The Fed gives itself a triple mandate
Every once and a while you need to stop and take stock of just how insane current monetary policy really is:
The tepid demand dampened inflation pressures last month. A price index for consumer spending edged up 0.1 percent, slowing from a 0.4 percent increase in June. Over the past 12 months, prices rose 1.4 percent compared with 1.3 percent in June.
It was the biggest increase since February.
Excluding food and energy, the price index for consumer spending nudged up 0.1 percent after advancing 0.2 percent in June. Core prices were up 1.2 percent from a year ago, rising by the same margin for a fourth consecutive month.
Both inflation measures continue to trend below the Fed’s 2 percent target. That, combined with the lacklustre consumer spending, would argue against the U.S. central bank trimming the $85 billion in bond purchases it is making each month to keep interest rates low.
Yes, so it would seem. Indeed they should sharply boost the pace of QE. But they will probably taper anyway.
Now I suppose you could argue that the Fed doesn’t have a single mandate, they are supposed to also focus on employment, so while easier money is needed to hit the inflation target, the employment target requires . . . umm, easier money?
Reuters continues:
Many economists, however, believe the Fed will make an announcement on the tapering at its September 17-18 policy meeting, starting off with a small cut to the bond-buying program, known as quantitative easing.
“This does nothing to alter our view of tapering. Fear of unquantifiable financial risks within a QE regime that offers diminishing returns is driving the policy agenda, not strong growth and inflation,” said Eric Green, global head for rates, foreign exchange and commodity research at TD Securities in New York.
Yes, I forget about the third (and top secret) mandate that Congress gave the Fed; “unquantifiable financial risks.” Here’s a general observation. When big cumbersome institutions are given the mandate to target “unquantifiable” anything, don’t hold your breath for good outcomes.
This is really absurd on so many levels. The asset markets are much more stable when you have steady NGDP growth, than when you have wild swings in NGDP. Anyone recall asset prices in 2008-09? The asset markets are suggesting that tapering will create instability in emerging markets, and to a lesser extent the US stock market.
Ben Bernanke is a student of history, and knows full well that this reasoning is EXACTLY WHAT THE FED DID WRONG in the 1930s. And I mean exactly. You could find dozens of similar articles in the NYT from the 1930s. I hope he’s quietly pushing back against this view from within the Fed.
PS. The current frontrunner for the job of Fed chair is the most famous proponent of focusing Fed policy on reducing unquantifiable financial risks.
PPS. The ECB raised rates in 2011. How’d that reduce “unquantifiable financial risks?” How about the Fed’s tight money policy of 1937?
PPPS. Right now I want all readers to cross their fingers. That’s it. That’s the Fed’s secret plan to bring inflation up to their 2% target.
PPPPS. Marcus Nunes has a good post on the declining inflation rate in America.
PPPPPS. Here’s Ryan Avent:
There are limits to what reporting can uncover about a decision that is the president’s to make. Mr Obama may in fact be enthralled by Mr Summers’ private monetary views. For all I know the president is a die-hard Scott Sumner fan and Mr Summers has whispered to him that market monetarism is now his macroeconomic lodestar. But there are few signs that anything like that is going on.
Here are some signs that that is not going on:
1. I favor strict rules, Summers favors discretion.
2. I believe monetary policy is highly effective at the zero bound, Summers believes it’s ineffective.
3. I oppose fiscal stimulus, Summers is in favor.
4. I believe the Fed should ignore asset “bubbles,” Summer disagrees.
5. I believe wage flexibility is stabilizing, Summers thinks it’s destabilizing.
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31. August 2013 at 09:19
I think Krugman and you are in the same camp. Bernanke used to be there. Is he still? http://krugman.blogs.nytimes.com/2013/08/31/bankers-workers-obama-and-summers/?_r=0&gwh=B990388ACDA06E1C880F00E398EB76A8
31. August 2013 at 09:26
I remember you have argued “keep finance out of macro”. Would you break up the Fed to a pure monetary authority and another institution that does financial stability policy if you had such a power?
31. August 2013 at 10:37
Chun, Absolutely yes. Break it up.
31. August 2013 at 12:01
I may be wrong or too simplistic.I have understood this matter like this: If a central bank’s policy objectives are both price stability and full employment, or stable NGDP growth path as you have argued, the central bank should be committed to those objectives and that’s the way it can actually contribute to financial stability. If the Fed tried to alter money supply because of too volatile stock market indexes, then it would make them more volatile. However, if it showed the market that it were indeed committed to its macro objectives, they would be tamed because economic agents could well predict what the economy would be heading and make better economic decisions.
31. August 2013 at 12:35
Chun, That’s right. You are not too simplistic, you are ahead of most of the profession.
31. August 2013 at 14:48
Triple mandate indeed. Why does Bernanke support it? Maybe he thinks that the Evans rule is sufficient to achieve the first two targets, and as QE is a secondary tool, financial instability is important in using it.
31. August 2013 at 15:06
The problem is that people think the target (whatever it is) is either unachievable or hard to achieve.
Things would be much simpler if the entire FOMC was fired if they missed the target two quarters in a row. Or better yet we could criminalize failure like we’ve done with business, and just move them from the Federal Reserve Board and hand them over to the Federal Bureaus of Prisons. That would solve the problem of fuzzy thinking.
31. August 2013 at 16:23
Okay, QE axiomatically leads to hyperinflation—no, scratch that, it is inert. But wait! QE leads to asset bubbles…like in Japan. Okay scratch that. Here is the real story: QE leads to…unquantifiable risks.
You know, financial markets were so stable in 2008, before this QE stuff…
31. August 2013 at 17:34
Fed monetary policy is ineffective because it tries to affect the interest rate of reserves when most of the money used in the economy is in the form of commercial bank deposits. Reserves st best can create an upward limit on how much commercial bank deposits are created but doesnt have any significant effect on commercial bank lending.
If the overall economy could directly access the reserve system then the fed could be effective.
31. August 2013 at 20:00
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31. August 2013 at 23:51
6. You believe monetary policy is conducted for the sake of the economy. Summers believes it is a tool of geopolitics.
1. September 2013 at 07:04
dtoh, Bad policy at the Fed reflects bad thinking among the broader group of economists, politicians and pundits. Until we change those views, it’s not going to change at the Fed.
5. September 2013 at 16:55
[…] The concern is with the twin fiscal drags of increased payroll taxes coupled with sequester and the looming budget fight (to say nothing of the impact of Syria), monetary policy has been keeping the economy afloat, and cutting back on it might do severe harm. From Scott Sumner: […]
5. September 2013 at 17:01
[…] The concern is with the twin fiscal drags of increased payroll taxes coupled with sequester and the looming budget fight (to say nothing of the impact of Syria), monetary policy has been keeping the economy afloat, and cutting back on it might do severe harm. From Scott Sumner: […]
23. September 2013 at 09:45
[…] The concern is with the twin fiscal drags of increased payroll taxes coupled with sequester and the looming budget fight (to say nothing of the impact of Syria), monetary policy has been keeping the economy afloat, and cutting back on it might do severe harm. From Scott Sumner: […]