The Fed Lays Out a Future Road Map
Day 1 of the Economic Policy Symposium at Jackson Hole saw the release of the revised Statement on Longer-Run Goals and Monetary Policy Strategy. This was last updated eight years ago. It’s a big deal! True to expectation, the Fed never fails us:
The Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity facilitates well-informed decision making by households and businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society.
Because nothing screams “democratic society” like a clandestine group of economic planners given a government-enforced monopoly on the nation’s money supply. That said, let’s see what the future holds, starting with interest rates:
The federal funds rate is likely to be constrained by its effective lower bound more frequently than in the past.
Considering we’ve been in a relatively “low rate” environment since 2008, the Rubicon on never raising interest rates again has long been crossed. And sure, there was that one instance when it took three years to get the federal funds rate to a whopping 2.4 percent in 2019; but that didn’t last very long. And here we are again, approaching zero, no end in sight.
On employment, much was said, but little offered:
The maximum level of employment is a broad-based and inclusive goal that is not directly measurable and changes over time owing largely to nonmonetary factors that affect the structure and dynamics of the labor market. Consequently, it would not be appropriate to specify a fixed goal for employment.
How a goal which cannot be “directly measurable” can ever be achieved remains unclear. But if anyone knows how to reach impossible targets, it is the Fed. However, with the unemployment rate still in the double digits, we can bet more monetary stimulus will be coming soon. If that doesn’t work, maybe they can ask the government to refrain from shutting businesses down whenever the next pandemic arises?
But the showstopper goes to inflation. It’s been confirmed “average inflation targeting” is now policy. Per the Fed:
The Committee seeks to achieve inflation that averages 2 percent over time, and therefore judges 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.
What tools will encompass the “appropriate monetary policy” given that rates are in the lower bound? Other than negative interest, there isn’t much more the Fed can do. They could always stick with the tried and true methods of more financial accommodations, such as new money-printing schemes or coordinated efforts with other central banks to bring the highly sought-after inflation to America. With the inflation rate being “too low” for the better part of a decade, how can we expect to overshoot the target now?
It was a bad day for democracy indeed. Those who apply monetary policy show the world how little understanding of economics they have to draw upon, or even cite. We know interest rates are expected to stay low, while unemployment should be reduced and inflation increased. Yet this is concerning, as we’ve only been given the desired outcomes. Nowhere have we been advised how this will be achieved. They’ll continue doing more of the same (money printing), only this time the expectation is that it will be different.
If it’s any consolation, the Fed concludes its strategy by noting that in roughly five years a new public review of these policies will take place. For those able to read between the lines, we must make those “well-informed” decisions now and consider what America will look like five years from today.