William Dudley, president of the Federal Reserve Bank of New York, argued on Monday that one explanation for the sluggish economic recovery is that the Fed should have acted more quickly and boldly in easing monetary policy as the severity of the recession became apparent. His comments served to illustrate the growing divergence of opinion between the “hawks” and the “doves” at the Fed’s policy body, the FOMC.
In remarks delivered to the annual meeting of the National Association for Business Economics in Lower Manhattan, Dudley presented the dovish case for more central bank action by recounting the degree to which economic forecasters overestimated the strength of the recovery, and then noting several reasons for the underperformance.
Predominant among these factors was his belief that the Fed relied for too long on traditional incremental interest rate policy before plunging into more exceptional moves like buying and holding government bonds. Recessions triggered by financial crises such as we endured in 2008 are generally more severe and extended than more typical business cycle downturns. Once the Fed recognized the pattern, the thinking goes, it should have rapidly expanded its balance sheet and flooded the markets with cash.
It should be noted that not all members of the Federal Reserve System agree with this assessment; the “hawks” on the FOMC have argued that enough has already been done and that inflation is certain to greet the Fed’s attempt to unwind its aggressive stance. These critics have not carried the day, as concern over long-term unemployment today has trumped the threat of price risk tomorrow (or in 2015).
Dudley clearly recognizes risks in the accommodative strategy. The real responsibility for promoting a recovery rests with Congress and the White House, who have so far been unwilling to move on productive tax reform and debt reduction measures. So, the Fed is left to play Sisyphus, pushing the stone uphill and inventing another flavor of Quantitative Easing each time it rolls back down.