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The Fed: What else can it do?

The U.S. Federal Reserve building in Washington, D.C.

TEXT OF INTERVIEW

Kai Ryssdal: A Monday in the second week of August often doesn't amount to a hill of beans, economically speaking. Except that it's followed by the Tuesday of the second week in August, and that's when the Federal Reserve usually sits down for one of its regular chats about interest rates. Chairman Ben Bernanke will call the Federal Open Market Committee to order tomorrow morning. They'll be done by two or so Washington time. At which point we'll learn what they think about the American economy and what they're going to do about it.

Alice Rivlin knows Fed meetings from the inside out. She spent three years as the vice chairman of the Fed. She's now a senior fellow at the Brookings Institution in Washington. Dr. Rivlin, good to have you with us.

Alice Rivlin: Glad to be here.

Ryssdal: What's the mind set going to be like tomorrow, when Mr. Bernanke and his colleagues sit down at that long conference table at the Fed building? What are they going to be thinking about?

Rivlin: I think they're going to be thinking several things at once. Their basic projection is that the economy will get better slowly. But recent news has been discouraging, and so, they will certainly be thinking about what do we do if it gets worse?

Ryssdal: Well, what do they do? I mean, they've already cut interest rates, they're buying mortgages right and left.

Rivlin: You got it. They don't have very many options.

Ryssdal: Oh good, I feel much better.

Rivlin: They could buy more mortgages, they could buy more government bonds that would get more easy money out there into the economy. But the portfolio of the Fed has expanded enormously since the beginning of this crisis, and they wish they were thinking about how to sell some of these things off, rather than how to buy more.

Ryssdal: What about inflation? I mean, that's the thing that all of the Fed's critics have been saying, "You know what, you plow all this money into the economy, it's only going to send inflation spiraling." And yet we're not seeing that. Is there a disconnect between reality and what people are thinking they're going to see?

Rivlin: Yes. People aren't thinking very clearly about that. They learned somewhere back in some economics course that inflation is caused by too much money chasing too few goods. But right now, we're not in that situation at all. We could have people spending a lot more before there was any upward pressure on the price level. So fear of inflation is just a silly thing to be afraid of right now.

Ryssdal: Well, let me ask you this then: The policy that you mentioned of the Fed buying up more government debt and more mortgages -- it's known as "quantitative easing," it's also called "printing money" by a lot of people -- if there is no inflation now, what exactly is wrong with that?

Rivlin: It's something we ought to do if nothing else is working. It's what they have been doing at the depth of the crisis, and arguably, it helped. They don't want to do it again, but if they have to -- because the economy is going into a double dip -- they can.

Ryssdal: How constrained is the Fed by the issue of the federal deficit? You know, Congress is butting heads against that one every single day.

Rivlin: One of the reasons the Fed is somewhat reluctant to buy more government bonds is that that looks like feeding future deficits. I don't think that's a real worry, especially the only reason for doing that kind of policy would be that the economy is not recovering and at that moment, you don't worry about the deficit, not the short-term deficit. But one possibility, if the federal government, the Congress, and the president were to set out a strong, long-run deficit control plan -- three to five more years from now -- then it would be easier for the Fed to do what they need to do to stimulate the economy in the short run.

Ryssdal: The thing that everybody's going to jump on tomorrow, after this meeting, Dr. Rivlin, is the statement that the Fed comes out with. They will do a word-by-word comparison with the previous month. What should we look for in tomorrow's statement that's going to let us know what the Fed might intend?

Rivlin: I think they'll make it pretty clear, but they'll also make it pretty clear that they don't know what's coming. They don't know any more than you do, and they will probably stress the slow growth and the uncertainty of the future.

Ryssdal: And it'll say something like "The Fed remains ready to do whatever it takes."

Rivlin: Absolutely. And that's what it should say.

Ryssdal: Alice Rivlin, former vice chairman of the Federal Reserve. Now a senior fellow at the Brookings Institution. Dr. Rivlin, thanks so much for your time.

Rivlin: Enjoyed it.

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Ms. Rivlin's simplistic rendering of the arguments was disingenous. We have gone through a period of low inflation, but with asset bubbles, which have been blamed on unnecessarily easy monetary. Monetary policy is by necessity easy now, but perhaps overly easy. Because of the historical context, the concern about the Fed's policies are warranted and should be questioned.

Inflation is not "too much money chasing too few goods"; that's merely an effect of the real problem we should be worried about, which is too much money, period. Because the "money" that the government prints isn't really worth anything; the supply of real value is constant, and adding any "money" to the economy means that any unit of currency is worth less. And it's the Fed's *job* to ensure that the value of the currency is stable.

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