The Fed's Quasi-Fiscal Policies
The policies that the Fed embarked on in late 2007 are a sharp departure from the old way of performing monetary policy. In fact, it is difficult to state that the Fed is any longer in the business of traditional monetary policy — understood in the United States as aiming for low inflation and smoothed output volatility. A new breed of monetary policies better referred to as “quasi-fiscal” policies has become the norm.
The Fed’s policies have a fiscal flair to them for two reasons.
First, no longer are output and inflation the primary concerns. The Fed has framed any reference to inflation over the past four years in the context of either:
- the low levels of price inflation erasing inflationary fears from pursuing unorthodox monetary policies, or
- the threat of deflation, thus creating the “need” for monetary expansion to ward off its ill effects.
Inflation has not been a direct concern in the sense that the Fed’s role is to control it. Instead, it has been viewed as a constraint on Fed policies to pursue other ends.
Concerns about maintaining output have likewise taken a backseat. Monetary economists (Fed officials included) conventionally viewed monetary policy as a tool to minimize the output gap. During recessionary periods, just the right dose of monetary expansion should tempt employers to increase production and hire workers. The attention now, however, is on keeping banks capitalized through monetary expansion. By not allowing the bad debts on banks’ balance sheets to bring them to insolvency, the Fed is hoping to stave off a contagious banking crisis. The Fed is seemingly less directly concerned with maintaining output, and more with keeping banks afloat (which, admittedly, officials think will translate into employment).
The second reason that the Fed has been taking on decidedly fiscal activities is that its policies are directly affecting its own finances. Traditional monetary policy left the Fed’s balance sheet intact. Until this recession, the textbook explanation of how the Fed alters the money supply held true: it bought or sold Treasury bills, and the money supply correspondingly increased or decreased. By purchasing assets of lesser quality
You can read the rest of this article at: http://mises.org/daily/5888/The-Feds-QuasiFiscal-Policies
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Posted by rbutler
on Feb 8 2012. Filed under Libertarian News.
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