August 05, 2011
David Wessel, the Wall Street Journal’s economics editor, badly misled NPR listeners this morning when he told them that there is little that the Fed could do to boost the economy. This is not true.
The Fed could do another round of quantitative easing, although this is likely to have a limited impact. It could also target a long-term interest rate, for example putting a 1.0 percent interest rate target on 5-year Treasury bonds.
Alternatively, the Fed could pursue a path that Bernanke himself had advocated for Japan when he was still a Princeton professor. It could target a higher rate of inflation, for example 4 percent. This would have the effect of reducing real interest rates. It would also lower the debt burden of homeowners, which could allow them to spend more money.
This policy has also been advocated by Paul Krugman and Olivier Blanchard, the chief economist at the IMF. It would be amazing if Wessel was unaware of this policy proposal.
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