Our Do Nothing Fed
Ugh.
These guys are getting really annoying.
The Federal Reserve Board released the minutes of the latest Open Market Committee today. The message was one of caution, slightly less optimism, and inaction. They promise to do something, sometime, just not yet.
The Fed has a charter to protect full employment and price stability. The latter has become the main goal of central bank policy the world over and with the former being relegated to a distant second. Focusing on price stability, aka combating inflation, has been such a priority that poor old full employment must feel a truly ugly step child. You could get kicked out of central banker clubs for allowing inflation to edge up, but a few points on the unemployment rate was never an issue. Indeed it became a badge of courage for central bankers to impose harsh measures that pushed unemployment up, as long as they fought inflation bravely. The feeling of that puritan hair shirt on their backs was a constant reminder to these bankers of their civic duty to impose discipline at any cost. Their reward was in the worldly and knowing looks they received from their peers around the globe. After all someone has to do the dirty work.
The relationship between inflation and employment has been well known for a while in economics. It is enshrined in the old Phillips curve which showed that higher inflation was associated with lower unemployment and vice versa. The relationship is not as strong as was first thought, but central banks all are supposed to manage that relationship in one way or another. In its current incarnation the Phillips curve is now the Taylor rule, which is more informal and a rule of thumb than a tight relationship. Using that rule, the current rate of interest for Fed funds, the overnight rate of interest banks charge each other, should be about -5%. Since that’s not possible we are left to use unconventional policies like buying a pot load of Treasuries to get loosen monetary policy.
Given all the above we would be reasonable to expect the Fed to be a hive of activity bashing away at the unemployment rate. After all:
- Full employment is one of the Fed’s stated policy goals
- We are nowhere near full employment
- Interest rates are at zero, or near zero
- Stable prices are also a policy goal for the Fed
- Prices are not stable, but are beginning to fall
So the Fed is failing to meet either of its stated policy goals.
That should stimulate a bit more than:
“The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings.”
Which is exactly what the Fed has been doing for a while.
So, even though it now acknowledges prices are out of line with its goals, and that employment is nowhere near the right level, the Fed is staying in a “wait and see” mode.
Our leadership is sorely lacking.
Meanwhile I won’t even dignify the comments of Thomas Hoenig with a response – he was the single “no” vote at the meeting and apparently worries that growth is so rampant that inflation is about to rage. Suffice to say he is an anti-social idiot.
With a do nothing Fed, no wonder this recovery is slow and feels more like a recession every day.
Addendum:
With respect to my comment on Thomas Hoenig: I have praised him in the past for his stand against big banks. He has been an advocate for breaking them up, and I applaud that approach.
But.
With that battle lost we have to focus on the current problems, and it is on those matters I find his position appalling. To advocate raising rates at present is ridiculous and deserves to be called so. To argue that our issue is that rates have been too low and that until they are higher we cannot return to normalcy is a statement without content. We would all like to return to the days of higher Fed Funds rates. Those levels of interest rate are associated with a thriving economy. It’s how we get there that matters. To summarize:
First, to argue we need to raise rates in order to re-esatblish a normal economy seems to me to be getting the cause and effect backwards. That makes him an idiot. Second: raising rates with unemployment still at horribly high levels is plainly and wantonly anti-social.
Hence anti-social idiot.
Good on the banking problem though.
