Gerald Epstein on why the Fed is pushing interest rates higher

Gerald Epstein

The quantitative easing is when the Federal Reserve essentially prints money and then buys Treasury bills and mortgage-backed securities and other things like that. And they've been doing about $85 billion a month and are now tapering--what they call tapering it down to $65 billion a month. And by doing that, they're putting less money and credit into the economy. And when there's less money and credit in the economy, that tends to raise interest rates. And hence you've seen a big shift in financial markets here in the U.S. and all over the world as a result of this expectation that both short-term and long-term interest rates are going to go up.

Coordinate Currencies or Stagnate

By Thomas I. Palley

The global economy needs exchange rate coordination now. Absent that, the world is likely to be increasingly afflicted by exchange rate fluctuations and policy acrimony. These are bound to undermine the economic recovery and increase the likelihood of stagnation.

Read the rest here.

Quantitative easing isn't magic

"... a candid review of what central banks cannot do. Yes, they can usually forestall panic. Yes, for better or worse they can keep zombie banks alive. No, they cannot bring on economic recovery or solve any of our deeper economic problems, from unemployment and foreclosures in America to unemployment and economic collapse in Greece and elsewhere."

By James K. Galbraith

What should we make of the latest moves to kickstart the US economy, and to save the euro? As the late, great Harvard chaplain Peter Gomes said to my graduating class many years ago, about our degrees: "There is less there than meets the eye."

Quantitative easing, the third tranche of which was announced in the US last week (QE3), is just a fancy phrase for buying bonds, notably mortgage-backed-securities, in which operation the Federal Reserve takes assets from the banks and gives them cash. This raises the bond price and lowers the yield. It also tends to boost stock prices – very nice for people who own stock – and it can spur mortgage refinancing, improving the cashflow of solvent homeowners.

Read the rest here.

Nominal output targeting

Christina Romer wrote this Sunday about the necessity for the Fed to target nominal output. The implication seems to be that so far the Fed had been targeting inflation, which is obviously incorrect. That would be the ECB. Krugman (here) for some reason liked it. By the way the idea is not new, Samuel Brittan had argued for that not long ago (here), and as noted by David Beckworth so have two other prominent FT columnists (Clive Crook and Martin Wolf).

First of all, Romer calls this a Volcker moment, which is from a historical point of view (and she is a macroeconomic historian) preposterous. Volcker is the guy that tried to use nominal monetary targets, as in Milton Friedman's monetary growth rule (now he is much better and is against de-regulation and too big too fail among other things).

Further, it's not clear how a nominal GDP target would be different from what the Fed is already doing, namely acting as a lender of last resort, and keeping interest rates (short and long, the latter through QE) low. Worse, her argument smells to the confidence fairy stuff you hear from the crazies serious people, and that correctly Krugman deplores. She says:

"By pledging to do whatever it takes to return nominal G.D.P. to its pre-crisis trajectory, the Fed could improve confidence and expectations of future growth."

Sure as objective targets come, nominal GDP is better than inflation,  but since the Fed does not target inflation what is she fighting? Ben Bernanke is fine, Super Mario (Mario Draghi), the new president of the ECB needs whatever is the reverse of a Volcker moment. The US (and Europe) need more fiscal expansion.