The Fed Can Handle the Fiscal Cliff
Posted at 1:30 p.m. on Dec. 13, 2012
While analysts have predicted a fresh recession if lawmakers fail to avoid the “fiscal cliff,” Ramesh Ponnuru and David Beckworth that the Federal Reserve could prevent the dire economic predictions.
“The point should be easy to grasp if you imagine a central bank that has a 2 percent inflation target that it hits every year… If austerity shrank the economy, the central bank would re-inflate it… In the real world, of course, central banks do not hit their targets perfectly. They do, however, have the power to come close, which means that fiscal policy cannot have a large effect if they are trying.”
“Knowing that the Fed would do whatever it takes, including aggressive open market operations, to maintain steady nominal GDP growth would create confidence and more economic certainty for households and firms — regardless of whether the government was cutting spending. The effect should be to offset every dollar of reduced government spending by roughly a dollar of increased private spending.”