Over the last week, I've looked at the various arguments advanced by the three Fed governors who voted against further Fed action (see here, here, and here). Here I want to sum up these arguments into two categories: those that make sense, and those that don't.
These arguments make sense.
1.) The fed is already at the end of what is can do; any new policy will only help at the margins.
This was advanced by Fed president Fisher and Plosser. Fisher noted the Fed has already flooded the economy with money and yet few loans are being made. Plosser noted that interest rates were already at incredibly low levels. Therefore, lowing them an additional 10-20 basis points would only help at the margin. Both of these arguments acknowledge a basic -- and important -- point: there is a limit to what central banks can do. These also highlight another important point: how far outside of the box should the Fed go in its efforts to stimulate the economy? Is a large scale asset purchase program warranted or prudent? These are important questions that should be honestly and openly debated. I should add that I support Bernanke's asset purchase program, but understand what these dissenters are saying and respect their logic.
2.) Inflation is running hotter than we'd like. This was advanced by Plosser and Kocherlakota (oddly, Fed President Fisher disagreed). This is a point I've made here as well, largely based on food prices. Overall YOY CPI is running at 3.8%. And while energy prices are dropping, food prices are stubbornly high right now. At this point we need to ask the question, "how much inflation is good and how much is bad?" There is no correct answer for this; it's really one of scaled degree. However, I believe this is also a legitimate argument.
These arguments don't make sense:
1.) Government can't help. This was advanced by Plosser and, to a lesser extent, Fisher. I could not disagree more strongly. While certainly not the be all and end all, governmental action can help in many ways. A classic example is the New Deal -- which essentially restored US growth by 1937 to pre-depression levels. Also look at China's response to the recession -- they went on a spending binge and are now printing growth in the 8%-10% range. In short, stimulus spending works and has been proven to work in several important historical examples. Conversely, European countries that are engaging in austerity measures are seeing their growth contract.
2.) What's really holding back hiring is too much regulation. This argument was advanced by Fed President Fisher. unfortunately, the data does not support this argument. The reality is regulations are a zero sum game: yes they do destroy jobs BUT they also create more or less the same amount of jobs lost. As I pointed out in another article, according to the BLS labor data, only .2% to .3% of jobs lost in the mass layoff data were lost due to regulation.
What we see above is a mix of pure policy and politics. There is nothing extraordinary about the arguments; but they are worth considering.
