Benn Steil offers a neat and innovative way for the Federal Reserve to reverse its monetary stimulus efforts as the economy recovers, without the worrisome economic and political consequences of having to sell off its massive stock of mortgage-backed securities.
"Europe's leaders were right about the pressure. Monetary union without banking union will not work, and a workable banking union requires at least some elements of fiscal and political union. But they were wrong about the irresistible part. There is no inevitability about what comes next."
Authors: Benn Steil and Dinah Walker Wall Street Journal
Benn Steil's Wall Street Journal op-ed, co-authored with Dinah Walker, shows that the Fed has effectively been targeting "risk on, risk off"—prodding investors into and out of risky financial assets—for over a decade now. He derives a rule that predicts the Fed's behavior since 2000 even better than the "Taylor Rule" did from 1987 to 1999.
As Europe continues to weather economic stagnation and a succession of debt crises, the European Central Bank has responded with an aggressive set of monetary policies that have redefined the bank's original mandate.
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