In an earlier article about the economy in these pages, I had made a strong case for structural intervention by monetary policy in the US economy.
Reuters, in excellent reporting about the happenings at the Federal Reserve, is suggesting that Janet Yellen, whom I had profiled briefly in my article, could be the first chairwoman of the Fed Board in Washington, D.C. She is reportedly siding with the doves on the Federal Open Market Committee (FOMC) to unleash a fresh round of beyond zero-bound monetary stimulus or using my popular metaphor for Fed’s quantitative easing, inaugurate HMS QE III, off the New York harbor.
The current Fed Chairman Ben Bernanke’s decision making style is to let the FOMC debate any upcoming major decision in public before he makes the decision, as he did with QE I when I was still at the Fed Board as an employee. His bias, clearly, however, is not to stimulate the economy based on the most recent FOMC meeting decision to stay at the status quo.
Bernanke’s bias also, however, has thus far been not to make industrial policy at the Fed or use monetary policy to actively direct real market investments except in the financial markets as he had done with the Term-Asset Backed Lending Facility (TALF) before QE I. It is highly unlikely that this bias of his will change anytime soon, though there are more ways than one, both not using the Fed (as I have outline in my article “small businesses“) and/or using the Fed, to make industrial policy.
The White House and Congress can take the former approach of not using the Fed in their budget appropriations to make industrial policy, given any budget outlays should the Fed decide not to make industrial policy by monetary policy. Should the White House and Congress decide to do so, the Fed need not stimulate the economy with QE III.
Moreover, it is unclear how the Fed is calculating the monetary aggregates M0 and M1 anymore, given the recent reports about M0 from St. Louis Federal Reserve Bank and reports about the $16 trillion issued in new money since 2007 in the context of the Government Accountability Office (GAO) audit of the Fed.
In our view, there is no reason why Vice Chair of the Fed Board in Washington Janet Yellen should argue on the FOMC – where she is only a permanent voting member 8 times a year but not the Vice Chair of the monetary policy making FOMC (the permanent voting Vice Chair of the FOMC to Ben Bernanke is the President of the Federal Reserve Bank of New York) - in favor of another round of fresh monetary stimulus unless it is to recycle existing stimulus funds by selling other securities in the Fed portfolio, as the FOMC had done before, and reissue the same Federal Reserve notes back into the market as cash in exchange for government bonds given the tentative recovery in the housing market.
At the current zero federal funds rate through end-2104, on balance, any QE III without first a pointed moral suasion of Wall Street and then structural monetary intervention under the Federal Reserve Act (FRA), will be a mistake.
The Fed must hold down its firehose unless both Bernanke and Yellen intend to leave the Fed Board.