Janet Yellen has been nominated to become the next chairperson of the Federal Reserve. She will appear before the Senate Banking Committee on Thursday at which time she will be asked about her views on the economy, quantitative easing, fed policy, etc. Unfortunately, most questions can be answered with vague, indefinite statements that essentially distill to “we’ll let the data drive our decisions.” Such an answer is frustratingly devoid of substance.
The Fed, along with every central bank around the world, has decided that quantitative easing [QE] is the right intervention (I believe this is a surreptitious effort to ultimately generate inflation and thereby erode debt burdens in real terms, even though central banks will never explicitly express or admit this). At every point, when central bank policy has failed to achieve the desired effect, the response has been to do more of the same. It is indeed possible that QE is the correct course of action. However it is imperative (I think) to at least consider the possibility that policy has failed not because it was too limited but because it was bad policy. As Einstein once said, “the definition of insanity is doing the same thing over and over again and expecting different results.”
If I had the ability to pose a question to Ms Yellen, I would ask:
“You rely on data to guide policy. If this is the case, then presumably quantitative easing is not a dogmatic, proscribed course, correct? Please describe several scenarios that would lead you to conclude that QE is either ineffective or even potentially deleterious. Thank you.”