The Convential Wisdom on Monetary Policy is Wrong

Former President and CEO at the Federal Reserve Bank of Dallas, Bob McTeer, is the only person affiliated with the Fed (and he is former Fed) that I have seen publicly state a view about current monetary policy that is in line with my thinking. He sees that too much emphasis has been put on lower interest rates and growth in the Fed assets, rather than on actual growth in money supply. We are in a period of monetary tightness and McTeer is one of the few that gets.

 Here's his latest commentary that explains the situation as it is:

The conventional wisdom is that Fed monetary policy has been extremely easy, there is a great potential for an acceleration in inflation already baked in the cake, and a return to quantitative easing would be a drastic step. The truth is that, except for low short-term interest rates, monetary policy has not been easy for quite a while. Most of the expansion in the Fed’s balance sheet and rapid money-supply growth took place at the peak of the financial crisis in the fall of 2008. The balance sheet remains large, and the bank reserves created remain. However, they are primarily on the banks’ and the Fed’s balance sheet as excess reserves. Those reserves bloat the monetary base (reserves plus currency outside the banking system), but they have not been used for money-creating bank lending and investing. The conventional measures of money, M1 and M2, have been growing only slowly for quite a while.


This prolonged and probably inadvertent monetary tightness is showing up in both the consumer and producer price indexes. The headline number for the CPI, for example, has been negative for the past three months. The explosion of money growth in the past two years is a myth and the resulting explosion of inflation is nowhere to be found. While I don’t worry much about imminent deflation, I do think that is more likely than a breakout of inflation.