Longing for a more sensible Fed

LONGING FOR A MORE SENSIBLE FED…. The New York Times‘ David Leonhardt explains today that the Federal Reserve always has to weigh two competing priorities: promoting growth and preventing inflation. More progressive-minded Fed officials focus on the former, conservatives focus on the latter.

Far too often, it’s the right that wins, contributing to a weaker economy and slower growth, on purpose, because of inflationary fears that have no real basis in reality. With the still-struggling recovery looking shaky, at best — oil prices, Japan, European debt, and Republican economic policies combine to create a serious threat — the Federal Reserve could be doing more.

But it doesn’t want to.

One group of Fed officials and watchers worries constantly about the prospect of rising inflation, no matter what the economy is doing. Some of them are haunted by the inflation of the 1970s and worry it may return at any time. Others spend much of their time with bank executives or big investors, who generally have more to lose from high inflation than from high unemployment.

There is no equivalent group — at least not one as influential — that obsesses over unemployment. Instead, the other side of the debate tends to be dominated by moderates, like Ben Bernanke, the Fed chairman, and Mr. Meyer, who sometimes worry about inflation and sometimes about unemployment.

The result is a bias that can distort the Fed’s decision-making. Just look at the last 18 months. Again and again, the inflation worriers, who are known as hawks, warned of an overheated economy. In one speech, a regional Fed president even raised the specter of Weimar Germany.

These warnings helped bring an end early last year to the Fed’s attempts to reduce long-term interest rates — even though the Fed’s own economic models said that it should be doing much more. We now know, of course, that the models were right and the hawks were wrong. Recoveries from financial crises are usually slow and uneven. Yet the hawks show no sign of grappling with their failed predictions.

In other words, politics at the Federal Reserve look an awful lot like electoral politics in general — conservatives get it wrong, the economy worse, conservatives propose the wrong solution again, the economy starts to improve despite conservative predictions, and conservatives nevertheless keep claiming credibility. And no one laughs them out of the room.

In electoral politics, we have easily-fooled voters who chose last year to reward those who screwed up the most. In Fed politics, misguided inflation hawks don’t need voters; they just keep touting a mistaken monetary policy targeting one imaginary threat that doesn’t exist (high inflation) while ignoring a real threat that does exist (high unemployment).

The Obama White House, for what it’s worth, would love to add some more sensible experts to the Fed’s board, but true to form, Senate Republicans won’t allow it.