I’m not surprised when reporters say incorrect things about an economy. They’re reporters, they’re just repeating what someone else said, and often someone’s using hyperbole to recruit people to their side.
Consequently, when everyday citizens incorrectly describe an economic policy or condition, I think it’s just the reflection of poor reporting on the subject coupled with the rhetoric of people looking for some political gain. Most people don’t understand economics, and don’t really want to get into enough details to start “getting it.” It can appear to be a daunting subject.
But when economists incorrectly describe a situation, it’s really frustrating. This is common when talking about monetary policy. It’s described as “tight” or “loose,” or money is described as “easy” or “tight.” The problem is that people get this backwards.
When the Fed lowers interest rates, it’s doing so to increase the money supply to help stimulate economic growth. When it raises interest rates, it’s trying to shrink the money supply to curb inflation. Consequently, when interest rates are low, people say that’s “easy money.” On the surface, that might sound correct. The Fed is increasing the money supply, so there’s more money available, and lending should increase. The problem is that it’s wrong.
The fed will lower rates to try to make money easier, but that doesn’t mean money is easy. They’re making money easier because it’s been too tight. The Fed is trying to combat tight money, by making money easier, but that doesn’t mean money is easy. When the Fed cuts interest rates, it means money is too tight, and they’re trying to counteract that problem. Conversely, when the Fed raises interest rates, people refer to that as tight money. But what it really means is that money is currently too easy, and they’re trying to reign that in to counteract current inflationary trends. Higher than targeted inflation means money is easy. Lower than targeted means money is too tight.
Which brings us to our current situation in the US. Almost everyone describes the situation as “easy” or “loose” since the Federal Funds Rate is near 0%. That’s actually incorrect. The rate is set that low because money is too tight. Economic growth isn’t as fast as we’d like, and inflation is *under* the target of 2%. That second point is a big deal because since the Fed started putting more emphasis on inflation, we’ve rarely deviated from our targets by more than 0.1% in a given period, and will immediately adjust. Except since the 2008 financial crisis. Inflation has been consistently too low. Lower than targeted inflation means money is too tight. We’ve been too tight for the past several years. And since we can’t make interest rates negative, the Fed has been doing what it calls Quantitative Easing as another method to try to increase the money supply.
The fact that money has been too tight, not too loose, during our economic downturn and subsequent recovery effort doesn’t sound right to most people. This is further muddled by political efforts to stimulate the economy with lots of stimulus spending. It feels like the government is throwing money around all over the place. But that’s not monetary policy, it’s fiscal policy. What the Fed does is monetary policy. They’ve had money too loose. Bernanke knows it, and that’s why he’s on his third round of QE, which is set to be continuous until the recovery is underway. Most of what he says hints that he knows that we need looser money, but monetary policy must be agreed upon by a committee. Convincing inflation hawks to through hundreds of billions of dollars into the money supply is a tough sell.