Fed Will Adopt “Helicopter Money” In The Next Couple of Years, Says Economist

Fed Will Adopt “Helicopter Money” In The Next Couple Of Years, Says Economist

Recently, US President Donald Trump stepped up his demands for easier monetary policy just hours after March employment showed stronger than expected job growth and little upward pressure on wages.

“I personally think the Fed should drop rates, they've really slowed us down,” Trump told reporters. “There's no inflation. In terms of quantitative tightening, it should be quantitative easing.”

Around the same time, Larry Kudlow, White House Economic Adviser said that they think the Fed went “too far” in its past hiking cycle and that the central bank could use “new thinking” for how supply-side dynamics influence the economy broadly.

Helicopter Money

In what could be said as prescient, Gluskin Sheff, a Canadian independent wealth management firm’s chief economist David Rosenberg during a discussion about how the “pause” by Fed impacted their monetary policy outlook declared that central bank would opt for something more radical by embracing MMT instead of giving QE another try.

As MacroVoice's Erik Townsend talked about the Fed’s ability to fight back another downturn, stating

“What I kind of see on the horizon is I think that if they try to propose another round of QE that looks like the last several, I think the political left is going to say “no way.”

There’s going to be a huge revolt and people are going to say, look, if you’re going to create money out of thin air, it needs to be helicopter money. Give it to the people, not to Wall Street.”

In response, Rosenberg said,

“The ensuing quantitative easings and incursions by the Bernanke Fed were all aimed at promoting a stronger stock market,”

but

“not only do we have record income inequality, but this created a situation of also record wealth inequality. With no evident impacts that it had any significant multiplier impacts on overall economic growth.”

Interest Rates

Historically, when the US has entered a recession, the Fed has to cut interest rates by 500 basis points to help the economy get back onto the track for growth. With the backdrop of this, Rosenstein further elaborates,

“When push came to shove and you look at what’s called the shadow Fed funds rate (and you can see this on the St. Louis Fed website), de facto, with the balance sheet effect, the funds rate actually went to minus 5% this cycle. People don’t realize how aggressive the Fed got.”

Outright Monetization

Now, historically, whatever the Fed might add to its balance sheet, it won’t have much of an impact and that’s why Rosenstein expects the central bank to engage in monetization in

“in the next couple years.”

He says, with debt monetization or helicopter money the Treasury could put a 100-year bond or a 5-trillion-dollar coin on the balance sheet of the Fed.

“And the Fed prints that money and then hands it over to the Treasury to do with it what you would like. And you don’t have to change the tax system. You don’t have to change any laws and have it held up in the House or the Senate. And there’s a whole bunch of things you could do with that money to try and stimulate aggregate demand.”

This he says will create a “whole new inflationary experience” and we will get worried about inflation at some point and then only deal with it.