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You are here:Home>>Strategic Research & Analysis>>Larry Summers and the Burden of FED’s Monetary Policy
Tuesday, 20 August 2013 18:53

Larry Summers and the Burden of FED’s Monetary Policy

Written by Emeka Chiakwelu
Larry Summers Larry Summers photo: raw story

All things being equal, when all the dust has settled, President Obama will likely to appoint Larry Summers to replace Ben Bernanke as the chairman of Federal Reserve Bank. It will not be a big surprise to the vigilant observers who were witnessing the intensification of the process for the appointment of the chair for the FED.  Janet Yellen , vice chairman of FED that many are rooting for the replacement may fall short to capture the position because Summers has  more support where it counts, in Obama’s White House.


President Obama from his earlier appointments has proven his comfortable level with those around him and people he has closely worked with in the past. When President Obama came in to the office in 2008 when American was losing about 700,000 jobs monthly. Summers was among early appointments that aided the president in navigating the economy to a soft landing. Therefore going by those past experiences the likely candidate for the FED chairmanship is Larry Summers.


Even with Summers appointment (if it happens), the burden of monetary policy is not likely to lessen. The key function of FED is to work towards full employment and to regulate and control inflation.  Momentarily, FED is doing a good job on inflation which is 2 percent annually. The big deal here was that inflation has been fiercely tamed even with the interest rate at zero percent.  The idea is to keep interest zero to enable economic growth to be possible and thereby reduce or slow down unemployment. FED has been lucky so far, if not successful with keeping down inflation low but it is not as lucky with reducing unemployment. US national unemployment stood at 7.4 percent in July 2013, notwithstanding the massive quantitative easing and gigantic stimulus.


The high unemployment is the burden that monetary policy could not subside.   The incessant Quantitative Easing fails to make an appreciable difference in the face of the biting joblessness especially among the youths and recent college graduates. The waning power of monetary policy has been buttressed by the limited effectiveness of quantitative easing. The cheap money supply maybe keeping the Wall Street and banking community happy but it has not really make any major difference on the Main Street.


There is little to nothing the chairman of FED can accomplish even with quantitative easing at its disposal, when it comes to employment. The higher unemployment and anemic economic growth can be reason to say that FED’s monetary tools may not be necessarily significant as we are made to believe. This is not to down play the enormous power of FED’s responsibility, especially the inflow and regulation of liquidity. But at this time with the economy losing of momentum and energy, monetary policy may not hold the key we are looking for.


The answer to the economic problems may be found in the fiscal policy. The executive and law makers must work together to implement policies that could stimulate the economy and incentivize investors to infuse capital in the economy. The tax policy that is favorable for investment and repatriation of capitals are necessary to make the economy grow faster and bountifully. Lower taxes and meaningful regulations are good to catalyze the weak economic growth. Excessive regulations may not necessary deter economic growth but the psychological pennants may restrict investors and capitalists from sinking their monies in the economy.  Moderation in taxes and regulations with regards to fiscal policy may open the door to a steady and faster economic growth.


It has been speculated that Larry Summers may not be enamored of Quantitative Easing and it makes sense because it maybe futility in action - nothing last forever. Quantitative Easing have to stop in near future because with the interest rate at zero percent and with profuse liquidity are likely to trigger higher inflation. The best way forward is to make sure that monetary and fiscal policies are complementary.


Emeka   Chiakwelu, Principal Policy Strategist at AFRIPOL. His works have appeared in Wall Street Journal, Huffington Post, Forbes and many other important journals around the world. His writings have also been cited in many economic books, publications and many institutions of higher learning including tagteam Harvard Education.,     This e-mail address is being protected from spambots. You need JavaScript enabled to view it

Last modified on Friday, 23 August 2013 05:05

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