Fed's New Policy Will Compound Its Errors

Mish

The Fed announced a new inflation policy today. It won't improve anything.

Fed Updates Long Term Strategy

Today the Fed issued an update to its Longer-Term Goals on Monetary Policy.

  • On maximum employment, the FOMC emphasized that maximum employment is a broad-based and inclusive goal and reports that its policy decision will be informed by its "assessments of the shortfalls of employment from its maximum level." The original document referred to "deviations from its maximum level."
  • On price stability, the FOMC adjusted its strategy for achieving its longer-run inflation goal of 2 percent by noting that it "seeks to achieve inflation that averages 2 percent over time." To this end, the revised statement states that "following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time." 
  • The updates to the strategy statement explicitly acknowledge the challenges for monetary policy posed by a persistently low interest rate environment. Here in the United States and around the world, monetary policy interest rates are more likely to be constrained by their effective lower-bound than in the past.

Price Stability

Fed chair Jerome Powell would not recognize price stability if it jumped out of the audience and spit grapefruit juice in his eye.

Somehow the Fed is wedded to a goal of 2% inflation with no explanation as to why the goal should be 2% in the first place.

Moreover, inflation is under 2% because the Fed ignores housing prices, employer health care costs, education, and stock market bubbles.

Offsetting Errors

The idea that one can offset errors by further errors in the other direction is pure nonsense.

It's as if a doctor said "For the last three months we gave you too little medicine so for the next three months we will give you too much." 

Alternatively, think of it this way.

No Economic Benefit to Inflation

My Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” has gone unanswered.

There is no economic benefit to inflation but there are winners and losers. The winners are those with first access to money, namely the banks and the already wealthy.

The Fed complains about income and wealth inequality but they are the primary source.

BIS Deflation Study

The BIS did a historical study and found routine price deflation was not any problem at all.

"Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the study.

For a discussion of the BIS study, please see Historical Perspective on CPI Deflations

Asset Bubble Deflation

It’s asset bubble deflation that is damaging. When asset bubbles burst, debt deflation results.

Central banks’ seriously misguided attempts to defeat routine consumer price deflation is what fuels the destructive build up of unproductive debt and asset bubbles that eventually collapse.

The problem is not deflation, it's the Fed's misguided attempts to prevent it.

Mish

Comments (47)
No. 1-29
PecuniaNonOlet
PecuniaNonOlet

67 days till election.

jfpersona1
jfpersona1

So apparently nobody learned a thing in the 70s and early 80s.

How typical.

Bam_Man
Bam_Man

"More inflation" is going to make the average person's life better?
Are these people completely insane?
Wait a minute. Don't answer that.

Sechel
Sechel

Goodhart's law

Casual_Observer
Casual_Observer

These are the kind of policy errors that will lead to MMT.

AbeFroman
AbeFroman

“ The Fed complains about income and wealth inequality but they are the primary source.”

Ding! Ding! Ding!

And guess who just got their remit expanded to include fighting racial inequality?

This is straight out of Infernal Affairs or The Departed.

Tony Bennett
Tony Bennett

When all you have is a hammer ...

Tony Bennett
Tony Bennett

"The Fed complains about income and wealth inequality but they are the primary source."

...

A reporter needs the stones to ask Powell about HIS portfolio. Powell is worth tens of $millions. Portfolio is LOADED with stock and (high yield) bond index funds. Federal Reserve's actions this year have directly benefited Powell's net worth. Well into the $millions.

Must be extremely nice to have control over the very market where your net worth stashed.

Comments ate the link. Here is Powell's financial disclosure minus the http

extapps2.oge.gov/201/Presiden.nsf/PAS+Index/B7B81E8D7ED5CA51852584040027DABB/$FILE/Jerome-H-Powell-2019-278.pdf

Sechel
Sechel

The Fed needs to hire some psychologists. If the government is intent on destroying my savings rather than spend it all now, i'm going to horde and protect it even more.

Call_me_Al
Call_me_Al

The title of this post is only appropriate if one thinks that the Fed's goal is for its policies to benefit the general public. For the Fed's owners there really haven't been any noteworthy errors over the past 100+ years.

Jojo
Jojo

Why does the government get to say what is the rate of inflation when it is to their benefit to ensure that the inflation numbers remain low?

Shouldn't there be an independent, non-government economic agency that defines what is inflation, what is measured to determine the rate of inflation (or deflation) and then publishes the numbers periodically?

Maybe we can get the new Biden administration to consider this?

nzyank
nzyank

Isn't lack of a coherent fiscal policy the real issue?

Idaho
Idaho

“The Fed announced a new inflation policy today. It won't improve anything.” Incorrect. It should improve the price of gold nicely.

ToInfinityandBeyond
ToInfinityandBeyond

The rich get richer. The poor gets shafted. What’s new?

Maximus_Minimus
Maximus_Minimus

Let's not forget the second cause of the destruction of finance and soon to be economy: the global synchronised debasement, i.e. synchronisation of interest rates through liberalisation of financial flows.
As they once again gather for their Jackson watering Hole groupthink sessions, one subject is sure to be off the agenda: what has led to this precariously calamitous situation.

TimeToTest
TimeToTest

The Feds policy is simple. It’s whatever it takes to keep the wheels on this thing.

More and higher is the mandate.

Vigorish
Vigorish

These Fed fools are a hoot. Hey, Jay, try this, if you really want inflation, raise interest rates. What? Don't you understand money lending? Real people in the real world (not your world), don't lend money (take risks) without some kind of return. You want real banks (unlike yours) to lend money, give them an incentive. Then watch that magic money multiplier you only dream about just take off and increase the money supply 10 fold, and the velocity of money thrice more, and BAMMO! You'll have more inflation than you can shake a stick at. Don't you remember the 1970s? Hahahaha, you're behavior is worthy of socially unacceptable words. But Misk Talk is here to straighten you out. You're welcome.

Sechel
Sechel

took me a while to digest the gravitas of the fed's new policy. the fed has a dual mandate in its charter from congress. criticize the fed as you may but they could always argue they were following the flawed goals set out by congress. well today they , on their own threw out the dual mandate and said they're now only focusing on maximum employment. didn't know the fed had so much latitude. in another time if we had men in the senate and congress who were serious students of fed history and understood economics they might actually speak up but the legislature is so derelict in its duty having ceded authority to the executive and the Federal Reserve that they are too timid to take back we just accept this.

Rbm
Rbm

So does that translate to higher stocks /housing/ medical and lower real wages for the working man. .

Petronix
Petronix

What I dont understand is how Powell going to increase employment through higher inflation? This insanity really is something I cannot grasp.

Sechel
Sechel

Is this really a new policy. Fed's been talking like this for months now. The era of Paul Volcker is long gone. In my book the last great Fed Reserve President

Jojo
Jojo

The NYT had a good article on this Thursday:

Fed Chair Sets Stage for Longer Periods of Lower Rates
Jerome H. Powell said the central bank would focus its efforts on maintaining a strong labor market while tolerating higher inflation.
By Jeanna Smialek
Aug. 27, 2020

Gerard Alex
Gerard Alex

I think the FED’s new policy directives point to the offering of 50 and possibly 100 year Treasuries. Remove all risk of future rate hikes.

ToInfinityandBeyond
ToInfinityandBeyond

When exactly did the muppets start running the Fed?

RayLopez
RayLopez

What is the flaw in all of the comments above? They assume money is not neutral. That robbing Peter to pay Paul will somehow lift all boats (increase GDP for all people). It's a lie, a big a lie as "Abenomics" (officially dead as of today, as Abe Shino is leaving as PM of JP). Money is neutral. What this means that as a whole, printing money (or not printing money) has NO EFFECT on GDP. None. If it was otherwise, the Spanish finding New World gold and silver would have been an economic powerhouse now. Sure finding gold helped them fund a few wars, and that's fine, but the effect of money created had no real long term effect on total GDP. In fact, real wages fell since the 15th century and have been falling throughout. The paper to read is this one: Paul Schmelzing of the Yale School of Management (Jan. 2020 paper, 'real rates have declined by 0.006-0.016 percentage points a year since the late Middle Ages (see chart). That may not seem much, but it means real interest rates have fallen from an average of around 10% in the 15th century to just 0.4% in 2018. ')

Who else believed money is neutral (robbing Peter to pay Paul has no real long term benefit to a country as a whole)? Fisher Black, Nobel prize winner in economics, Wall Street guru, and, importantly, he did not die poor.

Stop believing in the Wizard of Oz (the Fed), people. It's a children's fairy tale.

Vigorish
Vigorish

The Fed is just another victim of regulatory capture. They know low interest rates means tight money, but it serves the interests of the private owners of the Fed, and our deficit addicted Congress, to have most everyone believe otherwise. And why should you believe me? I don't have a fake Nobel-in-the-memory-of-Alfred Nobel in economics. Just that anyone with two eyes and that rare commodity of common sense can see what has been going on since 1987. It's ultra low rates for the insiders to fund stock buy-backs and government deficit spending, but 20% on credit cards for the wage-slaves. And the wee folk debate what is so plainly obvious. Look, you want to win at this rigged game? Live within your means. Pay off all your debt. Use your credit cards just for convenience and the 1.5% cash back. Save anyway, even if you get no return in your checking account. The FDIC insurance is certainly worth something, given the criminal idiots in charge. Learn to fix your own s**t, your house, your car, your body (exercise, eat right, cut out the sugar). Throw away that smart phone. It's rotting your brain with the constant drivel of the seven deadly sins. What are you eating right now? Gluttony. Look at my cute pet? Pride. So-and-so is a liar? Wrath. Margaritas on the beach? Sloth. Fed bailing out billionaire? Envy. NAS-100 to the moon? Greed. Yeah, it's getting tricky now remembering that 7th one ... Lust ! lust lust lust. can't get enough of that lust.

Brother
Brother

So the Fed admits to a long term 2% thievery of our money supply, great. The more they print and distribute the less value it has. And the happy taxpayer gets a raise and thinks he has more money! Cycle rinse repeat.

pakr
pakr

Wouldn't those who are already wealthy lose from inflation if they are not creating new value?


Global Economics

FEATURED
COMMUNITY