Lesson Learned: Central Bankers Can’t Manage Economies All by Themselves


The past three years have shown us the decline of over-reliance on low interest rates, and how the right balance of fiscal and monetary policy can lead to a strong economy.

In the 2010s, the main economic policy debate was about how to expand the labor market and return inflation to the Federal Reserve’s 2% target by avoiding a recession. The fund was based on a strategy of keeping interest rates at 0%, reducing borrowing costs and promoting asset valuation across the economy. The hope was that this merger would lead to more hiring and investment by companies.

Although it was the best option that the Fed had at a time when Congress did not want to spend money, the results of the rapid increase in interest rates this year clearly showed that the economic activity that we got from very low rates was not very high. behavior. This is proving to be another criticism of the economic policy in the 2010s. The lesson for the future is that fiscal stimulus rather than monetary policy should carry more weight when unemployment is high and inflation is low.

The end of 2022 is a good time to review the timing of the interest rate policy because one could argue that it is economic activity that is encouraged by the low interest rates that are decreasing due to the increase in the economy of the Fed this year. The housing market stalled as home prices rose to 7% from 3%. Speculative and unprofitable technology companies have seen their prices fall as investors move away from risky assets in favor of bonds that now offer good yields. Even in profitable technology companies, investors are punishing management teams that spend too much on unproven “scientific projects” that were considered attractive when interest rates were low. After the crash of FTX, cryptocurrencies are seen as nothing more than a growing group.

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So I sympathize with the idea that some of the real estate and financial speculation was possible because of low interest rates, but I don’t think the investors in these businesses should be held accountable by the Fed for any losses they incur. take it now. Yes, productivity growth was lower in the 2010s than in many years. But the Fed’s role isn’t just to promote economic activity or profits. It also wants to get all jobs and a 2% raise. And with tens of thousands of tech job cuts recently announced due to interest rate stabilization, it makes sense that the Fed’s policies in the 2010s helped support those jobs at a time when the labor market still needed support.

Now we can gather all the lessons of the 2010s, the Covid-19 pandemic and the painful changes of 2022 to make better decisions for the future. In the 2010s we had little monetary support from Congress and incredible monetary support from the Fed. The Fed’s hikes were better than anything, but the job growth they produced is not looking very good in retrospect and may have helped financial markets more than the real economy. Instead we would have found the financial solutions we saw after the pandemic – checks sent to families or increased unemployment benefits – we would have returned to work without much interest in Silicon Valley and cryptocurrencies.

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We had another problem in 2022, where the growth in the economy in 2020 and 2021 was so strong that raising interest rates aggressively did not do much to slow the economy. And the financial policy is an ambiguous tool – instead of 7% mortgage and a frozen housing market, it would be more effective to reduce other parts of the economy that are not affected by interest and maintain a stable housing market. We are now moving from very hot to very cold.

The main lesson for policymakers is that in a recession, fiscal policy alone is not enough to deal with the combination of high unemployment and low inflation. The kind of economic growth that we get from economic policy in those areas is very limited and very low. Apple Inc. was criticized in the 2010s for using its money to buy assets and benefits instead of selling self-driving cars or other technological innovations, but according to 2022 their decision seems to be the right one. Some tech companies are now struggling to make ends meet.

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The good news is that the last few years have taught us that good fiscal policy can help avoid the combination of high unemployment, inflation and 0% interest rates. The right mix of economic stimulus — whether it’s family checks, worker assistance, infrastructure, tax cuts or something else — will depend on the nature of the recession and the political will of Congress, but there’s no reason we should repeat the high-unemployment, economic recession of the 2000s. in the 2010s.

More From Other Bloomberg Opinion Writers:

• The Fed Shouldn’t Raise Its Interest Rate Target: Bill Dudley

• New Measurement of Inflation Expectations Has Bad News: Jonathan Levin

• Central Bankers Get Breath But They Can’t Breathe: Mohamed El-Erian

This column does not reflect the views of the editorial team or Bloomberg LP and its owners.

Conor Sen is a columnist for Bloomberg Opinion. He is the founder of Peachtree Creek Investments and may have a stake in the communities he writes about.

More stories like this can be found at bloomberg.com/opinion


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