Incoming Fed Chairman dreaming up ‘new tools’ for next recession since central banks haven’t normalized from previous one
In a recent discussion on monetary policy, President Trump’s incoming Fed Chairman stated that he believes there is a need for central banks to work on ‘new tools’ to deal with the next worldwide recession.
Central banks as a whole, which include the Bank of Japan, Bank of England, the European Central Bank, and of course the Fed, have not normalized their monetary policies since the last recession eight years ago.¬† And because of this, and because of astronomically bloated balance sheets, there is no ammunition left to deal with any real economic downturns, and especially none along the scale of what happened in 2008.
Previously, when a recession hit, a central bank‚Äôs first response would be cutting interest rates in¬†order to¬†support domestic lending and consumption. However, neither the ECB nor the BOJ are able to¬†provide such as¬†accommodation in the event case of¬†a new recession at¬†this point. This means these regulators would increase asset purchases in¬†the case of¬†an economic crisis, resulting in¬†devaluations of¬†their respective currencies.
This would result in¬†an even greater trade deficit for¬†the US.
Williams outlined the possible tools global central banks could use to¬†provide a safeguard against¬†future recessions. These do include going deeper into¬†the negative rates territory, and bond-buying, but¬†Williams emphasized the previously untested tools of: price-level targeting and nominal-income targeting.
However, the use of¬†such methods in¬†response to¬†a recession could trigger a global shift towards¬†a planned economy.
Price-level targeting is somewhat similar to¬†the widely used inflation targeting, but¬†its main indicator is core prices index (CPI). Price-level targeting considers changes in¬†prices in¬†the past¬†and future years, and provides more certainty of¬†future price dynamics to¬†consumers. This tool is essentially a mild form of¬†price control.
A nominal income target, on¬†its part, is a target level or rate of¬†economic activity over¬†a certain period, non-adjusted for¬†inflation or price changes. Central banks can use other policy tools to¬†reach the target, which makes economic forecasting easier. However, this mechanism might hinder GDP growth in¬†the event ofcase of¬†a negative supply shock (e.g. a sudden devaluation in¬†an import-dependent country). ‚Äď¬†Sputnik News
Negative interest which would lead to skyrocketing inflation are perhaps some of the primary reasons why the Vice-Chairman, as well as several regional Presidents at the Fed, decided to leave their offices en masse in 2017.¬† Because the reality is that they have admitted in recent years that they can’t even see, much less forecast, an economic crash, which makes their¬†ability to deal with the next crisis¬†meaningless no matter what ‘new tools’ they think they can conjure up to save a dying system.
Yet perhaps it is irony that the Federal government named Obamacare the Affordable Healthcare Act, because in the end it has proven to be exactly the opposite for consumers and the American people.¬† However then again maybe that was the plan from the beginning, since many who voted for this legislation wanted a single payer program run by the government in the first place.