I enjoyed Jon Hilsenrath’s profile of Janet Yellen, the likely next Fed chair, in today’s Wall Street Journal but I want to object to the framing. He says the big question facing her if she gets the top job will be when to exit from the Fed’s “easy money” policies. But what easy money?
Under Ben Bernanke and his policies, inflation has been lower than it’s been under any postwar Federal Reserve chairman. There are two possible explanations for that. One is that since he’s been in office we’ve experienced a large positive supply-side shock to the American economy that’s dramatically accelerated economic efficiency and allowed for the creation of a sustained non-inflationary boom. The other is that we’ve had tight monetary policies. Essentially all of the evidence points toward option No. 2. If the story of low Bernanke-era inflation were the story of a massive supply-driven boom, then we wouldn’t see real household incomes falling. We wouldn’t see labor force participation rates falling. We’d be experience a period of amazing prosperity. Since nobody thinks that’s the case, then everyone must agree with me that the macro trends reflect tight money not easy money. Yet the conventional wisdom is very much that the Federal Reserve has easy money policies. And nobody is better-sourced at the Fed than Hilsenrath himself so it stands to reason that Federal Reserve officials believe that they have easy money policies.
But, again, what’s easy about them?
The answer, obviously, is that interest rates are really low. But interest rates were really high in the late-1970s. Was money tight then? We could define things such that monetary policy was super-tight during America’s greatest period of inflation and very loose during a period of unprecedentedly low inflation, but that seems perverse. If “easy money” policies are meant to spark real growth but risk high inflation and we’re seeing neither, then it seems to me that we don’t have easy money right now. It would really be good to hear more from the Fed about this. Ben Bernanke never uses the term “easy” or “loose” money, but does refer to the Fed being “extraordinarily accommodative” which isn’t a phrase normal people use.
