Fixing a Headline for Reuters …
A recent report on Reuters cites various Fed officials on the topic of bubbles, with the headline “Fed officials say rates should not be used to fight bubblesâ€. This is the headline we have attempted to fix above, since by inference, rates are obviously only to be used to blow, rather than fight, bubbles.
From the article:
“A trio of Federal Reserve officials who disagree deeply with one another over the appropriate stance of monetary policy on Friday expressed a shared distrust for using interest rates to head off asset bubbles and other forms of financial instability.
Both Richmond Fed President Jeffrey Lacker, a policy hawk, and San Francisco Fed President John Williams, a centrist, told reporters after a policy conference here that they would not want to risk unmooring the public’s expectation that inflation will rise back to the Fed’s 2 percent goal in the next few years.
That, Williams said, is what appears to have happened in Sweden and Norway after those countries raised rates to address financial stability risks. Fed economist Andrew Levin had shown a slide making that point earlier at a presentation that both policymakers attended. Chicago Fed President Charles Evans, one of the Fed’s most ardent doves, echoed those sentiments.
“Degrading monetary policy tools to mitigate financial instability risks would lead to inflation below target and additional resource slack,” Evans said in slides released Friday for a talk he is set to give in Istanbul on Monday.
The role financial instability concerns should play in Fed policymaking has long been a subject of debate at the U.S. central bank. Over the past year, Fed Governor Jeremy Stein has argued strongly that there may be times when the Fed should raise rates to stamp out potential bubbles. Stein left the Fed earlier this week to return to his post at Harvard University, leaving the Fed without a forceful public advocate of that idea.
Philadelphia Fed’s Charles Plosser told reporters on Friday he was “kind of on the same page” as Williams and Lacker, in terms of rejecting a financial stability mandate for the Fed. But he added that he is worried about the risk that the Fed’s extraordinarily easy policies over the past five years themselves could stoke financial instability.â€
Indeed, Mr. Plosser has every reason to be worried, because it is absolutely certain that the ‘extraordinarily easy policies over the past five years‘ will ‘stoke financial instability‘. It would actually be better to say that they are doing so already. There is definitely no need to speculate over whether it ‘could’ happen.
US broad money supply TMS-2 (without memorandum items, which add several 10s of billions more). Could it be that ‘financial instability’ will result from this massive growth in the money supply? We would argue it is absolutely certain – click to enlarge.
The Myth of Divided Fed Officials
There are several points that need to be addressed here. One is the myth that Fed officials are ‘deeply divided’. Naturally, there are a number of differences between various Fed members. These differences inter alia result from the manner in which Fed officials are appointed. In the districts, member banks have more control over the appointments of boards and presidents than the board of governors (which only gets to appoint one third of the district board members). The board of governors, the chairman and the vice chairman in Washington are by contrast purely political appointments (appointed by the president, and confirmed by the Senate).
