Some economists, such as Harvard’s Larry Summers and Mohamed El-Erian, figured out much earlier than the Federal Reserve that we have a major inflation problem that requires higher interest rates.
And now El-Erian, president as University of Cambridge’s Queen’s College, is going after the Fed for its shortcomings.
“An independent #FederalReserve is critical to the well-being of the US #economy,” he wrote on Twitter.
“Having said that, it is getting harder to justify such independence when four big operational errors (of analysis, forecasts, actions and communication) are accompanied by a lack of accountability.”
This idea is ludicrous. Would any reasonable person really want Congress, which is technically in charge of the Fed, or the White House to begin meddling with monetary policy?
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To Err is Human
The Fed, like any policymaking body, has made mistakes since its formation in 1913 and will continue to do so forever. But in the last 40 years, the mistakes seem minor compared to the successes.
Experts agree Fed Chairman Paul Volcker let up on the policy brake too quickly in 1980, before tightening again. Does that mean he was a bad Fed Chairman? Most would say no.
Some experts say Alan Greenspan cut interest rates too much in 2001-03. Does that make him a bad Fed chairman? Most would say no.
If you extend El-Erian’s reasoning to another field, at points during the last few years, the performance of Warren Buffett’s Berkshire Hathaway lagged the S&P 500 for the trailing five-, 10- and 15-year periods. Should Buffett have been reined in?
As for El-Erian’s point about Fed forecasts, their inaccuracies shouldn’t be that big of a surprise. If Fed officials think their policies will be effective, which most likely do, there will likely be a tendency to see the economy performing better than it actually does.
Difficulty of Forecasting
In any case, forecasting the economy is a notoriously difficult business. When Summers was congratulated on Bloomberg TV for the accuracy of his inflation call, he pointed out that he also has made many forecasts that were wrong through the years. And this is someone who likely has as much insight about the economy as anyone.
Looking at communication, the Fed’s public policy pronouncements may have locked it into a policy that was too easy. That was indeed a mistake – a mistake well-meaning, knowledgeable officials can make.
The Fed has tightened policy since recognizing its mistakes, beginning its interest-rate increases in March. That may have been late, but who’s to say an alternative Fed would have done better?
In the end, judging the Fed is a relative business. Measuring it against a standard of perfection is unrealistic. All you can judge it against are the possible alternatives. Would different Fed policymakers have done a better job? Maybe … and maybe not.
