Fed’s New Policy Will Compound Its Errors

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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.

 

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