I would argue the Fed has proved, all things considered, to be led one of the most capable central bankers in history. Of the major central banks in the world, it has also shown that it understands how the economy works and what role it is supposed to play in it a great deal better than most others. I really enjoy reading about the thinking that goes on inside smaller central banks like the Swedish Riksbank, and some of the most creative thinking-out-loud by people actually wielding any power in the matter arguably comes out of those smaller central banks. But deciding how to run monetary policy for a small country like Sweden is, needless to say, something completely different than doing the same for the two largest economies in the world, the United States and the Eurozone.
Yet the Fed did not pass all tests presented to it with flying colors – quite the opposite. As I have mentioned before, the housing bubble crashed in 2006, and the real effects throughout the economy were not felt until the Fed decided to let NGDP growth collapse almost 2 years later. And by basically all conventional measures, monetary policy in the United States was also too tight compared to what was needed in the aftermath of the crisis. But it’s nothing compared to the colossal policy failure that the ECB represents. And what’s even more impressive is that the people in charge at the Fed are not ashamed of admitting their past failures. Over at Bloomberg we have William Dudley, the vice chairman of the Fed’s Open Market Committee, admitting that
“With the benefit of hindsight, we did not provide enough stimulus. Perhaps, if we had paid more attention to the persistent divergence between growth forecasts and outturns in Japan in the 1990s, we might have been more skeptical about the prospects for a strong economic recovery, even with a more aggressive monetary policy regime.”
Glad we cleared that up. Let’s not do it again. Again.