has been talking about is the reverse, quantitative tightening. Instead of buying new bonds or reissuing old ones as them come due, the Feds simply does nothing. Paying off older bonds takes them out of the economy. This removes money. The people who scream about the Feds and/or Democrats printing money should be loudly cheering whenever this phase of the Fed’s cycle occurs.
Guess what. It started two years ago. In that time the Fed has taken $1.6 trillion out of the economy. The voices on the internet and here on the board have been silent on the subject.
Is quantitative tightening a good thing? As always, the Fed walks a tightrope between letting the economy slowly cool and having it suddenly seize up for lack of funds. This guy thinks they’re going too slowly. (gift link from the Times)
He also has other criticisms of the Fed that we can discuss. A wholly positive article about the Fed is the unicorn of opinion articles. But he concedes that “So far in this round, the Fed has been managing the process deftly. Scarcely anyone has noticed it drain more than a trillion dollars from the financial system.”
So far, so good. Where is the cheering?
Republicans can’t cheer about anything a Democrat does, they would be tarred and feathered and run out of town on a rail. If they can’t criticize it, they will ignore it. Considering the level of economic literacy in this country, they probably could criticize it and no-one would recognize the hypocrisy. But they are too dumb to figure that out.
I agree that the Fed is walking the tightrope about as well as it is possible to do, yet lots of people are still complaining about ongoing inflation (at about 3.5% for the past 12 months, which is 175% of the target rate of 2%). These people generally don’t understand the cumulative effect of inflation, that prices never* go back down, and that if you compare what something costs today with what it cost 5 years ago, you will be shocked and then depressed. And they blame inflation on what is being done today, rather than on what has happened over the past 4 years (i.e. the Covid era).
*Commodity prices do sometimes go down, but this is pretty much always overshadowed by rising costs of production, since so few people ever buy raw commodities for their own use.
Here is a gift link with another view.
https://econ.st/3UMQtPo
Worth a read. The effects of QT were thought to be modest, but when the Fed has tried it three times since 2010 it led to some stability. QT seems to be poorly understood despite a decade of research. The problem is not just that QT may be responsible for a rise in interest rates of 50-100 basis points (0.5-1%). And not just that increasing QT is not that good an inflation fighting substitute for raising interest rates (see 2022 Economist article on this subject.).
The bigger problem is banks like the easy profits accorded by expansionary quantitative easing. Though there have been crises since 2010, notably Covid, central bank involvement has increased from $2.3T in 2010, more than tripling. The Fed needed to reduce QE long before they did and now have few tools to counter growing systemic inflation.
When I click the link the article appears for a second and then I got “Our apologies. An error seems to have occurred.”
That’s been happening frequently to me on a number of sites. Any ideas on what’s going on? Anyone else seeing this?
I was highly dubious about that NYT piece. Columnist whines about “Glacial” pace of quantitative tightening. Doesn’t provide a lot a relevant analysis. For example $60 billion per month of not-rolling-over-debt, amounts to $720 billion per year, which would eliminate the $7.4 trillion stockpile in a little over a decade. That’s not glacial, nor is it “piddling”. For example (2), you don’t want to eliminate that stockpile entirely: the stockpile gives room for the Fed to tighten more if they wish, aka conduct conventional open market operations. For example (3), author whines about how this represents further tightening, but also whines about how bad it is that the Fed reduced tightening by slowing down asset reduction from $95 billion. So which is it?
The article was wholly empty hand-wringing, with weak or non-existent economic analysis. You would never know from the article that conventional open market operations have been suspended for years and that the Fed has shifted to massively subsidize the banking system by paying interest on all reserve balances (which may or may not be a bad thing, but could be a more coherent criticism than what the author provides. ).
I get a message that the gift has been used up.
I agree that the “analysis” was weak and grumpy. Reading between the lines, I saw that despite the author’s dissimulations, the Fed was indeed doing its job and trying to do it well. It should deserve congratulations.
The media - by which I mean the mainstream media, exemplified by a few papers and the nightly news - seldom reports on news when it’s good. Gas prices, to use the most abused example, are a constant barrage when they are rising but go without a word when they fall.
Quantitative easing followed the same path. Why is it not getting reported by the mainstream media? Or the conservative media, who should be ecstatic over the news?
I put this in P&E because Trump has been bloviating about putting in a more pliable Fed chair even though this one is doing everything he should want. OTOH, Biden could claim these actions as a win and use them to show the economy is moving in the right direction. Everything the Fed does is inherently political. Yet not a word.
Trump wants a supine Federal Reserve in the model of Arthur Burns under President Nixon. The Nixon Tapes show Executive branch arm-twisting and Federal Reserve compliance, though the exact nature of cause and effect is up for debate. Cite.
Loose monetary policy conveniently timed to produce high economic growth on election year is a godsend for any administration, which is why central bank independence is a widespread and hard won reform.
It’s an issue in the UK too, especially from a leftwing p.o.v. in relation to increased banking profits - the obvious answer to which is one Labour dare not make much noise about, namely (ssh!) taxes.