Thirteen years ago, the Federal Reserve was just about the most popular federal agency around. Only the Centers for Disease Control was ranked more highly in terms of competence than Alan Greenspan’s Fed.
Today, the CDC still inspires more confidence. But so does the FBI. And the CIA. And NASA, the Department of Homeland Security, the Environmental Protection Agency and—gasp—the IRS. The Fed is less popular than the IRS. All because it doesn’t have the crystal ball that Greenspan once seemed to have. You know, until he didn’t anymore. And even though lots of people messed up and failed to see where the economy was going over the last decade and a half, when the Fed fucks up, it does so for everyone.
Private economists, too, have been baffled by these developments. But Fed miscalculations have consequences, contributing to start-and-stop policies since the crisis. Officials ended bond-buying programs, thinking the economy was picking up, then restarted them when it didn’t and inflation drifted lower. Its shifts became a source of uncertainty in financial markets.
And the Fed became a perfect scapegoat. Unsurprisingly, it thinks that’s a wee bit unfair.
Many Fed officials believe—and private economists agree—their responses to the crisis helped avert a second Depression, outweighing any unfairness in the bailout process. Fed leaders believe low rates helped, too. “Inflation would be lower and unemployment higher now by noticeable amounts had we not employed those policies,” Ms. Yellen said in March….
She lamented the government has leaned so heavily on the Fed to stimulate the economy while tax and spending policies were stymied by disagreements between Congress and the White House.
“They have held out the prospect of tighter money, and that has had a discouraging effect on demand to a greater extent than would have been ideal,” said Lawrence Summers, a Harvard professor and former Treasury Secretary. “They have lost credibility by constantly predicting tightening that, out of prudence, they didn’t deliver….”
“We should be extremely worried,” Mr. Summers said. “We are essentially on a fairly dangerous battlefield with very little ammunition.”