For students of monetary policy, yesterday’s Wall Street Journal has two articles that deserve particular attention. The first is a piece of reporting by Nick Timiraos about the Fed’s balance sheet. The second is an op-ed by William Walker and Stanton Anderson about inflation and trade policy. Both contain more heat than light.
Mr. Timiraos discusses the Fed’s deliberations about reducing its asset holdings. Reducing its balance sheet is “another tool” for fighting inflation. The primary tool is, of course, interest rates. Christopher Waller, normally a voice for saner policy on the Fed board, is quoted as saying the Fed won’t “have to raise interest rates quite as much” if the Fed doesn’t hold quite so many bonds. This implies that changing interest rates and adjusting the balance sheet are two substitutable ways of conducting monetary policy.