The Chuck Norris and Jean-Claude Van Damme Approach to Central Banking

Over at FT Alphaville, I argue the Fed is not ready for the next recession:

Whether or not a recession actually occurs, one thing is certain. The Fed in its current form is not well equipped to handle another downturn. The Fed’s inability over the past seven years to create a strong recovery from the last recession speaks to this weakness. The Fed tried everything from pushing interest rates to zero percent to buying up trillions of dollars of government bonds and yet it was still not able to generate the spending needed to get the economy back to full health.

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The real reason for this failure is the Fed’s firm commitment to low inflation. Like a governor placed a truck’s engine to control its speed, a commitment to low inflation helps prevent the economy from growing too fast. Normally, this is a good thing. But sometimes it can backfire. A truck driver may need to temporarily go faster to make up for lost time after being stuck in traffic. Similarly, an economy may need to temporarily speed up to get back to its full potential after a recession. Neither can happen with a rigid adherence to the speed limit.