Unlike Fed policy in the 1990s, central bank actions this century do not appear overly accommodative, writes Andrew Smithers
The aims of economic policy are broadly agreed, with success defined as brisk growth combined with low and stable levels of unemployment and inflation.
As explained in my article, Escaping the structural liquidity trap (Central Banking journal, Vol 34, Issue 3), we live in a multi-equilibria economy – so that successful management of the economy cannot be assured simply by keeping demand properly balanced with available supply. We also need to avoid excessive levels of money supply and asset prices. To meet all three targets, we need at least three policy instruments and, as monetary and fiscal policy are thus inadequate on their own, an additional instrument is essential. I pointed out that tax policy, which should not be confused with fiscal policy, is available for this vital role.
This century we have failed to realise any of those policy aims, having suffered from nearly stagnant output, a recent upsurge in inflation and the worst recession since the Great Depression of the 1930s. This followed a major financial crisis, and we have today the high risk of another. The most often expressed opinion is that the key fault was bad economic management by central banks, but they only control one of the three policy tools needed for success and cannot therefore reasonably be blamed for our economic policy failure. They can still be criticised for their decisions if they resulted in a worse outcome than would otherwise have occurred.
The policies of the Federal Reserve System in the late 1990s fail on this criterion but not its policies of this century, including the initial introduction of quantitative easing (QE) nor its subsequent reintroduction. The policies of the Bank of England and the European Central Bank seem equally justifiable and, as Japan has not yet suffered from the twin US problems of an asset bubble and soaring inflation, its central bank appears to deserve praise for its judgement and decisions.
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