Karen Dynan and Don Kohn Support the Federal Reserve
KD and DK:
Fed keeps its focus amid the criticism: The US is navigating tough economic times... the economy... is not growing fast enough to reduce very high levels of unemployment... considerable excess capacity in labour and product markets for some time to come... likely to keep inflation well below the 1¾ to 2 per cent level that Ben Bernanke, the chairman of the Federal Reserve, has identified as desirable.
In an action designed to improve the prospects for the economy, the Fed has announced a programme to expand its holdings of intermediate and long-term Treasury securities. This is intended to promote an easing in financial conditions, thereby boosting spending and promoting a return of inflation to a more desirable level....
Will these purchases lead to much higher inflation?... [I]ntense competition in labour and product markets has driven underlying inflation to its lowest level in decades. With these conditions unlikely to disappear soon, inflation expectations and inflation itself could fall further....
Will the purchases lead to adverse consequences for other countries that will overwhelm any benefits, even for the US? Lower interest rates on US Treasury securities... put downward pressure on the dollar’s foreign exchange value. Some decline in the currency’s foreign exchange value is a way that easier monetary policy has traditionally bolstered activity and prevented undesirable declines in inflation. A lower dollar along with lower interest rates and higher asset prices in the US are not ends in and of themselves but rather channels through which the US can achieve a more vigorous and sustainable recovery in the context of long-run price stability. This outcome is in everyone’s interest....
A good discussion of the Fed’s difficult policy decision certainly is in the public interest. But a discussion of this broader agenda would hold more promise than the finger-pointing at the Fed that has been so prominent in recent commentary...
