Dear Scott,
I Wholeheartedly Agree
Thank you for your public service as Secretary of the Treasury of the United States. I read your recent excellent article in The International Economy titled “The Fed’s New ‘Gain-of-Function’ Monetary Policy.” I agree with much of your criticism of the Fed. In addition, I believe that we share the same optimistic “Roaring 2020s” outlook for the US economy, and we both hope that the Fed doesn’t screw it up.
In an internal memo to your colleagues at Keysquare Capital Management dated January 31, 2024, you wrote: “Our base case is that a re-elected Donald Trump will want to create an economic lollapalooza and engineer what he will likely call ‘the greatest four years in American history.’ Economist Ed Yardeni believes that post-Covid America has the potential to have a boom similar to the ‘Roaring Twenties’ of a century ago. We believe that a returning President Trump would like this to be his legacy. In this scenario, the greatest risk factor, in our opinion, would be a sudden rise in long-end rates.”
In your recent article, you criticize the Fed for attempting to manage the economy with unconventional monetary tools. You rightly observe that the Fed successfully ended the Great Financial Crisis of 2008 by implementing the first round of quantitative easing (also known as “QE1”) in late 2008 and early 2009. In that round, the Fed purchased $1.25 trillion in mortgage securities and $300 billion in Treasuries.
QE1 was consistent with what arguably is the primary job of any central bank: to provide liquidity during such crisis periods. Indeed, the Fed was created at the end of 1913 in response to previous financial crises. Its original central mission was to maintain financial stability.
We both agree that the Fed’s subsequent three rounds of quantitative easing (QE2, QE3, and QE4) were a mistake. When the federal funds rate was cut to zero on December 16, 2008, Fed officials should have acknowledged that monetary policy could do no more to stimulate the economy, leaving fiscal policy to do the heavy lifting. Instead, the Fed implemented QE2 in November 2010, committing to purchase $600 billion in long-term Treasury securities by the middle of 2011. Fed officials said that their economic model estimated that in effect this would lower the federal funds rate below the so-called “zero lower bound” by as much as 75 basis points. Other central banks around the world adopted similar unconventional policies, including actual negative-interest-rate policies.
