After watching the State of the Union address, and the GOP rebuttal, you should consider the role that the economic crisis played in getting us to this point. Obama didn’t mention many cyclical or monetary factors, but rather emphasized growth in his speech. Notably, the GOP rebuttal did address monetary policy when Paul Ryan called for sound money. Tom Iacono at Seeking Alpha discusses what Ryan is reaching for when calling for sound money in his speech and recent writings. Ryan is calling for the use of a basket of currencies to be used when setting monetary policy alongside an explicit inflation target. Changing the Fed’s policy mandate is a direct challenge to the current dual mandate of the Federal Reserve. Some members of the FOMC, such as Charles Plosser support changing to an explicit inflation target.
Questions you might try to think about:
- I asked this question in a previous blog, but you might want to consider it here given Ryan’s recent comments. Should rules be set to manage monetary policy? If so, what or who would help out in times of crisis if you even think anyone should intervene. You might consider the case of Iceland to examine the aftermath of not bailing out the banking system as many other countries have done.
- Would the Fed be changing it’s “easy money” stance if the U.S. inflation target were 2%? Would we still be doing QE1 and QE2?
- If we were to switch to a strict inflation target, would the Fed be in danger of losing its independence?
- Would the use of a strict inflation target help ‘anchor’ inflation expectations in the general public?