Paul Krugman quotes the arguments of the three Federal Reserve Bank Presidents who called for pain and austerity at the last meeting:
Incoherence at the FOMC: Messrs. Fisher, Kocherlakota, and Plosser dissented because they would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the federal funds rate for an “extended period,” rather than characterizing that period as “at least through mid-2013.”
Mr. Fisher discussed the fragility of the U.S. economy but felt that it was chiefly nonmonetary factors, such as uncertainty about fiscal and regulatory initiatives, that were restraining domestic capital expenditures, job creation, and economic growth. He was concerned both that the Committee did not have enough information to be specific on the time interval over which it expected low rates to be maintained, and that, were it to do so, the Committee risked appearing overly responsive to the recent financial market volatility.
Mr. Kocherlakota’s perspective on the policy decision was shaped by his view that in November 2010, the Committee had chosen a level of accommodation that was well calibrated for the condition of the economy. Since November, inflation had risen and unemployment had fallen, and he did not believe that providing more monetary accommodation was the appropriate response to those changes in the economy.
Mr. Plosser felt that the reference to 2013 might well be misinterpreted as suggesting that monetary policy was no longer contingent on how the economic outlook evolved. Although financial markets had been volatile and incoming information on growth and employment had been weaker than anticipated, he believed the statement conveyed an excessively negative assessment of the economy and that it was premature to undertake, or be perceived to signal, further policy accommodation. He also judged that the policy step would do little to improve near-term growth prospects, given the ongoing structural adjustments and external challenges faced by the U.S. economy.
And Krugman comments:
So, let’s see: Fisher thinks that the problem is “uncertainty” caused by
our Muslim socialist president“fiscal and regulatory initiatives”. This happens to be just wrong, as shown by lots of evidence; businesses aren’t expanding because of lack of demand, not because they fear Obamacare. But even if it were true, you don’t have to refill a flat tire through the hole: monetary policy is what you use when demand is insufficient, for whatever reason.
Kocherlakota basically says that the Fed has already done enough, because unemployment is down since the Fed’s last policy change, while inflation is up. But the Fed’s policy was supposed to put unemployment on a steadily declining trend, which hasn’t happened, while inflation was clearly a temporary bulge from commodity prices, now fading out.
Plosser thinks things are better than they seem, or something. (Why do I think of Oscar Wilde saying that Wagner’s music was better than it sounds?) He also, if I read this right, believes that our problems are largely structural or external or something; maybe he thinks we’re suffering from a lot of structural unemployment, despite strong evidence to the contrary.
Indeed. I guarantee you that Kochrlakota's claim that the job market had improved and the inflation outlook worsened was believed by nobody around the table except for his two peers. Why not? Because it was false: the job market had not improved and the inflation outlook had no worsened. And I guarantee that everybody around the table (except perhaps for his two peers) rejected Fisher's argument for the reason Krugman gave: you don't refill a flat tire through the hole. And I can derive no coherent view of the economy and economic policy from Plosser at all. These do not seem to me like arguments intended to persuade anybody who has contact with reality.
As Krugman writes:
The point is that all three dissents sound like people who have decided that they’re against easy money, and are looking for reasons to justify that decision. I sort of knew that, but it’s useful to have that demonstrated so clearly.