June 3, 2019
By Howard Schneider
WASHINGTON (Reuters) – Act quick in a crisis, talk simpler all the time, and do not be afraid of faster inflation.
Those are among the messages a group of top economists have delivered to the U.S. Federal Reserve ahead of a high-profile conference in Chicago this week.
Papers prepared for the Tuesday and Wednesday sessions were released ahead of time, and included a critique of the Fed’s “jargon-laden” public statements, a discussion of regulatory gaps that will make it hard to head off another financial crisis, and a proposal for new labor market measures that may give more insight than the unemployment rate alone.
But the broader theme seemed clear. That in the event of a serious economic downturn the Fed should be ready again to buy assets as a way to support the economy, only with more speed and perhaps in greater quantities than it did in response to the 2007 to 2009 economic crisis.
Those programs worked, former U.S. Treasury chief economist and Northwestern University professor Janice Eberly and two co-authors wrote. But they estimated that millions of workers could have found jobs years sooner if the Fed, for example, had bought an additional $2.5 trillion of Treasury bonds and mortgage-backed securities.
The Fed purchased $3.5 trillion in securities over three “quantitative easing” programs.
“We estimate that ‘stronger sooner’…policies have a relatively rapid effect on the economy,” the three wrote.
Notably, they estimated that if the crisis-era Fed had “inherited” an economy with higher inflation and a higher inflation target, say of 3% or 4% versus the 2% currently used, the economy could have effectively reached full employment as early as mid-2014 instead of early 2017. The higher inflation would have meant higher interest rates and more “headroom” for the Fed to cut rates.
That argument endorsed one of the central ideas the Fed is exploring – whether to try to engineer higher inflation in coming years to make up for several years spent below the 2% target.
The Fed is holding a series of panels this year on that and other aspects of its operations. No changes are expected until next year.
Other suggestions for the Fed included a call for its policy statements to be written at a high school reading level.
The Fed’s policy statements “tend to be complex, jargon-laden, press releases that a casual reader cannot easily absorb,” Brandeis University professor Stephen Cecchetti and New York University professor Kermit Schoenholtz wrote in calling for the Fed to overhaul many of its core documents.
(Reporting by Howard Schneider; Editing by Lisa Shumaker)