Is Fed Policy Inconsistent
When the Fed started QE they viewed it as a stimulative, easing of monetary policy.
Now they are arguing that tapering or reducing QE is not tightening.
Can both of these two positions be correct?
Relevant and even prescient commentary on news, politics and the economy.
A foolish inconsistency is the hob-goblin of [allegedly] dual-mandate conflicted minds.
Of course they can both be correct because it’s not about the reasoning. It’s about the ends.
What ever sells baby!
Tapering is moving in the direction of tighter policy.
If a child gets accustomed to watching 8 hours of TV per day, and then as a parent you tell the child to cut back to 7 hours a day, even though that is still a lot of TV, the kid will feel constrained.
Logically there is no contradiction.
If I am driving a car at 60 mph and step on the gas to pass a car at 80 and then let off on the gas to drift back to 60 once safely passed there is no point at which I am ‘braking’.
Now an economist might argue that an elimination in acceleration is independent of the mechanism and so claim there is no difference between friction slowing the velocity and active braking doing the same. But I am a peasant with a drivers license and operationally know the difference between taking my foot off the gas pedal and slamming on the brakes.
Gas = stimulation
Letting off gas = tapering
Braking = tightening
Now it may well be that in monetary theoretical terms there is no difference between tapering and tightening. But there is no logical reason to deny a possible distinction on purely operational grounds.
Signed, the Logical Peasant
Edward –
With unemployment still high and GDP growth still low, your analogy seems particularly ill timed.
Bruce –
I have to disagree. Slowing down is slowing down, and whether you are doing it actively or passively is of little significance.
In either the case of braking or coasting, it is not merely elimination of acceleration [that would be cruise control on an open road straightaway.] It is deceleration, the opposite of acceleration.
Braking and coasting are differences of degree, not of kind.
Tapering is absolutely tightening.
Cheers!
JzB
Jazz:
They would call such, engine drag. I suspect there is just enough input to keep the engine running; but not enough to cause it to speed up. Kind of like the economy, we have a very slow acceleration or a creep upwards in velocity/speed.
Bruce,
I see a glitch in your analogy of the car passing another car. Let’s say the Fed is in the car that wants to pass. They drive fast to get around the slow economy. But then the slow economy car picks up speed to move with the Fed car. They start going at the same speed… matching their speed to the Fed car. When the Fed car slows down, the economy car will slow down too.
Jazzbumpa,
i don’t think there is much upside to the economy. Business profits are already feeling constrained. If the Fed lowers QE, that feeling of constraint grows a little more, in spite of huge reserves.
Edward my argument doesn’t depend on passing another car that is just a plausible reason for accelerating, instead one might just be wanting to show off your car’s acceleration/power/speed.
The question was whether relaxing acceleration could logically be distinguished from actively braking. Tapering vs tightening. I suggest that you can plausibly distinguish between them on the analogy of letting off the gas as opposed to actively applying the brakes. Now once you descend from the meta to the actual this difference in mechanical operation might have the same outcome in the end as the car goes from 80 to 60. Still even in that case you might have a variation in rate of deceleration with tapering having a slower effect than tightening.
But as I tried to suggest I was not making an economic argument at all. At least explicitly.
JzB
“Braking and coasting are differences of degree, not of kind ”
Well I suggest you don’t drive icy mountain roads. Because should you go into a skid the difference between using the remaining friction you have from letting off the gas and steering into the skid as opposed to slamming on the brakes and effectively losing all friction are potentially the degrees of difference in kind that might leave you alive or dead.
In the case of QE we have two extreme cases and one intermediate: going from $85 billion per month to zero in one month, announcing a reduction from $85 billion a month to zero effective six months out, and announcing a reduction of $14.16 billion per month over that same six months. Whichever of those you want to label “tighten” vs “taper” I doubt the markets will just conclude “$85b is $85b”.
Alll I am suggesting is that it is not logically absurd to distinguish between and label accordingly an immediate ‘tightening’ corresponding to overnight abandonment of QE (announced or expected or neither) and a phased in ‘tapering’. Although it might be clearer if you asked for the difference between ‘strangling’ and ‘tapering’. Rate vs quantity.