The Fed’s Failure to Launch
The July Federal Open Market Committee (FOMC) meeting this week had many interesting sound bites and a lot of Fedspeak, as is typical from one of the nation’s most powerful central planners, talk of the Fed’s “liftoff” being among them. Don’t bother looking in any textbook in search of an economic model or the theory behind liftoff; there is none.
It began when a reporter pressed Fed Chair Jerome Powell on his inflation target, asking:
In your opening statements in March and April, you noted that a transitory rise in inflation above 2 percent this year would not meet the threshold of moderately exceeding 2 percent for some time, and I noticed you didn't repeat that qualification last month or today. And so, in your view, has the rise in inflation this year met the threshold of moderately exceeding 2 percent for some time?
Exceeding the inflation target, or average inflation targeting, where the Fed purposely overshoots inflation to make up for previous years of low inflation, is an idea whose origins started with central bankers. It is not an economic theory.
It’s curious the Fed spent over a decade aiming for its (arbitrary) 2% target, yet earlier in the year warned us that if the target were met, they still wouldn’t consider the goal achieved...
Powell responds to the reporter:
That would, again, be a question for the Committee. But I would really say the guidance that you're talking about is really the guidance to do with liftoff, right? That's -- what the guidance is for liftoff…
Liftoff occurs when we have:
… labor market conditions consistent with full employment, inflation at 2 percent and on track to run moderately above 2 percent for some time.
However (per the Chair of the Federal Reserve):
It really isn't relevant now.
It -- because we're really -- we're looking at tapering asset purchases. We're clearly a ways away from considering raising interest rates. It's not something that is on our radar screen right now. You know, so when we get to that question, when we start to get to the question of liftoff, which we are not at all at now or near now, that's when we'll ask that question. That is when that will become a real question for us.
Said plainly, the Fed is in no rush to taper asset purchases. When Powell speaks of tapering, he’s referring to the decrease of $120 billion a month in bond purchases. This is very different from actually shrinking the balance sheet which seems entirely off the table. As for raising rates, that will also be at an indeterminate time in the future. When these goals are to be met remains both immeasurable and unknown to everyone outside the Fed’s committee.
Consider humoring all the Fed plans. It may take months or years, but the Fed’s accommodative stance is expected to continue until its goals are achieved. Once sufficiently met, liftoff (tightening) will commence. It’s a big if but assuming this happens exactly as the Fed hopes, how long until the Fed capitulates its liftoff, citing a new crisis, a recession, or other external factor attributed to anything else except the Fed?
The cycle comes full circle. Once the tightening starts, it’s only a matter of time until the Fed will have to reverse course, engage in expansionary monetary policies yet again, citing another new economic crisis. Due to the accumulation of past interventions and its compounding effects, regardless of whether the Fed is on an expansionary or tightening stage, the current trajectory is a path ensuring everything increases, as the idea of any sort of a deflation clearly is not on the agenda. If there is a liftoff, it will come in the form of higher prices for all we hold dear, as over time, the money supply, national debt, asset prices, and the prices of goods and services will continue to “liftoff” in unimaginable ways.