Powell Fails to Explain Himself Yet Again
November’s Federal Open Market Committee (FOMC) meeting finally brought the long sought-after tapering. This month, instead of unleashing $120 billion into the market to lower the purchasing power of the dollar, the Fed will aim for closer to only $105 billion per month; hence the taper. As per usual, the Q & A highlights offer great insight into seeing just how far gone the Fed is from economic theory.
Starting with a question of whether interest rates will be increased once or twice next year. Chair Powell responded:
We don't think it's time yet to raise interest rates. There is still ground to cover to reach maximum employment both in terms of employment and in terms of participation.
Taken literally, he must believe there is a trade off between interest rates and employment. According to Powell, a rate rise would impede on achieving the maximum employment goal. But if this is true now, there’s no reason to say it won’t be in the future. To make matters worse, no one at the Fed has articulated what maximum employment means.
Powell reiterates the lack of definition elsewhere during the Q&A:
So, we don't actually define maximum employment…
Despite both the media and the Fed not knowing what maximum employment means, the question was asked:
…do you think it's possible or likely even that maximum employment could be achieved by the second half of next year?
So, if you look at the progress that we've made over the course of the last year, if that pace were to continue, then the answer would be yes, I do think that that is possible. Of course, we measure maximum employment based on a wide range of figures, but it's certainly within the realm of possibility.
Another question was asked about the wage price spiral; the idea that wages would rise too fast and cause prices to increase by too much, as explained by the head of America’s central bank:
You know, the concern is a somewhat unusual case where if wages were to be rising persistently and materially above inflation and productivity gains, that could put upward pressure on or downward pressure on margins and cause companies to [sic] their employers [sic] really to raise prices as a result, and you can see yourself, find yourself in what we used to call a wage price spiral. We don't have evidence of that yet.
Perhaps something imposed by the government, like a mandatory minimum wage, could artificially raise the cost of labor, which in turn will hurt profit margins. Yet, every time they talk about the wage price spiral, minimum wage laws never come up.
Powell’s lack of understanding between changes to the money supply and changes to purchasing power was put proudly on display:
The inflation that we're seeing is really not due to a tight labor market. It's due to bottlenecks, and it's due to shortages, and it's due to very strong demand meeting those.
Consider the monetary and fiscal policy since the start of the pandemic. The Fed and Congress created many inflationary programs, like the Paycheck Protection Program or stimulus check programs, which created money for the purpose of giving it to certain members of society. With this new money comes no increase to the supply of goods and services in the economy. But there is an increase to the demand for goods and services. For Powell to say that bottlenecks, shortages and strong demand are causing prices to increase misses the very source of this demand (i.e., increase in money supply), which led to bottlenecks, shortages and price increases.
The Q&A continues with talk of climate change, the Fed’s mandate and much more discussion over economic issues, which is economics in name only. This dance between the Fed and media plays out its continuous loop over and over again, but it is all part of the process; an unapologetic gathering between those who control the media and those who control our money.