The Federal Reserve is hesitant to undertake a third round of monetary easing:
Federal Reserve officials are in no hurry to respond to recent indications U.S. economic growth has hit another soft patch, despite chatter in financial markets that the Fed might start a new program of U.S. Treasury-bond purchases to boost growth.
The central bank has already purchased more than $2 trillion of mortgage and Treasury bonds. The purchases are meant to hold interest rates down by reducing the supply of securities in private hands and to drive investors into areas such as stocks to encourage businesses and consumers.
Fed Chairman Ben Bernanke signaled in April that the hurdle to more "quantitative easing," as it is known, is very high and Fed officials have done nothing to indicate that Mr. Bernanke's guidance has changed as economic data has worsened in recent weeks.
In an April news conference, Mr. Bernanke said the tradeoffs that would come with additional purchases were becoming unappealing. "It's not clear we can get substantial improvements in [employment] without some additional inflation risk," he said.
As a trade-off between the existing crisis of mass unemployment and the utterly non-existent threat of returning even to Reagan-era levels of inflation, this strikes me as insane. But even if we accept this calculation, it strikes me that the Federal Reserve ought to be taking more account of fiscal policy.
In 1993, Alan Greenspan helped persuade the Clinton administration to reduce the deficit, promising to loosen up monetary policy in order to offset the contractionary effects of fiscal tightening. The policy worked. Now, given that the economy is far worse than than in 1993, we shouldn't be doing any short-term deficit reduction anyway. Given that it's on the table, though, why shouldn't the Fed consider more easing if and when President Obama and Congress agree to reduce the deficit?
If Bernanke believes that current monetary policy is appropriate given the present threat of inflation, then contractionary fiscal policy ought to reduce the threat of inflation and make quantitative easing more attractive.