Tyler Cowen: belief

Transcript context

…Maybe not, but I don’t think that’s really the right way to think about monetary rules. To me, rather than think of either/or, rule versus discretion, think about it in terms of how rule-like is the policy regime? We can see, for instance, over the last 30 years or so in the United States, inflation has averaged about 2 percent, and that’s probably mostly because the Fed has decided that’s the appropriate rate of inflation. That is more rule-like behavior than the previous three decades, where inflation ranged from almost zero in some years to double digit for a considerable period of time. I would say monetary policy has become somewhat more rule-like over the last 30 years, compared to the previous 30 years. And it has the potential to become even more rule-like despite the fact that ultimately, it will never be a perfectly automatic rule because of the influence of politics. Let’s say we think of monetary policy as a game between the Fed and Congress, and Congress is always threatening to intervene in the economy, and most of those interventions are ill considered. The Fed is not just trying to achieve monetary policy goals, but it’s trying to keep Congress at bay. One of the reasons why it ends up with more discretion rather than less is to limit Congress. After the pandemic, or the tail end of the pandemic, the Fed is fairly inflationary, but maybe in part it knows, well, if it doesn’t do something, Congress will. Is that a useful way to think about some parts of monetary policy, and does it lead us to having to tolerate yet more discretion than we might like? It’s probably a useful way in some countries, but I think less so in the United States than you might imagine. I think that what happened in the case of COVID and other monetary policy mistakes, it’s more a question of the Fed just getting things wrong, misjudging the situation. You can imagine countries where the central banks are forced to inflate for political reasons, to accommodate deficit spending, to monetize the debt, but I don’t think that was foremost on the Fed’s mind in terms of the decisions that were made in 2020 and 2021. There had been a shift in the zeitgeist in terms of the way policymakers think about monetary policy after a decade of below-target inflation, and a perception that the Fed had been not expansionary enough during the previous decade. They were determined to not repeat the mistakes of the recovery from the 2008 and 2009 recession by being more aggressive the next time around. Now, they ended up being too aggressive, but I think that was actually the view of Powell and the others at the Fed, that they needed to be more aggressive. They needed to try for what are called makeup policies, to explicitly promote above-target inflation for a while to get a quicker recovery. I don’t think it was pressure from Congress that pushed them to be as aggressive as they were. I don’t think that Congress was going to do a lot of fiscal stimulus, whether they set interest rates at zero or at 1 percent during that period. Congress was determined to push a lot of money out in the economy for a variety of reasons, partly for relief, partly for stimulus reasons. I don’t think the Fed was foremost on the minds of policymakers in Congress when they made those fiscal decisions.…

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