December 12, 2012

Jason Reed, Reuters

In the “elections have consequences” department, add today’s announcement by the Federal Reserve that it will not only tolerate somewhat more inflation, but will do so until unemployment drops below 6.5 percent. It’s a decision that pushes the Fed more and more in the direction of liberal economists who have supported monetary policy designed to encourage economic growth, not fight inflation. (See Mark Thoma’s explanation of the new policy.)

Or, to put it another way, it’s a sign that the current Fed board is increasingly taking the “dual” part of its dual mandate — to seek stable prices and full employment — a lot more seriously than it seemed to earlier in Barack Obama’s presidency.

And so today’s decision is a consequence of an election, but not the one we just had — it’s a consequence of the November 2008 election, which allowed Obama to appoint and a Democratic Senate to confirm members of the Fed Board of Governors; he’s now appointed six of seven, all of whom voted for today’s policy.

Republicans, meanwhile, have moved in the other direction, with many of them rejecting entirely the Fed’s responsibility for improving the economy in favor of having it worry only about inflation. In fact, just last week, Marco Rubio implied that he may adopt that as a key position in his possible presidential campaign. Yes, that’s right: it didn’t get that much attention during the recent campaign, but many Republicans believe that (at least when it comes to monetary policy) the United States has been paying too much attention to jobs and not enough to fighting inflation.

Of course, there are no guarantees that the new Fed policy will work. But after a very slow start, in which Obama was slow to nominate new people to the Fed and the Senate was slow to confirm those he did nominate, at least Democrats are now implementing the economic policy that many liberal economists support. And thanks to Obama’s re-election and Democratic gains in the Senate, they’ll be able to keep doing that for some time into the future. Elections have consequences!