Mike Konczal: What Constrains the Federal Reserve? An Interview with Joseph Gagnon

Thayer Hall at Harvard

Thayer Hall at Harvard

Anyone who has been following the monetary policy debates on this blog will be interested in this interview with Joseph Gagnon. Joseph was an insider at the Fed, but now works at the Peterson Institute for International Economics: thus he can speak freely. 

Here is one exchange in the interview:

Mike Konczal: Let’s start with the basics. Does a random person – not at the highest levels, but among those who make up most of the researchers and workers – at the Federal Reserve think that the Fed is “out of ammo”? What are their opinions on how well previous expansionary monetary policy at the zero bound, like QE2 and Operation Twist, have worked to bolster the economy?
Joseph Gagnon: Let me start by linking to a blog post from a former classmate at his new blog, Miles Kimball’s Balance Sheet Monetary Policy: A Primer, that spells out what the Fed could do and why it would work. However, he ignores some of the legal restrictions on what the Fed can do. (See below.)

Joseph goes on to detail exactly what legal restrictions the Fed faces on what assets it is allowed to purchase.  Though there may be some legal interpretation here, I can tell you that it matches the view of legal restrictions facing the Fed that I heard from Fed staffers when I visited the Fed as detailed in my second post, Getting the Biggest Bang for the Buck in Fiscal Policy.“ I will refer to this interview in the future as a source for understanding the legal restrictions facing the Fed. 

Joseph was my undergraduate classmate: our dorm rooms were only a few steps away from each other freshman year in Thayer Hall on the Yard.  I am delighted to be in contact with him again through the blogosphere.