The Fed Embraces a "Whatever It Takes" Model on Inflation
The level of Fedspeak last week tells us something peculiar happened at the Fed. After the Jackson Hole meeting, and with the release of the new goals and strategy updates, members of the Fed are providing detailed explanations about the new framework. Perhaps by design, each explanation raises more questions than provides answers.
On Monday, Vice Chair Richard Clarida gave a speech, The Federal Reserve’s New Monetary Policy Framework: A Robust Evolution, expanding on the new vision, which aims for “average inflation targeting” and will continue to “remain focused exclusively on meeting the dual mandate” of maximum employment and stable prices.
He mentions that going forward changes to unemployment will not, in and of themselves, nevessarily be a cause to raise interest rates. The “new” idea flies in the face of the widely held central banker belief in the Phillips curve, the idea there is a tradeoff between inflation and unemployment. To his credit, Clarida said one of the most honest things that has ever been publicly stated by a central banker:
This is a robust evolution in the Federal Reserve’s policy framework and, to me, reflects the reality that econometric models of maximum employment, while essential inputs to monetary policy, can be and have been wrong.
The serendipitous event of abandoning failed economic models does not leave us without a sense of irony. The question remains: If employment data is no longer as important as it once was and if “appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time,” what will it take to raise rates again?
If the intent is to never raise rates, then the concepts of asset bubbles, unsustainable debt levels and malinvestments, among other things, continue to go unnoticed by our planners. And if they succeed in suppressing rates for another decade, the next economic crisis, the level of risk and the Fed’s response become almost unfathomable.
Tuesday offered Governor Lael Brainard giving us one of the greatest Fedspeak-laden speeches of the year, entitled: Bringing the Statement on Longer-Run Goals and Monetary Policy Strategy into Alignment with Longer-Run Changes in the Economy. Championing the commitment to achieving their goals by any means, she noted:
It will be important to provide the requisite accommodation to achieve maximum employment and average inflation of 2 percent over time, following persistent underperformance.
We are left wondering what exactly the “requisite accommodations” will be that will achieve any of these objectives. Given their track record on inflation, there’s little reason to believe that the Fed has finally found a way to control it.
Continuing with the idea of a less narrowly defined employment goal, she expanded on employment “inclusiveness” to aid those from diverse socioeconomic backgrounds:
The statement defines the statutory maximum level of employment as a broad-based and inclusive goal and eliminates the reference to a numerical estimate of the longer-run normal unemployment rate.
With no economic theory to draw upon, nor plan to reach these goals, the Fed has given us nothing more than wishful thinking. We have no idea what the Fed can do to help disenfranchised groups who, in the Fed’s own words, “face the greatest structural challenges in the labor market.” We don’t know the maximum unemployment goals. Nor do we know how inflation of over 2 percent can be met. To make matters worse, it appears they don’t either.
Economic policy has come a long way. But we’re a far cry from 1989, when Alan Greenspan wrote a letter to the Senate Banking Committee saying that he desired “approximately zero” inflation. Yet, after all the recent speeches, we remain in the same boat as the Fed, with no clue as to how these goals can be reached nor the reason for the goals in the first place. We’re entering this decade in crisis mode, guided by those who need guiding themselves. They remain willfully ignorant of the world around them and the damage they inflict.