The elusive argument of what the Fed should do

After reading in two separate posts that there are 'many actions' the Fed could take to help employment in this country, I decided to search for a listing of these actions. I'm surprised that I had to search, because one of the first tenets of argumentation is that you support your assertions. So when someone asserts that the Fed could help employment, in the next sentence or paragraph, they should explain how. Simple, right? Not too much to expect, I would have thought.

Well, the arguments for what the Fed could do were largely attributed to Paul Krugman, a Nobel laureate in economics, so it wasn't too hard to find. Nor is it too hard to understand Krugman's suggestions:

1. First of all, be bold and try actions other than the usual limited set of raising or lowering the Fed fund interest rates.
2. Buy longer term government bonds and government-backed mortgage securities. (Krugman reports that the Fed is currently doing this.)
3. Change the inflation target from 2% to 4%, signally that the Fed will continue pumping money until there's enough growth to start having significant inflation pressure.

Once the suggestions are enumerated, it becomes clear that there aren't 'many' actions. #1 isn't a specific action. #2 is already being done. So that leaves a single action--changing the inflation target.

With only one additional action being suggested, I would think our society or pundits could have a substantial debate. So what are the pros and cons, the risks of pursuing this course or not pursuing it?

• Pro, from Krugman: "If the Fed were to raise its target for inflation....it would help persuade investors and businesses alike that sitting on cash is a bad idea.
• Con, from the American Enterprise Institute: Inflation lowers the purchasing power of dollars, which mean higher prices for commodities like oil.

I believe the con argument, but the pro argument is less probable. I don't know if the investors who got so badly burned in 2008 will unleash their cash out of fear of inflation that hasn't appeared yet.

What I find strange is the lack of more discussion. Is this all there is? No more ideas for what the Fed could do? It's no wonder that the economy is rebounding so slowly. The Fed can't really do much more, the Congress and president can't agree on what to do, the rest of the world either has its own problems or they aren't looking to pump us up. So, no quick fix. How unAmerican!

Inflate your way to riches.

Photo: tootoo.com

Economist article with comments
St. Louis Fed comments
Background comments by Bernanke
Related argument on quantitative easy from AEI: The low interest rates force investors into riskier investments, like commodity speculation. Lovely.
Four specific suggestions with rationales from an economist. Many times better than Krugman, but more work to read.