Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance

Speaker 0: Forward guidance is brought to you by VanEck, a global leader in asset management since 1955. You'll be hearing more about a VanEck ETF later on. But for now, let's get into today's interview. I am extremely pleased to welcome to forward guidance William English, professor of the practice at the Yale School of Management and senior fellow at the Yale program on financial stability. Bill served as the director of division of monetary affairs for the board of governors for the Federal Reserve and the secretary for the federal open market committee from 2010 to 2015.

Bill, thank you so much for doing this. Welcome to forward guidance.

Speaker 1: Thanks very much, Jack. Happy to be here.

Speaker 0: I am really glad you're here. Bill, I wanna start off by asking you from a book you recently published. It's a collection of essays about monetary policy and the responses to the post pandemic inflation. In your forward, you had 7 lessons about what central bankers and the economics community could learn about monetary policy and inflation. And I'm I'm curious on your 6th lesson is that, quote, monetary policy will have a much larger fiscal effect than many hoped in the pre COVID era of low interest rates, an effect which could lead to more political pressure on central banks.

What did you mean by that?

Speaker 1: So I should start by saying this is joint work with Christian Forbes and Angelabide. We put put the document, the the book together, and and we got chapters from from many central bankers around the world. We're very grateful for their their input. That that's right. They're one of our lessons, I think, is that it it would be very nice and very helpful if monetary policy and fiscal policy were really separated.

They never really were separated. There always were fiscal implications of monetary policy. But but for a long time, they were relatively small because interest rates were low. And so changes in monetary policy didn't have big implications for fiscal policy, and that I think was was helpful. That that wasn't true during this post COVID period for for a few reasons.

I mean, one is monetary policy makers particularly in their role as crisis managers, lenders of last resort needed fiscal support. And so the the congress passed, in the the COVID relief act, you know, provision of funds to the treasury to provide support for Fed lending programs that were not risk free that that involved taking on some real credit risk. And so there there was a link that monetary policy broadly conceived needed fiscal support. Then in addition to that, as a result of the crisis, the level of debt in the US, government debt went up a lot. Deficits got much larger.

And so when it came time to raise rates, rates went up much higher than they had for a long time. The effect of that on the budget is big. The the interest cost of of that debt is is substantial. So I think these these effects, which for a long time, for a generation, were pretty small, suddenly look not so small. And, and as as we said, I think the the results of that could be increased political pressure on the Fed if if there's a big fiscal, effort to kind of get the deficit down and so on.