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Ben Bernanke: Monetary Policy is Weak Sauce

Janet Yellen has been rather clear that financial instability is one of the reasons she might raise rates at some point this year.  And back in 2013 she said financial instability was one of her primary mandates:

“I pledge to do my utmost to keep that trust and meet the great responsibilities that Congress has entrusted to the Federal Reserve–to promote maximum employment, stable prices, and a strong and stable financial system.”

But Ben Bernanke seems to disagree. The world’s most famous blogger said this in a post yesterday:

“Let there be no mistake: In light of our recent experience, threats to financial stability must be taken extremely seriously. However, as a means of addressing those threats, monetary policy is far from ideal. First, it is a blunt tool. Because monetary policy has a broad impact on the economy and financial markets, attempts to use it to “pop” an asset price bubble, for example, would likely have many unintended side effects. Second, monetary policy can only do so much. To the extent that it is diverted to the task of reducing risks to financial stability, monetary policy is not available to help the Fed attain its near-term objectives of full employment and price stability.”

That’s a pretty interesting quote. You could actually apply that perfectly to, well, using monetary policy for anything. After all, it is an inherently indirect and imprecise policy tool. It works only through indirect transmission mechanisms like overnight interest rate changes, expectations channels, wealth effects, etc. If the last 5 years haven’t proven that monetary policy is a rather indirect and blunt policy then I don’t know what would.

Basically, monetary policy is weak sauce. And maybe we should stop believing in the idea that Central Bankers can steer the economy in certain directions and fix all of the world’s problems. Maybe it’s time to focus on other policy approaches like tax cuts, infrastructure spending, regulatory changes and other more precise tools….Of course, we won’t do any of the no-brainer policies I’ve talked about in the past because we’re too politically divided to get anything helpful done.