Another U.S. Federal Reserve official has questioned the effectiveness of the central bank’s post-crisis monetary policies, saying they have done little to stimulate the economy.
In a new white paper, St. Louis Fed Vice President Stephen D. Williamson said zero interest rates have failed to meet inflation goals, the Fed’s “forward guidance” has served only to confuse investors, and quantitative easing has at best a tenuous link to actual economic improvements.
“There is no work, to my knowledge, that establishes a link from QE to the ultimate goals of the Fed — inflation and real economic activity. Indeed, casual evidence suggests that QE has been ineffective in increasing inflation,” Williamson wrote.
Most Fed officials credit its policies, including near-zero interest rates, with averting an even more severe recession and an even slower recovery.
But Williamson’s views echo those of St. Louis Fed President James Bullard, who wrote earlier this year that forward guidance and quantitative easing may actually be of little use in jump-starting a moribund economy.
“In spite of massive central bank asset purchases in the U.S., the Fed is currently falling short of its 2% inflation target,” Williamson noted.
The white paper was discussed at length by CNBC Tuesday.
“Interestingly, one of the biggest fears Fed critics have espoused about its activities has been that the bloated balance sheet would drive inflation by releasing that ‘high-powered’ money into the economy and driving up prices,” CNBC wrote. “However, the inflation rate for the U.S., and for much of the other developed world where central bank activism is high, has remain muted, at least by conventional measures.”
According to Williamson, that’s because Fed policymakers have fallen into the trap of zero interest rate policies (ZIRP).
“With the nominal interest rate at zero for a long period of time, inflation is low, and the central banker reasons that maintaining ZIRP will eventually increase the inflation rate,” he wrote. “But this never happens and … the central bank will fall short of its inflation target indefinitely.”