This just in: Yellen and Fischer fight over the controls of a disconnected thermostat!

People!  Check out this quote,

“Michael Gapen, chief U.S. economist at Barclays Plc in New York, said Fischer’s comments “reflect an ongoing divergence of opinion” at the central bank. Fischer “doesn’t see much room for running the economy hot” while Yellen’s views “seem to provide a wide-open door to do that. You have a chair and a vice chair who see policy differently right now,” he said.”

After the events of the great recession, it’s just amazing to me that people think the economy is a steak, the Fed is a precision sous-vide machine, and all we have to decide is medium-rare or well-done.

For the millionth or so time, the models implying the Fed can do this, completely and utterly failed during the great recession. There is also evidence that a large part of the good outcomes credited to the Fed during the great moderation were actually due to exogenous forces (i.e. good luck).

Neither the Fed nor the President “runs” the economy. There is no stable, exploitable Phillips Curve / sous vide machine that lets us cook at a certain temperature.

This Fed worship is more religious than scientific. The past 10 years should be enough to convince anyone with an open mind that  the Fed’s power over the economy is quite limited and tenuous.

But I guess it’s comforting to think that the little old lady behind the curtain can fix things for us.

She can’t, Stan Fischer can’t, Bernanke couldn’t. Maybe the sous vide machine is unplugged?




8 thoughts on “This just in: Yellen and Fischer fight over the controls of a disconnected thermostat!

  1. Pingback: The Economy is Not a Sous-Vide Machine - Marginal REVOLUTION

  2. Well…yes and no.

    The globe’s central banks did change something after about 1982, and instead of inflation, we got disinflation and then deflation across much of the developed world.

    Public agencies tend to ossify and fight the last war. and become self-reverential.

    I think the Fed and other central banks could tolerate higher rates of inflation (say 3%) and we would see more real growth. An inflation target band of 2.5% to 3.5% might work. Of course, the US should somehow clamp down on property zoning.

    What is dangerous is the idea that central banks can do nothing, and somehow we will get to zero inflation and robust economic growth.

    A manager who leaves a pitcher on the mound who is getting bombed is also “doing nothing.”

    In baseball and in central banking, the do-nothing policy is often wrong. Being too tight is a problem too.

    • So what we’re left with is a manager who should punch a button on a black box and hope it has a positive effect because there is no good reason for him to make conscious decisions and be confident that his intentional efforts will yield positive results.

  3. Australia.

    Seriously, RBA policy is why no recession since 1993. (The “but sold to China!” response is pathetic — Australia took a bigger export income shock than the US in 2008 and just kept going because the RBA policy of “an average of 2-3% inflation over the business cycle” stabilised expectations.) A powerful indicator is the RBA is the ONLY major central bank that actually hits its inflation target.

  4. Pingback: Kevin Grier rants | askblog

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