Some Strange Fed Scolding

Ever since the Federal Reserve started its latest round of monetary stimulus, the scold brigade has struggled for something to find wrong with it. The latest entry comes from Henny Sender at FT:

But there is little hard evidence of either a recovery in the broad economy or a connection between “quantitative easing” and any hopeful signs of improvement in the economy. The economic activity that was supposed to be sparked by the third round of quantitative easing has yet to materialise.

Indeed, the impact of this latest round of unconventional monetary policy is already fading. Analysts at Morgan Stanley this week decided that returns in the high-yield market were no longer attractive in the face of deteriorating fundamentals. The stock market is struggling to make further headway, while yields on mortgage-backed securities have started to turn up after an initial drop. A drop in third-quarter capital expenditure suggests the Fed policy hasn’t been a catalyst for corporate investment at all.

Conflating the fortunes of Wall Street with those of the broader economy may be common, but it is rarely correct. The point about the stock market is particularly ridiculous—more than 80 percent of stock wealth is held by the top 10 percent, and the figures for mortgage-backed securities are even more skewed. Besides, the Fed action was announced only a month ago. It will surely take longer than that for increased demand to spark additional corporate investment.

Bill McBride over at the indispensable Calculated Risk gives us an update from the real economy:

The US economic data clearly improved last week. This was the third week in a row with mostly better than expected data, and suggests some recent pickup in economic activity.

The week started off with a strong retail sales report for September. Although some of the increase in sales was related to higher gasoline prices, sales excluding gasoline picked up too.

And once again the housing reports showed significant improvement. Housing starts were up sharply (as were permits), and residential investment is now a fairly strong tailwind for the economy (I expect this to continue in 2013 and beyond).

Housing is up so sharply, in fact, that folks like Kevin Drum have argued the news is too good to be plausibly attributed to the new Fed action, even though monetary policy traditionally works mainly through the housing market. Whether that’s true or not, Sender’s premise is simply preposterous. Things are looking mildly up, as they have been for the past two years or so.

But this graf on the upcoming “fiscal slope” really makes clear the contradictions in the scold mentality. On the one hand all the economists reasonably argue on straightforward Keynesian grounds that should Congress fail to stop its spending cuts and tax increases, the economy will slow. On the other hand the scolds have been dedicated to actually cutting the deficit for the last twenty years and more. How do we keep on scolding? Simple, just declare inescapable doom:

Paradoxically, perhaps, the impact of cliff risk is likely to be dramatic whether or not politicians take bold action. If Congress does succeed in negotiating the deficit down to 1 per cent or 1.5 per cent of GDP from its current 4.3 per cent, the tightening impact will be significant. But if Congress fails to act, the uncertainty is equally likely to curb corporate investment and growth.

(Note the invocation of the confidence fairy in the last sentence.)

In any case, reasonable people at this point can look at the mild improvement in economic data and tenuously conclude that it is due to the Fed action, which was after all pretty small. The most important thing to do now is keep refuting the scolds, to give the medicine time to work.


Ryan Cooper

Ryan Cooper, a contributing editor of the Washington Monthly, is currently the Washington correspondent for The Week.