“The traditional argument against a rules-based monetary policy is that it requires Fed officials to specify too many contingencies ahead of time.” Those are the words of economist Jason Furman, chairman of Barack Obama’s Council of Economic Advisers from 2013-17, and Harvard economics professor at present. The bet here is that Furman could be persuaded to change his tune, or at least be persuaded that what he deems the “traditional argument against a rules-based money policy” is not the most effective one.
Much more effective (and true) is that the information residing within the minds of Fed economists is nano relative to the marketplace itself. The information gap is so vast as to ensure that the Fed’s interventions will always and everywhere worsen whatever it intends to improve; that, or Furman could simply point out that the former Soviet Union, Cuba, North Korea and China under Mao had brilliant central planners too. Get it?
Furman proceeds with some of the demerits of a rules-based monetary policy, and specifically that “no rule would have counseled the central banks to cut interest rates to zero in March of 2020 as it wisely did.” Furman’s assertion implies that the very market intervention that no serious economist would recommend in times of tranquility is wise when politicians are losing their proverbial heads, and in the process are recommending economic contraction as a virus-mitigation strategy. It seems Furman could be persuaded yet again to think differently, and acknowledge what’s true: reliable market signals are most crucial when the economic outlook is most troubled.
After that, it’s odd how literally Furman takes the Fed. That’s important mainly because memory says credit-card companies were aggressively canceling credit cards as the economic horrors of lockdowns revealed themselves, after which loans and other forms of financing for businesses dried up altogether as the Fed went to zero. That’s precisely why the federal government rolled out a myriad of lending programs: the lockdowns rendered it the only funding game in town. In other words, the Fed going to zero wasn’t wise as much as it was irrelevant relative to global economic collapse borne of panicky politicians.
Last on “zero,” one guesses there’s a column or two somewhere in which Furman states the obvious, that artificial price controls are but another way of governments decreeing scarcity. Why would the Fed’s stab at price controls be any different?
From the impossibility that is “zero” (if you’re confused, look up compounding), Furman made the claim about inflation that “the central bank cleaned up the mess more aggressively than most of its hawkish critics would have thought possible.” That’s difficult to countenance. Prices are a function of the number of global hands and machines at work in the creation of any goods. Translated, the Fed cleaned up nothing. Instead, a global economy eviscerated to varying degrees by panicky politicians is painstakingly putting back together what politicians broke, and falling prices are the logical result.
Rather than recognize that global cooperation is always and everywhere the driver of falling prices, Furman pivoted to the “Taylor Rule,” and his belief that “The Fed wouldn’t have needed so many supersize hikes in 2022 and 2023” had it followed yet another “Rule” that is nothing more than another call for market intervention by the few as a substitute for the market itself. Yes, further calls for central planning instead of allowing free people to cooperatively produce.
Which is why we should ultimately be relieved. Furman’s newly arrived at belief in Rules from the Fed exists as yet another reminded that rules or no rules, what the Fed does really doesn’t matter. Perhaps Furman could be persuaded there? Because if the Fed had a fraction of the power over the markets that he imagines, then it’s safe to say there wouldn’t be markets for Furman to analyze in the first place.
